The Trump administration has decided to back away from a rule that would have fundamentally reformed how manufacturer rebates are distributed in Medicare Part D. While the administration is passing on an important, and broadly popular, opportunity to reduce the cost of medicines for seniors, leaders in Congress are taking action.
Slowly but surely, bipartisan agreement is taking shape on how to address the lack of transparency in our nation’s health care system. The Lower Health Care Costs Act, spearheaded by Tennessee Sen. Lamar Alexander (R) and Washington Sen. Patty Murray (D), is a critical step toward beginning to rein in a system that has avoided accountability for far too long.
While the bill is grabbing headlines for its reforms to unfair hospital surprise billing practices, an underreported facet is how the Lower Health Care Costs Act stands to fundamentally alter our prescription drug system for the better. Namely, the proposed legislation looks to correct the costly practices of industry middlemen known as pharmacy benefit managers and to hold them accountable.
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PBMs are frequently overlooked in the debate around rising drug costs but serve as an arbiter between pharmaceutical companies, insurers, pharmacies and patients. Unfortunately, relaxed oversight by the federal government has created an environment in which three PBMs control more than 85 percent of the marketplace.
Leveraging their outsized clout and a lack of any meaningful transparency, these companies have profited greatly since 2012 due to vertical and horizontal integration and increased use of formulary control. PBM revenue is typically based on a percentage of the list price of a drug and on the size of the rebate amount. So, as drug list prices rise, so typically does PBM revenue.
Drug manufacturer price concessions reached $166 billion in 2018 largely due to the increased negotiating clout of PBMs, but very little of that money made its way to patients at the point of sale to help them pay for their medicines. It is also unclear if enough of that money made it back to employers that pay for health coverage for their employees.
PBMs have utilized practices such as “spread pricing,” where plans and patients are charged more for a drug than the price PBMs paid for the medication. Some states are finding this spread pricing accounts for a $225 million disparity. PBMs also frequently pocket drug rebates or discounts instead of using them to offset patient costs at the pharmacy counter, leaving patients with a raw deal. These practices are all aimed at maximizing profit for these corporations, with little to no accountability.
This could be about to change.
In addition to increased interest by the federal government to address these PBMs’ practices, the proposed bill by Alexander and Murray addresses these concerns head on. The Lower Health Care Costs Act looks to prohibit PBMs from engaging in spread pricing tactics, which would be a critical step toward changing misaligned incentives, potentially lowering patient costs at the pharmacy counter. The legislation, through Section 306, would also require PBMs to pass 100 percent of negotiated rebates and other price concessions to employers (i.e., plan sponsors of group health plans) while also mandating bi-annual reports on the costs, fees and rebates in their contracts.
This additional, commonsense market transparency may, in turn, ultimately work to lower list prices and patients’ out-of-pocket costs. Furthermore, the Congressional Budget Office has stated that Section 306 would result in “a net decrease in the deficit of $1.7 billion over the 2019-2029 period” and that premiums for some private health insurance plans also could decrease.
This bill is an important step toward addressing the broken incentives in the current system and therefore could represent a huge win for patients and their families struggling to make ends meet because of these PBM practices, and for employers just seeking a fair deal in this opaque system. It also illustrates what can be done when lawmakers put down their partisan rancor and look to find workable solutions to Americans’ problems.
With reforms stalled at the executive level to find workable fixes to the Medicare rebate system, this bill represents a crucial opportunity for progress. There will undoubtedly be special interests cautioning them against these actions.
They shouldn’t be cowed. Affordability in our health care system is desperately needed; accountability is long overdue, and patients have waited too long for solutions from Washington.
David Balto is a former policy director of the Federal Trade Commission’s Bureau of Competition and a former antitrust lawyer at the U.S. Department of Justice, and he has since represented numerous consumer groups on health care competition issues, including Consumers Union, Consumer Federation of America and Consumer Action.
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