By Rich Bagger
“Skyrocketing prescription drug prices” are a fixture of American healthcare policy and politics, and patients are indeed feeling the pain in the form of the dramatically higher co-payments they face at the pharmacy counter. In fact, over the past decade, patient out-of-pocket costs for prescription drugs have increased 53 percent. (1)
Yet importantly, at the same time, net prices of prescription medicines, after accounting for discounts and rebates paid to intermediaries such as pharmacy benefit managers (PBMs), have actually declined. (2) How can that be? Working on behalf of insurance companies and health plan sponsors, PBMs determine which drugs are covered for more than 266 million Americans. (3,4)
They use this immense leverage over pharmaceutical companies to secure major discounts in the form of rebates, in many cases paying far below the drug’s list price. (The PBMs’ leverage comes from their ability to deny or restrict patient access to particular therapies.)
Benefitting from this model, the three largest PBMs, – CVS Caremark, Express Scripts, and Optum Rx –now control nearly 80 percent of the total prescription drug market. (5,6) And it is profitable: PBMs, insurers, distributors and other middlemen now retain more than 50 percent of the cost of prescription drugs, including over $140 billion in rebates in 2020 alone.(7,8) Put another way, less than half of every dollar spent on prescription drugs goes to the companies that discover, develop, manufacture, and commercialize them. (9)
These rebates, in practice, create a perverse incentive whereby PBMs benefit from higher list price increases to gain greater rebates via net-price purchases. (10,11) The higher the list price, the higher the rebates received by the PBM. Meanwhile, patients, who often have coinsurance obligations tied to the list price, pay more for prescription drugs at the pharmacy when list prices increase. (12) Therefore, we are seeing the paradoxical reality that even though the average net, or after-discount, price actually fell in 2021, list prices and therefore patient out-of-pocket costs continue to rise. (13)
In most states, PBMs are not required to disclose the amount of rebates and discounts they receive from pharmaceutical companies. (14) Some portion of these rebates are passed along to plan sponsors in lower premiums; the rest become part of PBM profits. And notably, the savings are typically not passed on to patients in lower costs at the pharmacy counter.
A bipartisan consensus, led by state officials, is emerging to put guardrails around these practices, ensuring that plan sponsors and patients benefit from the rebates and discounts that reduce net prescription drug costs. In 2021, governors from both parties signed legislation increasing transparency and reporting requirements, requiring that savings be passed on to pharmacies and patients, and implementing PBM “reverse auctions” for state prescription drug programs. These steps represent positive moves toward improved prescription drug access and affordability, and create a blueprint for further reforms.
If policymakers want to address patients’ frustration about the cost of prescription drugs, it is imperative to look beneath the surface and examine what is really going on with prescription drug pricing.
Rich Bagger is a Partner and Executive Director of Christie 55 Solutions. A former state legislator and gubernatorial chief of staff, he also served as the chief global corporate affairs officer for two Fortune 500 companies.
1 House Committee on Oversight and Reform Minority Staff, “A View from Congress: Role of Pharmacy Benefit Managers in Pharmaceutical Markets,” December of 2021.
2 Dr. Adam J. Fein, “Gross-to-Net Bubble Update: Net Prices Drop (Again) at Six Top Drugmakers,” Drug Channels, April of 2021.
3 Dr. Jay C. Patel, “Middlemen Pocketing More Money Than Pharmaceutical Companies,” Bay to Bay News, April of 2022.
4 The Pharmaceutical Care Management Association, “The Value of PBMs,” 2022.
5 Dr. Jay C. Patel, “Middlemen Pocketing More Money Than Pharmaceutical Companies,” Bay to Bay News, April of 2022.
6 House Committee on Oversight and Reform Minority Staff, “A View from Congress: Role of Pharmacy Benefit Managers in Pharmaceutical Markets,” December of 2021.
7 Andrew Brownlee and Jordan Watson, “The Pharmaceutical Supply Chain, 2013-2020,” Berkeley Research Group, LLC, January of 2022.
8 Pfizer, “Insurers and Middlemen Profiting More From Prescription Drugs,” 2022.
9 Andrew Brownlee and Jordan Watson, “The Pharmaceutical Supply Chain, 2013-2020,” Berkeley Research Group, LLC, January of 2022.
10 United States Centers for Medicare and Medicaid Services, “CMS Issues New Guidance Addressing Spread Pricing in Medicaid, Ensures Pharmacy Benefit Managers Are Not Up-Charging Taxpayers,” May of 2019.
11 Howard Dean, “It’s Time to Crack Down on the Middlemen that Inflate the Costs of Drugs like Insulin,” Chicago Tribune, April of 2022.
12 Howard Dean, “It’s Time to Crack Down on the Middlemen that Inflate the Costs of Drugs like Insulin,” Chicago Tribune, April of 2022.
13 Joel Zinberg, “Drug Prices Haven’t Been Going Up,” The Wall Street Journal, December of 2021.
14 Dr. Jay C. Patel, “Middlemen Pocketing More Money Than Pharmaceutical Companies,” Bay to Bay News, April of 2022.