Reigning in the opaque practices of PBMs and payers is long overdue

The considerable attention given to drug prices is appropriate and timely. While attention is trained on drug manufacturers, policymakers diving into solutions are uncovering the hard facts driving rising prescription drug costs. Namely that profits taken by drug middlemen, primarily Pharmacy Benefit Managers (PBMs), are a key cause of escalating prices.

PBMs secure rebates from manufacturers to get on formularies. In theory, rebates could be a positive aspect of our prescription drug market if they were passed through to consumers. But, this is not the case. Health and Human Services Secretary Alex Azar correctly noted that any plan to bring down drug prices “has to include looking at the thicket of manufacturer rebates and discounts that aren’t working for many Americans.”

Rebates are increasingly pocketed by the PBMs, which unsurprisingly have seen skyrocketing profits. In fact, rebates have almost tripled to over $153 billion in the last five years.

This expensive drug payola has dramatically increased drug costs, harming millions of consumers.  

Fortunately, the Trump administration’s Blueprint to Lower Drug Prices and proposed budget are grappling with this issue directly. The administration is bringing the problem to the public’s attention and questioning the role these rebates play in the prescription drug marketplace, especially in the unregulated and often uncompetitive world of PBMs.

To grapple with this problem costing consumers millions in higher prices, the Trump administration has a simple solution. The idea: require insurers and PBMs to share a proportion of negotiated rebates from Part D negotiations with patients, and ensure PBMs are fulfilling the interests of its customers (for example, by determining that PBMs have a fiduciary duty to plans).

But the protectors of this system seem to be launching a sneak attack on the administration’s efforts to bring transparency and competition to the market. A recent New York Times piece quoted a number of industry leaders, who profit from the status quo, trying to preemptively throw cold water on this proposal.

They suggest that trying to bring basic regulation to PBM arrangements, such as requiring pass through of rebates or creating a fiduciary duty for PBMs, would violate the noninterference provisions under Medicare Part D.

They could not be more wrong.

The administration’s proposal properly aligns the incentive system so PBMs are less inclined to inflate rebates and prices. The proposal does not dictate a specific price in negotiations, which will still occur without government interference. But it does require negotiated rebates to clearly lead to reduced prices for patients, consistent with Part D’s mandate.  

This specific proposal leans on the unique strengths of the Part D program, namely private sector negotiations unencumbered by government interference, by ensuring that the savings negotiated on behalf of patients actually get to the people they were designed to serve.

By requiring that a portion of manufacturer rebates be used to reduce the negotiated price at the point of sale, the proposal takes what works in Part D — private sector negotiations — and fixes what doesn’t, secretive and anti-competitive practices of industry middlemen. It’s the kind of common sense health-care policy that everyday Americans look at and wonder, “Why hasn’t this been done before?”   

These small changes can have an enormous impact not only on the lives of patients, but also the broader prescription drug market. For patients, these discounts can work to ensure they can afford the care they need and are able to access preventative treatments that can help manage costly chronic conditions.

These measures can also help reduce emergency intervention for unmanaged conditions, limiting unnecessary health-care utilization, which ultimately drives down costs for everyone participating in the health-care market.

Taking these simple steps to rein in the opaque practices of PBMs and payers is action that is long overdue. The Trump administration’s proposal to shed a light on PBM and payer practices represents the optimal role the federal government should play in regulating the private marketplace.

Requiring Part D plans to share the program’s negotiated discounts with seniors is a simple check that keeps the private sector honest, accountable and working to improve patient health.

David Balto is a former policy director of the Federal Trade Commission’s Bureau of Competition and a former antitrust lawyer at the U.S. Department of Justice. He has since represented numerous consumer groups on health-care competition issues, including Consumers Union, Consumer Federation of America and Consumer Action, and has in the past represented pharmacy benefit managers.