Health Care Has a Middleman Problem

Earlier this year, the Department of Labor doled out a huge win for consumers. In a move that solicits the response, “Wait, that wasn’t already the case?” the department mandated that financial advisors recommend what is in a client’s best interest when they offer advice on 401(k) plans, IRAs, and other retirement options. This is reflective of the enormity of the retirement savings market, which totals $25 trillion. It is also a welcome response to the meteoric rise of middlemen in banking and financial services, who too often act in their own profit-motivated self-interest.

The middleman problem does not begin and end with finance. Health care, once the realm of providers and their patients, has become a battleground for go-between entities, including insurance companies and pharmacy benefits managers, also known as PBMs.

PBMs have quietly become one of the largest actors in the health care marketplace. They serve as an intermediary between health plans and the outside world, negotiating prescription drug prices with manufacturers and providing administrative services for health plans.

PBMs are also not shy when it comes to advocacy. Steve Miller, the chief medical officer of Express Scripts, the nation’s largest PBM, has been one of the most prominent voices against rising drug prices.

It’s nice that PBMs are speaking out about rising prices, but because their business model is paying themselves from the consumer’s co-payment, we don’t think they’ll push too hard for any real reduction in the burden consumers shoulder in the deal.

PBMs are supposed to be negotiating lower prices for the patients they cover. But then they turn around and take a service fee for each negotiation, which automatically increases the price of the medication. Someone has to pay for that, and more and more, it comes out of consumers’ pockets.

In a recent exposé by Kaiser Health News, reports found that the practice of “clawbacks” is making prescriptions far more expensive than necessary for patients in need. According to the article, “at the pharmacy counter, patients pay their share of the cost as set by their PBM and insurance plan. Days or weeks later, the PBM firm takes back a portion of that patient payment from the pharmacy after the PBM determines what it will actually pay for the drug. … That money does not go to the consumer, but is generally kept by the PBM.”

Top PBM industry leaders Express Scripts, Medco and Caremark have faced accusations of monopolizing the industry and have been sued by pharmacies alleging violations of the Sherman Act. Plaintiffs have accused PBMs of conspiring to fix drug prices, diverting prescriptions to their own mail-order pharmacies, and imposing punitive low reimbursement rates on member pharmacies.

The oligopoly that is the PBM industry not only hurts struggling consumers, it also makes jaw-dropping profits off of them. In 2015 alone, the PBM industry accumulated about $11.5 billion in profits and revenue increased at a “whopping annual rate of 20 percent over the last 5 years,” according to consumer advocate and lawyer David Balto.

This kind of double dipping, especially for consumers already squeezed by high-deductible plans and rising co-pays, is simply unacceptable. In the past five years, co-pays to see a primary care doctor have risen 20 percent; specialists and surgeons cost even more. And that’s just to get in the door, before any medical treatment is completed or prescriptions are filled.

PBMs, by definition, should be pro-consumer, but instead they engage in practices that lead to higher prescription drug costs for those who can least afford them. One New Orleans patient caught his PBM in the act, taking more than $38 of a $50 co-pay — more than 80 percent — for an over-the-counter acne treatment. Both patients and pharmacies are stuck overpaying as the middleman takes an even bigger chunk of the sticker price for the drug.

Stories of high drug prices have made waves, particularly in the past couple of months. There is genuine concern for the millions of Americans who are putting off treatments due to their high cost. However, in today’s health care market, things aren’t always as simple as they seem and many more actors than drug companies are responsible for gouging the customers at the end of the line.

The financial services example shows us that, even in the most complex markets, consumers can be protected through common sense regulation. State and federal health care regulators should act to follow the DOL’s example and ensure PBMs are acting in the best interest of the consumers who rely on them. And consumers should demand that action from their government sooner rather than later.


Ken McEldowney is the executive director of Consumer Action, a California nonprofit that focuses on consumer education for low- and moderate-income, limited-English-speaking and other under-represented consumers.

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