With congressional Democrats’ prescription drug pricing plan stalled in the Senate, the Biden administration is reportedly considering enacting it administratively. Yet whether their price-setting proposal is implemented legislatively or through executive fiat, it would do more harm than good. For a better, bipartisan approach, federal policymakers should look to a new bill in Missouri that can dramatically reduce drug costs without the significant consequences associated with the Democrats’ plan.
Democrats propose lowering medication prices through price controls, euphemistically called price “negotiation.” Unfortunately, government price-setting reduces the amount of money drug companies can spend on research, threatening the prescription drug innovation pipeline. The nonpartisan Congressional Budget Office and numerous academic studies indicate Democrats’ Build Back Better price control plan would result in significantly fewer drugs brought to market in the coming years. Unsurprisingly, a recent large survey finds that nearly two-thirds of Americans oppose such government negotiation of drugs when they learn about its innovation consequences.
In contrast, Missouri legislators are tackling high drug prices by advancing legislation that addresses the true culprit for their rise: pharmacy benefit managers (PBMs).
Most people have never heard of PBMs, but they are one of the most powerful players in American healthcare. They are middlemen between drug manufacturers and health insurers. They provide almost no effective market function yet are responsible for the entire increase in drug prices in recent years. A new Missouri bill would regulate PBMs, reducing medication costs.
PBMs are owned by or affiliated with health insurers. They control the lists of drugs that health insurance plans cover. For a drug to become marketable, it must secure placement on these lists, called formularies. PBMs take advantage of this asymmetry by charging manufacturers enormous rebates as a condition of formulary placement. In other words, the prescription drug market is largely a pay-to-play operation that sticks ordinary patients with the tab.
These rebates get tacked on to the price of drugs, driving up their cost. Imagine a grocery store charged Heinz $2 a bottle for placement of its condiments on store shelves. Think what that would do to the price of ketchup. This scenario is behind today’s high drug prices, where rebates make up 40 percent to 50 percent of a medicine’s list price.
According to drug price data from SSR Health, an independent drug price data research organization, net drug prices (list prices minus rebates) have actually declined for the past several years as rebates have soared. While health insurers pay the discounted net price, patients are stuck with ballooning list prices for their pre-deductible and coinsurance costs. A recent analysis by the Drug Channels Institute finds that total rebates exceeded $200 billion in 2021.
For some drugs, rebates make up most of their price. A 2021 Senate Finance Committee report revealed rebates can amount to 80 percent of the price of insulin. The study details how one PBM’s insulin kickbacks rose from between one and three percent of the list price in 2013 to 56 percent in 2018.
Adding insult: PBMs often refuse to accept less expensive drug alternatives on their formularies because these products don’t offer lucrative rebates.
Missouri’s legislation would bring transparency requirements to PBMs, compelling them to disclose their annual rebates so the public can see just how much wasteful kickbacks drive up their drug prices. The bill would also require PBMs to disclose how they’re spending these vast rebate dollars.
Federal legislators can adopt such provisions in Congress to begin to reverse runaway drug prices. Even better, they can codify a Department of Health and Human Services rule finalized in November 2020 that requires these distortionary rebates in Medicare plans to be passed along to patients in the form of savings at the prescription counter. Under intense PBM lobbying, this rule’s implementation was delayed until 2026.
Americans are sick of partisan legislative and executive efforts that often have negative unintended consequences. Yet tailored, bipartisan legislation that reduces drug prices by eliminating this massive rebate distortion is something all Americans, especially patients, can get behind. Missouri can lead the way.
Scott Hardeman MD, FACS is a private practice otolaryngologist in St. Louis and a member of the Job Creators Network.