The Trump administration believes PBMs are unnecessary and costly middlemen between pharmaceutical companies and consumers. This belief reflects a common fallacy and risks doing more harm than good to consumers and the public fisc. Moreover, by narrowly focusing on PBMs, the administration ignores the large structural problems that are driving up drug prices. In fact, PBMs not only add value by negotiating lower prices for health care providers, they also play an integral role in constraining government expenditures under Medicare Part D.
Part D’s perverse incentive / PBMs foster free-market competition within Medicare Part D by negotiating with drug companies. The goal of these negotiations is explicitly to reduce the net price paid for pharmaceuticals by program enrollees and the government. PBMs also do this for the privately insured, thereby helping health plan sponsors and their beneficiaries save money.
In its current form, Medicare Part D seems almost as if it were designed to encourage high list prices for brand-name drugs. Part D consists of four payment stages for enrollees:
- The deductible stage, in which beneficiaries pay 100% of the cost of drugs. The deductible is currently capped at $435, although some plans provide a lower amount or even a $0 deductible.
- The “initial coverage” stage, in which insurers pay for some of the costs of covered drugs. Depending on the plan, patients pay a copayment (a set amount per drug) or coinsurance (a percentage of the cost of drugs).
- The “coverage gap” stage, during which the drug plan is responsible for only 5% of brand-name drug costs and the patients and drug manufacturers shoulder the remainder of the costs (more on that below).
- Finally, there is the “catastrophic coverage” stage. Once a patient’s out-of-pocket costs reach a certain threshold ($6,350 in 2020), the government pays 80% of covered brand-name drug costs, the drug plan pays 15%, and the patient pays only 5%.
Obviously, drug makers have an incentive to reduce their liability in the coverage gap stage. They do this by charging high prices, thereby hastening patients’ move to the catastrophic coverage stage in which the government pays nearly the entire amount for their full-price drugs for the rest of the year, regardless of how expensive the drugs in question are.
PBMs improve this problematic structure by protecting patients from these exploitative moves by drug makers. In large part, PBMs work to negotiate rebates that the pharmaceutical companies provide on their list prices to PBMs and insurers. In other words, the list price for drugs may be high, but insurers are often not responsible for the full cost of Part D drugs because they receive rebates on their payments. Those rebate savings are passed onto Medicare Part D patients in the form of lower premiums.
Thus, eliminating the rebates does nothing to reduce Medicare Part D’s incentive to drug makers to raise drug prices. The goal of the pharmaceutical companies is still to get patients to the catastrophic coverage phase as fast as possible. Eliminating rebates only raises premiums, which is something that the Congressional Budget Office has recognized and the Centers for Medicare & Medicaid Services’ actuarial analysis of the proposed order has acknowledged.
Drug makers have an incentive to charge high prices in the “coverage gap” stage, hastening patients’ move to the “catastrophic coverage” stage.Blaming the middleman / The larger problem with the administration’s order is that its rationale — and the heated rhetoric that accompanied it — is predicated on a fundamentally false assertion that PBMs are a primary cause of high prescription drug prices and that reducing PBMs’ ability to operate will magically reduce consumer costs. Only drug companies set the prices for their drugs.
The instinct to blame middlemen is common. But PBMs exist because they deliver value to health plan sponsors such as insurers, unions, and employers and their beneficiaries. PBMs negotiate lower drug prices and provide other useful services such as incentivizing the use of generic drugs and managing high-cost specialty medications, among other things. And they retain nearly none of the money from the rebates that the administration seeks to target to achieve these outcomes.
A 2019 Government Accountability Office report found that PBMs pass through 99.6% of the negotiated rebates to Part D plan sponsors, who use them to lower costs for beneficiaries and the federal government. As a result, tying the hands of PBMs would reduce one of the few effective tools to constrain prices.
If the administration truly wishes to rein in drug costs for seniors, it should work with Congress to restructure the Medicare Part D design to eliminate the perverse incentives that encourage drug companies to push prices higher. Instead of trying to eliminate PBM “middlemen,” it should empower them.
