Who helps keep drug costs affordable? Pharmacy benefit managers

You may have noticed an inordinate number of television commercials offering opinions on the price of prescription drugs. That’s because a fierce battle is being waged in Washington over the role that pharmacy benefit managers (PBMs) — the administrators of prescription drug plans — play in the health care industry. 

The Senate Committee on Commerce, Science, and Transportation will hold a hearing this week to evaluate whether PBMs keep drug costs affordable for American families and workers. A review of the data supports that view. 

For decades, employers and insurers believed they did not have enough collective bargaining power to negotiate effectively with drug companies, especially with the largest three distributors, which control over 90 percent of the marketplace. That’s why employers and insurers began increasing their leverage by forming PBM collectives to negotiate bulk price discounts and fair drug pricing terms for their customers.

Scott Hague, board member with the Insure the Uninsured Project, put it best: “Small and medium businesses, like the ones I work with, don’t have the scale to negotiate lower prices from pharmaceutical companies that are the biggest drivers of increasing prices, accounting for 65 percent of the net cost of every prescription,” he said. “But PBMs have the clout to take on the drug manufacturers, squeeze their profit margins and get a better deal for patients.”

In a study on drug pricing competition, the nonpartisan Congressional Budget Office found that while drug companies have a vested interest in increasing costs, PBMs have a vested interest in restraining them. The CBO went on to describe PBMs as “an important intermediary that helps limit costs” by “putting downward pressure on the prices of brand-name drugs, which would tend to reduce the returns from selling them.”

Peter Orszag, who ran the Office of Management and Budget under President Obama, recognized this. He testified before Congress that, through PBMs, “we have seen a very dramatic shift towards generics and away from branded drugs,” which he categorized as “the primary explanation for why Part D in Medicare is costing a lot less than was projected initially.” This view is supported by a 2019 study in which the Government Accountability Office found that the drug price rebates PBMs negotiated “offset Part D spending by 20 percent, from $145 billion to $116 billion.”

The importance of these cost savings to Medicare cannot be overstated. While other parts of this government health insurance program are at risk of going bankrupt in the near future, PBMs are helping to keep Medicare Part D (Medicare’s prescription drug plan) in far better financial shape, benefiting seniors and taxpayers.

PBMs do not only save Medicare beneficiaries money; they provide benefits to nearly all health care consumers. Another GAO review found “the average price PBMs obtained from retail pharmacies for 14 brand name drugs was about 18 percent below the average price paid by customers without third-party coverage.” The review also found that “enrollees in the plans reviewed had wide access to retail pharmacies, coverage of most drugs, and benefited from cost savings generated by the PBMs.”

The overall net economic benefits from PBMs are astounding. According to the National Bureau of Economic Research, PBMs’ “net value to society reflects a $240 billion net benefit for plans and their members,” and at least $148 billion in savings each year. Another study demonstrated similar results, finding that “PBMs save payers and patients an average of $941 per person per year,” or “40 to 50 percent on their annual prescription drug and related costs compared to what they would have spent without PBMs.” Overall, they are expected to save plan sponsors and consumers more than $1 trillion from 2020 to 2029.

While drug manufacturers with a vested financial interest in keeping prices high may understandably disagree, the data are clear: PBMs present a net consumer good. Here’s hoping that the members of the Senate Commerce Committee manage to separate the facts from the skewed advertising rhetoric. The millions of Americans who struggle with the cost of prescription medication are counting on it.

Jason Altmire (@jasonaltmire) served three terms in the U.S. House of Representatives from 2007 to 2013. He was an executive in both the hospital and health insurance industries and is currently an adjunct professor of health care management at the Texas Tech University Health Sciences Center.