This is one of two arguments for and against state regulation of drug sales. Read an opposing viewpoint here.
In America’s complex health-care system, few entities are more misunderstood yet critically important than pharmacy benefit managers (PBMs). The surge of state-level policies aimed at weakening PBMs reveals a dangerous gap in understanding the critical role they play in lowering drug costs and ensuring access to affordable medications. At its core, the war on PBMs is an attack on lower prescription prices as a favor to drug manufacturers and pharmacies. It is also a textbook case of how regulation nominally intended to protect consumers can end up harming them.
PBMs serve as negotiators hired by insurance companies, employers and government programs to reduce prescription drug costs. These price reductions are accomplished by negotiating rebates from drug manufacturers and setting compensation levels that bring down costs across the board.
Why has there been a big push against them? Drug companies dislike PBMs because they reduce their pricing power and profit margins. Independent pharmacies resent PBMs for limiting prices and increasing competition. These entities have together crafted a narrative depicting PBMs as shadowy, high-profit “middlemen” that drive up drug costs and force small, independent pharmacies to close.
Let’s explore these myths. Insurance companies and others employ PBMs for a reason: They reduce drug costs anywhere from 17 percent to 47 percent, according to government studies. Still, contrary to claims, PBM profits are much lower than other links in the prescription drug supply chain. Pre-tax profit margins for major PBMs hover around 3 to 4 percent, compared to the 16 to 25 percent profit margins enjoyed by pharmaceutical manufacturers.
There’s also zero evidence linking pharmacy closures to PBMs. Many independent pharmacies have closed but even more have opened to replace them. More are open today than in 2009. The challenges facing pharmacies stem from changing brick-and-mortar retail dynamics, online competition, and rising wholesale drug prices set by manufacturers, not PBMs.
Nonetheless, the assault on PBMs is having some success, to the detriment of patients. Just this year, Arkansas passed Act 624, prohibiting PBMs from operating pharmacies there. The effects could be severe: Act 624 is expected to close pharmacies and limit access to critical mail-order and specialty pharmacies for nearly 400,000 patients, many of whom suffer from severe health conditions and depend on their medications.
The legislatures of West Virginia and Tennessee recently chose to regulate PBMs directly, enacting laws that require health plans to pay pharmacies higher rates for their services. Don’t be surprised when such policies increase costs to patients.
On the West Coast, California’s SB 41 attempts to delink rebates from list prices. Rebates are fixed discounts secured by PBMs from drug manufacturers to reduce patient costs, and delinking requires the PBMs’ commission to be unrelated to the size of the rebate. Typically, PBMs keep only about 2 percent of a rebate as compensation. Delinking reduces their incentive to push for higher rebates.
Some combination of these ideas might be coming soon to your state. But before enacting policies that could raise drug costs for vulnerable patients, legislators should carefully consider both the economic evidence and the true motives of those advocating for these changes. Our health-care system needs more cost control — not less — and PBMs are among the few entities effectively delivering it today. Pharma-cists might live more comfortably, but that outcome will be funded by patients paying higher drug prices and higher insurance premiums.
George S. Ford is the chief economist for the Phoenix Center for Advanced Legal & Economic Public Policy Studies.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
