PBM fee separation improves patient outcomes

This piece was co-authored by Sally C. Pipes and Wayne Winegarden.

The pharmaceutical supply chain is rife with improper incentives. Because of these disincentives, reasonable policies under most market conditions will create problems that harm patients. The combination of pharmacy benefit manager (PBM) fees with the discounts they negotiate exemplifies this problem.

The three largest PBMsCaremark (CVS Health/AetnaAET), Express ScriptsESRX (CignaCI) and OptumRx (UnitedHealth GroupUNH) control 80% of the market and are integrated into large health insurance groups. PBMs negotiate drug prices with pharmaceutical companies on behalf of insurers and manage their drug formulations. PBM control of drug formulations, insurers’ preferred drug lists, and patient cost-sharing responsibilities are the leverage PBMs use when negotiating with drug manufacturers.

Consistent with current market theories, PBMs are compensated based on the size of the discounts they negotiate with manufacturers. Their compensation is “combined” with discounts. If the PBM’s incentives align with patient interests, this typical compensation structure makes a lot of sense.

Alas, that is not the case. PBMs are responsible for minimizing the costs that insurance companies pay when patients are prescribed drugs, especially expensive drugs. PBMs are not directly responsible for controlling costs for patients.

To make matters worse, drug manufacturers often do not sell drugs directly to patients. Instead, manufacturers must bypass PBM gatekeepers to get insurers to allow manufacturers to sell their drugs to patients. This complex process significantly distorts market incentives.

To ensure that patients have access to their medications, drug manufacturers focus on obtaining the best possible formulary placement, incentivizing manufacturers to offer PBMs at low net prices for their medicine. But the term “net price” is the key issue.

There are two ways to achieve a low net price. Manufacturers can list the drug at the lowest price they are willing to offer, or they can list the drug at a higher price and then offer a discount that, once deducted from the higher price, will equal to the lowest price they are willing to offer. Since PBM reimbursement is based on the size of the discount, PBMs prefer the second compensation structure. And strangely enough, this is the dominant pricing structure.

As Drug Channel has documented, a drug’s list price (i.e., the higher price) has increased between 4% and 6% annually over the past five years, while the net price (i.e., the price including discounts) has increased go up. decline during the same period of time. As a result, the difference between gross and net prices (which Drug Channel has designated as a gross net worth bubble) has increased greatly.

PBM fees are related to the size of the discount, suggesting that PBM revenue has grown steadily over this period. Insurers’ costs were controlled because PBMs passed on the rebates to their “customers,” offsetting the insurers’ costs. The problem is that patients do not receive these discounts.

In fact, price reductions increase costs for patients. Uninsured patients often have to pay inflated list prices when purchasing drugs; Insured patients are harmed because their cost-sharing costs are often based on the drug’s higher list price.

Therefore, the link between PBM compensation and the size of the negotiated discount unfairly shifts costs from insurers to patients. This system persists because PBMs are accountable to insurance companies, not patients.

In other words, combining the PBM compensation with the size of the negotiated discount aligns the interests of the PBM and the insurer (as economic theory suggests) but distorts the interests of the PBM and the insurer. patient. This bias is driving up out-of-pocket costs for patients who need expensive drugs even though net drug prices are falling.

Ignoring these market realities, advocates say there are costs ranging from uncoupling PBM compensation to negotiated discount rates. Specifically, they asserted that decoupling would eliminate PBMs’ incentive to negotiate discounts, which would increase costs for Medicare and other payers.

Ignoring the fact that the PBM and the insurer are often the same company, this response essentially argues that sophisticated insurers are aware of the current net cost of the drug that will stand still while the PBM allows Insurance company drug costs increase. Obviously an unlikely outcome. Furthermore, if PBMs can only reduce insurers’ costs if they are allowed to maintain opaque pricing systems that harm patients, it is unclear whether PBMs add any value .

The benefits of PBM delinking being compensated from the size of the negotiated discount are clear when the inherent misaligned incentives of the current system are considered. Due to these inappropriate incentives, high drug costs are passed on to patients. This inequitable transfer leads to current drug affordability problems, which are better understood as problems of high out-of-pocket costs for patients rather than high drug prices.

Sally C. Pipes is President, CEO and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Wayne Winegarden is a senior fellow and Director of the Center for Health Economics and Innovation at the Pacific Research Institute.

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