Are PBMs to blame for high drug prices?

On June 12, the Senate Health, Education, Labor, and Pensions Committee held a hearing to review the Trump administration’s plan to lower drug costs, with Alex Azar, secretary of the U.S. Department of Health and Human Services, testifying that pharmacy benefit managers (PBMs) are to blame for the high prices.

As part of his written testimony, Azar said that since PBMs are paid based on the number of rebates they negotiate, the possibility exists for them to retaliate against manufacturers who cut prices by dropping them from formularies or placing them on a higher tier.

“We may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts,” he said. “Such a system’s incentives, detached from artificial list prices, would likely serve patients far better, as would a system where PBMs receive no compensation from the very pharma companies they’re supposed to be negotiating against.”

This, he said, would prevent PBMs from impacting prices, as a major criticism of the current system is that PBMs keep some of the rebates instead of passing them to consumers in the form of lower out-of-pocket costs.

The Pharmaceutical Care Management Association (PCMA), a national organization representing America's pharmacy benefit managers,  strongly disagrees with this position. A recent study, “Reconsidering Drug Prices, Rebates, and PBMs,” conducted by the healthcare consulting service Visante, shows that pharmaceutical manufacturersset prices unrelated to the rebates they negotiate with PBMs.

“Drug companies keep raising prices even when rebates go down,” Mark Merritt, PCMA’s president and CEO, said in a press release. “Simply eliminating plans’ ability to negotiate price concessions would enrich drugmakers at the expense of patients, who’d not only face higher prices but higher premiums and out-of-pocket costs, too.”

Furthermore, he says, PBMs have long encouraged manufacturers to offer payers alternative ways to reduce net costs, so the easiest solution is for drug companies to lower their prices.

Research by Express Scripts, a PBM based in St. Louis, shows prescription drug prices continue to rise, with the median price of brand medications increasing 232 percent from 2008 through 2017.

Perry Cohen, PharmD, CEO of the Pharmacy Group, a consultant to healthcare and pharmaceutical companies and organizations, says consumers are just looking to pay a fair price for the value of a drug. Therefore, he says, if price fixing or anything else “fishy” is going on, the government should play a role in fixing it.

“The Trump administration has looked at it and said drugs are too expensive and they want to make them less expensive for the voting citizen,” Cohen says. “The big questions everyone is asking now are if their plan will make it better or worse for physicians or better or worse for patients.”

Impact on patients and physicians

Todd Edgar, PharmD, senior vice president, payer access solutions for the consulting firm Precision for Value in Gladstone, N.J., says the administration’s goal is to remove the safe harbor protection for rebates, with the ultimate objective of eliminating them entirely. 

“The goal is to drive the discount down to the consumer,” he says. “The rationale is that the consumer doesn’t benefit a whole lot from the rebates, and the entities tasked with controlling costs earn more rebate on a higher-priced drug.”

Edgar notes that patients who pay a fixed co-pay, initially wouldn’t see a change, but those who pay a co-insurance or a percentage of the drug cost could see a significant benefit if the rebate system ends. He cites an example of a hepatitis C patient who pays 25 percent of a $30,000 prescription, but if rebates were to end, would pay 25 percent of a $15,000 prescription.

The problem with this, Edgar adds, is that if rebates are no longer available as a revenue source for the PBMs and insurers, they would probably charge more for services they provided free in the past. Insurers could also raise co-pays and premiums to make up for the lost revenue. 

In addition, Edgar says, ending rebates could result in a change in formularies and what preferred medications physicians would prescribe. Still, Edgar says, formularies change annually anyway, so he doesn’t see a huge change for physicians if rebates were eliminated. 

“Formularies would stay in place, utilization management would stay in place, so there’s no less burden for the physician as far as writing drugs for their patients,” he says. “Rebates from a financial position have never touched physicians, so there’s no good or bad from that perspective.”

Meanwhile, Cohen says, the patient will be more aware of what they are actually paying for a drug.

Jennifer Luddy, a spokesperson for Express Scripts, says a simple solution for high drug costs, and one the company endorses, is for pharmaceutical companies to lower their list prices, rather than offering rebates. 

Edgar warns that this is just one approach to the problem and the medical industry as a whole should consider several approaches and quantify them before following through with a plan.

Meanwhile, a study, “Drug Rebates Do Not Increase Costs to Consumers,” published in May from the University of Illinois, concludes that abolishing the rebate system would not lower drug prices, and may only be replaced by a more complex system.

Study author Anthony T. Lo Sasso, PhD, professor in health policy and administration at Univeristy of Illinois-Chicago and executive director of the American Society of Health Economists, concludes that blaming high drug prices on manufacturer rebates misconstrues the nature of the market for prescription drugs. 

“We submit that these rebates are the product of a healthy negotiating process between pharmacy benefit managers and manufacturers, one that serves to inject a modicum of market discipline into a market where it would be otherwise absent,” he wrote in the study. “We see no reason that abolishing such a system would result in lower drug prices, and suggest that the most likely outcome from such a prohibition would be another, more convoluted system that imprecisely replicated the rebate system.”