Why PBMs’ Flawed Efforts to Stop Sensible Reform Won’t Work This Time

There are tremendous concerns about drug pricing that are receiving increasing scrutiny by both the administration and Congress.  

Unlike some of the past debates, the current one appropriately focuses on all aspects of the drug distribution system from manufacturer to consumer, questioning whether consumers are receiving the value they are paying for. Increasingly, we are finding systemic loopholes that have allowed middlemen such as pharmacy benefit managers and insurance plans to exploit the lack of transparency and competition and pocket startlingly large profits.

Nowhere is this worse than in the PBM market, where three firms control 80 percent of the market, allowing them to exploit consumers by reducing choice and increasing cost. The system is plagued by conflicts of interest. Because PBMs profit off rebates and fees that are based on a product’s price, they have strong incentives to seek higher prices.

You don’t need a Ph.D. in economics to know this is a bad deal for consumers and the government.

Fortunately, the administration has proposed a sensible reform to begin to correct these distorted incentives, at least in the Medicare Part D program. The new proposal would eliminate the anti-kickback statute safe harbor for these rebates and permit price reductions that will go directly to patients. The new proposal also introduces an unprecedented level of price transparency into a notoriously opaque system.

The PBMs can’t argue that the current market is competitive or transparent when it isn’t. They can’t argue the rebates benefit consumers, when so much of the rebates end up in their pockets. So instead, they go searching for some shield against the long overdue reform.

Like any good Washington lobbying arm, when you lack facts or sound public policy, what do you turn to? The law, of course.

There are slim pickings since the Department of Health and Human Services clearly has the power to eliminate the safe harbor exemption. So, the PBMs turned to a Depression-era antitrust statute — the Robinson-Patman Act — to try to defend their kickback schemes. They suggest manufacturers will face unprecedented liability under the act if they start giving direct discounts to patients, rather than rebates that line PBMs’ pockets.

Their rhetoric appears to claim this would be a ferocious lion of concerns; but it is no more than a unicorn.

First, everyone agrees that the Robinson-Patman Act is an anachronism of a bygone era where there was a greater concern in protecting small businesses rather than consumers. If it were fully enforced, there probably would be no Amazon or Walmart.

Not surprisingly, the government has called for its repeal since the Carter administration, and no government price discrimination case has been brought for over 20 years.There has been less than a handful of pro-plaintiff decisions in the past 30 years. Investing in Robinson-Patman litigation is like buying riding equipment for a unicorn.

The PBMs claim the rebate system came about because of a settlement of a case in the 1990s brought by independent pharmacists. But that case, which continued to be litigated unsuccessfully for another 20 years, resulted in no precedent that suggested that a discount system was illegal.

Full disclosure: a Federal Trade Commission investigation I worked on led to the same result. So, anyone opposing the rebate reform would have no precedent to rely upon.

As a former FTC general counsel once noted, “Bottom line is if somebody is trying to say that the Robinson-Patman Act is going to prevent a scheme from giving discounts to end consumers, they are just not doing a thorough analysis of” the law.

Although PBM advocacy groups raise this specter, they fail to answer the most basic questions: If manufacturers turn to a direct discount system, what price discrimination would exist? Who is being harmed? Would an insurance company claim it is being harmed because its patients are receiving these discounts? Who would bring this incredibly theoretical case under a law with little to no recent relevant cases to speak of?

Not a single case is cited to support their claims.

We shouldn’t let them distract us. By focusing on the facts, rather than excuses from bad actors, common-sense solutions to prescription drug pricing issues become readily apparent.

We know seniors need help lowering their out-of-pocket costs for medications. We know there are ample discounts that are not getting to these patients thanks to a complex and secretive process with far-too relaxed oversight. And we know that companies who make a disproportionate profit off this system will fight tooth and nail to preserve it.

And reform is long overdue.


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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