Pharmacy Benefit Managers Lower Drug Prices for the Government

Recently, President Donald Trump announced his intent to drive down drug prices by “taking aim at global freeloading” and establishing a system to “allow Medicare to determine the price it pays for certain drugs based on the cheaper prices paid by other nations.” This was only the most recent in a series of changes proposed by the administration on the issue: In May, when Trump first released his “blueprint” to reduce the cost of prescription drugs, he particularly targeted prescription drug rebates.

Since then, members of the administration have repeatedly argued that the discounts that pharmacy benefit managers negotiate with drug companies contribute to higher drug prices. In July, the Department of Health and Human Services indicated it was considering a new rule that might end this practice. That would likely be a mistake, and could stymie other initiatives from the administration.

While the contents of the proposed rule have not been released to the public, its 21-word title, “Removal Of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection,” is revealing. Currently, insurance plans, and the PBMs that represent them to drug manufacturers, negotiate discounted prices in exchange for covering certain drugs.

For example, if the list price for a given drug were $1,000, a PBM could encourage the drug company to lower that price in exchange for having its drug included on plans used by many health care consumers. The PBM would then receive a rebate or a percentage of the negotiated discount. PBMs pass on most of the negotiated savings to health plans and their consumers.

By removing safe-harbor protections for mediations between manufacturers and PBMs, the administration could ultimately block PBMs from engaging in any negotiations for lower drug prices. The desire to do so appears to stem from the administration’s perception that the rebates PBMs receive from drug manufacturers are “kickbacks” that serve to raise the cost of drugs, rather than discounts that reduce total drug costs help to hold down premiums for consumers, including for seniors in the Medicare program.

It is a perspective that many find baffling — especially given that the government recently announced its intent to use the PBM model to constrain drug costs in Medicare Part B.

To understand the problems with this way of thinking, it helps to clarify what PBMs do. A PBM representing a large number of companies can offer a manufacturer a potentially large volume of sales in exchange for a lower price per drug. The PBM receives a percentage of whatever discounts it negotiates with the manufacturer — which comes in the form of a rebate — but most of the actual savings are passed on to its clients.

These rebates often work in favor of patients: The Altarum Institute estimated that, in 2016, PBMs earned $11 billion in profits while passing on $89 billion in rebates to employers and insurers.

Given the competition in the insurance market, health plans have strong incentives to pass on rebate revenue to their enrollees through lower premiums and better coverage. Higher prices make it difficult to keep and attract customers.

This is why, despite the administration’s criticism of rebates, it recently announced it will allow for greater use of PBM tools in Medicare Advantage for Part B drugs (which are generally outpatient injectable drugs). Trump announced HHS Secretary Alex Azar explained that the plan aims to bring “the latest negotiation tools to our government programs and [expand] private-sector negotiation to parts of Medicare that have never had negotiation.”

Seema Verma, the head of the Centers for Medicare and Medicaid Services, similarly noted that “PBMs have done important work in negotiating rebates that go toward reducing premiums — growth in rebates is a major reason that Part D premiums have remained flat in recent years.”

Such a move would also fulfill a pledge Azar made during his confirmation hearings. Azar, who helped launch the comparatively free-market-friendly Medicare Advantage program while working in the George W. Bush administration, stressed the potential benefits of implementing “value-based payment models” in Part B. He argued that we should take the lessons “from Medicare Part D and apply them to Part B,” which would include using the same negotiating tools currently employed by PBMs in Part D to reduce drug costs in Medicare Part B.

These are sensible steps toward lowering Medicare drug costs that would enable the government to utilize rather than dismantle tools that have successfully delivered savings in the private sector.

Unfortunately, the federal government’s inconsistent approach toward PBMs has generated considerable confusion. After all, if HHS blocks PBMs from negotiating with drug companies, it will also prevent HHS from expanding the use of PBMs in Medicare Advantage for Part B. The dissonance regarding the role of PBMs within one department alone is puzzling.

In the past, when seeking to reform government-funded health insurance, HHS has taken steps to incorporate market elements from the private sector. Medicare Advantage is an important example of how well this approach can work. However, HHS’ proposed rule seems poised to do the exact opposite and would serve to destroy a component of the private sector’s health insurance marketplace.

Eliminating the discounts PBMs obtain for insurers and consumers could result in drugs becoming more expensive, premiums and out-of-pocket costs rising, and patients having far fewer affordable health insurance options.


Devorah Goldman is an assistant editor at National Affairs and health policy consultant for Capital Policy Analytics.

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