The U.S. Supreme Court handed down a historic decision on Dec. 10, allowing states to regulate pharmacy benefit managers. These are massive Fortune 50 corporations that most Americans have never heard of and whose role in health care most Americans couldn’t describe. Their influence over the pharmacy business is significant, however. As Justice Sonya Sotomayor wrote for the unanimous court, PBMs “are a little known but important part of the process by which many Americans get their prescription drugs.”
That’s an understatement. The three largest PBMs control when, where and how consumers access well over three-quarters of all prescriptions in the United States, as well as which prescription drugs your insurance will cover. Their original purpose was to minimize billing paperwork on behalf of insurance plans — the classic middleman.
Since then, the top PBMs have all merged with insurance companies or giant pharmacy chains like CVS Health Corp. Now they exert tremendous power over pharmacies and pharmacy patients. The smallest of these three companies raked in over $150 billion in revenue, well ahead of household names like Microsoft Corp., Bank of America Corp., and Home Depot Inc.
In addition to their influence on how consumers access prescription drugs, PBMs decide which pharmacies patients can use, how much the pharmacies are reimbursed for dispensing drugs and how much patients must pay out of pocket. And from their position in the middle of every transaction, the PBMs make billions of dollars.
Part of the PBMs’ gushing revenue stream comes from fees that pharmacies pay on prescriptions they fill. And they charge those fees weeks, and sometimes months, after the patient has picked up the prescription. Those fees have increased 45,000 percent in recent years! Combine that with ever lower reimbursements for drugs – lower reimbursements negotiated by PBMs – and it’s easy to see how pharmacies can lose money on most prescriptions they fill.
Many states have tried to rein in the PBMs with limited success. The PBMs have escaped meaningful regulation mostly by hiding behind the federal Employee Retirement Income Security Act of 1974 (ERISA). That law was intended to prevent a patchwork of state rules for large employer health plans.
Arkansas passed a bill in 2015 that, among other things, prohibited PBMs from reimbursing local pharmacies at a lower rate than what the pharmacy paid to fill prescriptions — Economics 101. The obvious purpose was to keep the PBMs from ruthlessly steering patients into their own affiliate pharmacies, resulting in fewer local pharmacies staying in business and leaving whole communities and neighborhoods, especially underserved communities, without a vital health care provider.
In its Rutledge vs. PCMA decision, the Supreme Court justices unanimously brought the flimsy ERISA defense crashing down. The decision means that states can protect their citizens and small businesses. PBMs won’t be able to hide from state oversight behind a federal law. That’s important, because they currently don’t have much federal oversight either. Indeed, one reason PBMs have become so powerful is they’ve been able to operate without meaningful regulation at any level. That dynamic was shattered on Dec. 10.
We hope the states start with new rules protecting local pharmacies and their patients. Community pharmacies are essential health care providers. They’ve been on the front line of the fight against COVID-19, and soon they’ll be giving millions of vaccines to end the pandemic. But many won’t survive if they keep losing money because of PBM business practices and their predatory behavior.
Douglas Hoey is CEO of the National Community Pharmacists Association.
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