Tackling High Drug Costs: Administration Works to Rein in Middlemen

Few problems generate stronger emotions than the cost of drugs. President Donald Trump identified bringing down drug prices as a key priority in his campaign, and his administration, under the leadership of Health and Human Services Secretary Alex Azar and Food and Drug Administration Commissioner Scott Gottlieb, has brought welcome intensity and sophistication to untangling the web of problems in the drug market.

The administration’s American Patients First report provides sound and careful first steps to address areas where lack of competition and over-regulation have led to rapidly escalating drug costs. Perhaps no other area of health care requires as much scrutiny as the role of pharmacy benefit managers – the little-known middlemen that are able to inflate the cost of drugs by demanding and pocketing high rebates from manufacturers.

As a result of a lack of transparency, PBMs can pocket an increasing amount of these rebates with neither payers nor patients sure they are acting in their best interest. To add insult to injury, vague laws allow PBMs to argue that they lack any fiduciary duty to their clients, and thus can pocket rebates as they please.

Of course, other markets like credit card companies rely on middlemen. But they only make pennies on transactions. In contrast, PBMs have managed to impose substantial costs on the drug distribution system.

A 2017 Berkeley Research Group study found that 42 percent of initial gross drug expenditures are going to non-manufacturer entities in the prescription drug system. The result of this lack of competition and regulation is straightforward and painful, especially for patients; and the administration is appropriately concerned.

Moreover, there are clear conflicts of interest at play. PBMs also have their own retail and mail-order operations and often force consumers to use their preferred distributors, undermining patient choice.

Additionally, there is increasing evidence of PBMs driving consumers to use drugs with the highest rebates, not necessarily the most clinically appropriate options or what their doctor prescribed – a result that is especially problematic for patients with chronic conditions such as rheumatoid arthritis, diabetes and autoimmune disorders, which require consistent and individualized treatment. An instructive example is insulin, where patients’ savings are diffused through the complex rebate system. In this case, PBMs have kept about 10 percent of the issued rebate, raising the costs on individuals in need of treatment.

The administration’s plan provides an important first step to addressing these problems. On the question of conflicts of interest, the administration is considering clarifying the law to ensure that PBMs have a fiduciary duty to the employer or plan for whom they are managing benefits, ultimately ensuring they are acting in the best interests of patients. This is a critical step to empower employers and payers to be able to guarantee that a PBM properly reflects its interests.

PBMs prohibit pharmacists from informing consumers of lower-priced alternatives. The administration’s proposal seeks to outlaw these egregious “gag clauses” and empower consumers with information essential to a competitive marketplace.

The downstream benefits of these kinds of reforms illustrate their importance to the wider health care marketplace. Returning more control to consumers at the pharmacy counter improves affordability and, by extension, access to vital treatment regimens. Broadening these possibilities for patients helps to promote greater preventative care and medication adherence, particularly for individuals living with lasting conditions.

The plan the administration outlined is a great first step toward creating a fairer, more efficient health care system that works on behalf of patients rather than industry middlemen. The administration’s leadership continues to cut through bureaucratic entanglements that artificially inflate and obscure drug prices for consumers.

In announcing the plan, Trump stated, “We are very much eliminating the middleman.” Although PBMs may not become extinct, bringing sound regulation will begin to make the market work for consumers.


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.

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