The market for prescription drugs is exceedingly complicated, in part because there are many disparate actors. Besides the pharmaceutical companies that make the drugs and the patients who ultimately consume the drugs there are a number of entities that intermediate the relationship between these two groups: For instance, health insurers and public health programs pay for most of the prescription drug costs of the people they cover, and unions and large employers do the same for their workers. Pharmacists work with insurers and their pharmacy benefit managers (PBMs) to provide the prescribed medications to their enrollees.
The government also plays a huge role in the market: Besides regulating the market, it also pays for most of the prescription drug costs for tens of millions of workers, disabled Americans, and retirees via Medicare Parts B and D and Medicaid, as well as current and former government employees. In 2020 the total spending on prescription drugs in the U.S. was almost $350 billion; the federal government’s share was roughly $125 billion.
State and federal regulators have indicated their desire to reduce drug costs. Opportunistically, other parties have entered the debate with their own self-serving “solutions” to the problem of high drug costs. In particular, independent pharmacies have focused their energies on lobbying state legislators and federal regulators for policies that would benefit their bottom line at the expense of consumers and taxpayers.
As a result, regulators and policymakers have turned their attention to a concern often raised by independent pharmacists: regulating pharmacy benefit managers, or PBMs. PBMs negotiate discounts on prescription drugs from pharmaceutical companies on behalf of the insurers, unions, and large corporations who pay for health coverage. An ostensible rationale for limiting PBMs’ cost-saving tools is that they are merely “middlemen” and that any profits they make somehow could have otherwise gone to the drug purchasers, so constraining their negotiation power will, therefore, reduce drug prices.
However, this notion does not comport with reality, and much of this rhetoric is driven by independent pharmacists, who claim against evidence that their revenue has fallen because of the cost-saving practices of PBMs. They advocate for a policy agenda that will cost consumers and taxpayers billions of dollars by limiting the ability of PBMs to drive down costs and-not coincidentally-help pharmacies increase their profits as well, at the expense of consumers and taxpayers.
The reality is that PBMs provide essential services to their clients, most notably by negotiating on their behalf to obtain lower prices for prescription drugs, but they provide other valuable services as well. Consumers and the policymakers that represent them should know the price tag for these proposals currently being debated, especially as inflation continues to climb.
We have examined the four main proposals pushed by independent pharmacies and some policymakers to constrain PBMs. Below, we detail the effects of these policies and how they would sharply increase prescription drug costs.
Banning Preferred Pharmacy Networks
HR 2608, The Ensuring Seniors Access to Local Pharmacies, is a bill that would limit the use of preferred pharmacy networks in Medicare Part D. PBMs and health plans create preferred pharmacy networks with pharmacies that agree to participate in the network by negotiating a lower price in exchange for increased business from plan members. This tool is common throughout health care.
While banning such networks would likely increase the business done by small independent pharmacies, it would come at a significant cost to patients, as these networks allow PBMs to lower premiums and deductibles, optimize drug delivery, and limit unnecessary spending.
For instance, a report published by the Department of Health and Human Services found that limiting preferred pharmacy networks results in higher drug costs and greater inefficiency, since such limitations prevent managed care organizations from negotiating discounts.
A study published in the American Economic Journal: Economic Policy found that preferred pharmacy networks have greatly benefited Medicare Part D, while an Oliver Wyman report estimated that prohibiting preferred pharmacy networks would increase spending in Medicare Part D alone by $4.5 billion a year. The report also found that Part D premiums would increase under such a regime and observed that Part D beneficiaries in plans without a preferred pharmacy network paid twice as much in premiums.
Limiting such networks would also cost the employers who rely on them to control their drug costs; a conservative estimate of the cost of limiting preferred pharmacy networks is roughly $1.1 billion per year in high drug costs.
Banning Home Delivery of Drugs
Independent pharmacists have long opposed benefit designs that fulfill prescriptions by mailing them directly to patients’ homes, arguing that it limits patient choice. Some states – most notably New York – have banned plans from requiring home delivery.
Such bans are extremely costly for patients; not only is mail order delivery appreciably less expensive for patients and their employers, but studies also show it appreciably improves drug adherence, since it virtually eliminates the possibility that the patient will neglect to pick up their refills. This is a particularly salient feature for older customers and persons with disabilities, became even more critical for these groups and millions more Americans during the pandemic.
As a result, mail order drug delivery saves money not only by being more cost-effective but by also improving health outcomes and reducing expensive hospital visits. One study estimates that the savings from improved health outcomes alone is $13.7 billion per year. Conversely, limitations on home delivery pushed by independent pharmacists would cost consumers billions in higher drug costs as well as higher overall plan costs from these higher medical expenses.
The benefits that accrue to independent pharmacists from such bans are much less than the costs to patients.
Imposing Pricing Mandates
Independent pharmacies cannot match the scale and scope economies of the large national drug chains but have nevertheless pushed for legislation that would impose price floors on these negotiated rates that are far above the equilibrium price that the
market might otherwise reach. These are sometimes referred to as requirements for National Average Drug Acquisition Cost (NADAC) pricing, a self-reported pharmacy industry cost average that can be far higher than what the private sector typically pays.
This policy would directly profit pharmacists at the expense of consumers by tying the hands of PBMs’ ability to encourage pharmacies to compete on price and service, and such an outcome would cost both taxpayers, consumers and Medicare Part D enrollees. The government acknowledges that increased spending on Part D plan subsidies and the higher premiums for enrollees from doing this exceed any purported savings, and it estimated an annual cost of $4 billion to taxpayers and consumers from a law that would limit such price negotiations.
Imposing Minimum Dispensing Fees
Mandated minimum dispensing fees paid to independent pharmacies on top of negotiated reimbursement rates are common in Medicaid fee-for-service but are increasingly being discussed for Medicaid managed care and the commercial market as well. State Medicaid programs set their own dispensing fees for Medicaid, and most states mandate a dispensing fee between $9 to $12 for every prescription provided to a Medicaid recipient in “traditional” fee-for-service Medicaid. In contrast, this same fee in the commercial market is typically less than $2. Independent pharmacists have pushed in some states to increase these fees as high as $15 per prescription, a staggering increase.
Pharmacies make money on the spread between their cost for the drug and how much they receive in reimbursement and dispensing fees from the insurer along with the patient’s cost sharing paid at the pharmacy counter. Most independent pharmacies utilize pharmacy service administrative organizations (PSAOs), that represent hundreds or in some cases thousands of pharmacies to negotiate competitive reimbursement rates with PBMs. Poor or inefficient purchasing practices can lead to pharmacies overpaying for their drugs and losing profits, but—nonetheless—pharmacists have pushed for these guaranteed higher dispensing fees to boost their profits, which is tantamount to a government-mandated subsidy at the expense of consumers.
A federally mandated dispensing fee for all drugs and across all states would result in a $16 billion increase in annual costs to consumers and taxpayers.
Restricting PBMs’ work for consumers inevitably results in higher drug spending. PBMs use their market power to negotiate lower drug prices for employers, insurers, and ultimately patients. Many of their practices also improve patient adherence to drug regimens and encourage the use of lower-cost generic drugs and less expensive pharmacy channels, further saving money for patients as well as their insurers.
Attributing high drug prices to PBMs’ tools makes little sense, but the very notion that cutting out the “middleman” will somehow reduce costs still makes for an easy, if inaccurate, cudgel for politicians to wield. President Trump resorted to this rhetoric when he announced an executive order to limit the activities of PBMs, and the Biden Administration has adopted this rhetorical approach as well.
But creating a bogeyman out of a “middleman,” as both pharmaceutical manufacturers and independent pharmacies have attempted to do, is disingenuous. As we have shown, it represents little more than a political effort to deflect blame from a problem for which there is no politically palatable solution. While the inaccurate objections to PBMs and the attempts to limit their activities may be presented as ways to save consumers and taxpayers money, the reality is that constraining them would increase drug costs to consumers and taxpayers by nearly $35 billion a year while worsening health outcomes. The sole beneficiaries of this largess will be drug companies and independent pharmacies – not the public.
Tony LoSasso, chair of the economics department at DePaul University, co authored this article.