The mantra we hear over and over by pharmacy benefit managers (PBMs) is that they “reduce the cost” of medicines. What they don’t tell us is that they reduce the cost of medicines for themselves – not for the patients. This was a point of contention that came up recently when I testified before the U.S. House Energy & Commerce, Health subcommittee.
There is a big difference between price and cost when it comes to medications. There may be one list price for a medicine but many different costs depending on who is buying the medicine. Blame falls squarely on the manufacturers for setting high list prices and increasing them year after year. That list price is what it costs patients to buy the drug who have no insurance coverage. That list price is also what is used by PBMs to calculate a patient’s coinsurance for specialty drugs. Patients bear the burden of that high list price.
Not so for the PBMs. Their cost is the list price minus formulary rebates, administration fees, price protection rebates and any other fees that are in the PBM-manufacturer contract. These price concessions are based on a percentage of the list price. Consequently, the higher the list price, the bigger the price concession or kickback. This is why PBMs will construct formularies with drugs that are higher priced over lower-priced alternatives: bigger kickbacks. After all these price concessions, PBMs could pay as little as 10 percent of the list price. Not so for the patients.
PBMs now claim that they pass back most of the formulary rebates to their clients. No one knows if that is true because the contract with the manufacturer (which spells out all of the rebates and fees) is kept a secret and not shared with their clients. Even if partly true, the administration fees and price protection fees, which PBMs may keep, can be much more profitable than the formulary rebates.
It has been proposed that manufacturers give the rebates (kickbacks) to the patient instead of the PBM. This has resulted in loud complaints from PBMs that the cost of medications will go up. And, yes, they will go up – for the PBM, especially if they are not already passing back the rebates. However, the cost for the patient will go down as they will be the direct recipient of the rebate (kickback) at the point of sale.
If you think about it, PBMs are only middlemen doing no research, making no drugs, and taking no responsibility for the mandatory formularies they construct that can be harmful to patients. Formularies that serve to reduce the cost of the drugs for PBMs. Formularies that can favor higher priced drugs because it “reduces the cost” (makes more money) for the PBMs. It is a perverse system that enables PBMs to be one of the most profitable entities in the entire drug supply chain with patients suffering the consequences.
Flat fee-based PBMs and formularies based on lowest list price, not the highest price concession, may be one way to make this upside system better for the patient. Let PBMs keep profits but stop the profiteering.
It should be noted that this commentary in no way absolves manufacturers for the primary role they play in drug pricing. Drugmakers and PBMs are dancing a tango that results in higher prices and bigger profits for both. They may be pointing fingers at each other, but they are both “tango-ing” all the way to the bank.