One in four people struggle to afford their medications, and eight in 10 people say the cost of prescriptions is unreasonable. Do we really understand why?
The answer: pharmacy benefit managers, or PBMs. If you’re not in healthcare, you’ve likely never heard of these conglomerates, even though some are in the Fortune 10. They impact consumers by controlling and driving up drug prices. After pressure from provider and pharmacy groups, and on the heels of the bipartisan Pharmacy Benefit Manager Transparency Act, the Federal Trade Commission launched a long-overdue investigation into the anti-competitive, anti-consumer practices of the major PBMs, including CVS Caremark, OptumRx, and Express Scripts, who control 80% of the prescription drug market.
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The major PBMs rely on our mistrust of the prescription drug industry, plus their opaque business models, to maintain sky-high prices and profits ($28 billion in 2019). Rather than growing profit through value, PBMs build it by inflating and obscuring the cost of drugs while restricting competition through bundling and other anti-competitive practices.
How do PBMs work? It’s complicated, on purpose. But the crux is this: PBMs negotiate “rebates” with drug manufacturers to ostensibly lower the price of drugs for consumers on commercial health plans. If you’re a drug manufacturer and don’t pay the rebate, you’re likely excluded from the PBM’s benefit plans. It’s a pay-to-play scheme, and a common practice in this market, leading to allegations that at least one PBM forcibly steered patients to more expensive drugs. Another way PBMs grow profits is adding margin to the price they pay the pharmacy versus what they charge the health plans and patients, a practice known as “spread pricing.” The PBM keeps the spread while raising drugs prices, and any savings comes out of the pockets of pharmacy owners.
What’s more, PBMs operate completely in the dark. There’s no transparency on rebates they get from drug manufacturers, why they cover some drugs but not others, and how they reimburse pharmacies for filling prescriptions. These practices have so inflated the cost of drugs that no one even knows what the real cost is, making all parties in the chain – pharmacists, employers, providers, consumers – completely disempowered. If you’re not mad yet, get ready: PBMs increase their control through bundling, or more precisely, “tying.” The three biggest PBMs are owned by or operate medical payers – CVS/Caremark now owns Aetna, ExpressScripts is now operated by Cigna, and OptumRx is a subsidiary of UnitedHealth Group. They use their newfound drug profits to subsidize their health plan premiums – the argument for vertical integration being, “we’re lowering the cost of healthcare.”
I call it moving money from the left pocket to the right. But the real strategy here is more nefarious. By leveraging their market power in the drug business, bundling this very profitable business with the lower margin medical insurance business becomes an effective tool for blocking new market entrants that would disrupt their lucrative model. The winner is the vertically integrated oligopoly; the loser is consumers.
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These conglomerates not only control what drugs are covered and what you pay for them, but even where you can buy them – whether you can use your local community pharmacy or the mail order pharmacy they own and operate. The result is that consumers have been steered away from essential community pharmacies and toward PBM-owned pharmacies, further restricting competition and increasing the PBM’s profits.
Because PBMs have created market distortion in price and prevented a more efficient market from developing, people can’t shop for the drugs they need. Co-pays are sometimes more expensive than paying in cash, patients increasingly can’t afford their medication, and pharmacies are struggling to survive.
So, what can be done? FTC, we look to you: you must nail PBMs on price transparency and tying, bringing real change to the industry through the following requirements:
- PBMs must disclose to their customers the actual net prices paid and rebates they receive for employer health plans.
- Make it illegal to limit a patient’s choice of pharmacy providers to the PBM’s owned pharmacy.
- Enforce existing prohibitions on price tying and bundling when used as a device to block competition.
- Continue expanding patients’ right to their data, with severe penalties making the cost greater than the rewards for protecting their existing business model.
Anything less will continue the pain at the pharmacy counter. Only through transparency can change come. When people know the price of their drugs and can compare prices across pharmacies and co-pay vs. cash, they can finally take control of their prescription drug experience – and make the right choices for their health.
Photo: illustration, Getty Images
Chris Blackley is the CEO and Co-Founder of Prescryptive Health. Chris brings more than 20 years of startup and leadership experience to Prescryptive Health. His prior startup in this industry delivered to market the first multi-tenant hosted platform for retail and mail order pharmacies and was recognized as a Visionary in Gartner Group’s Magic Quadrant.
Prior to launching Prescryptive, Chris spent 14 years at Microsoft leading commercial enterprise and public sector licensing in their Worldwide Licensing and Pricing business. Previously Chris led teams in software engineering and cyber security consulting at IBM and Ernst & Young LLP. He is a graduate of Texas A&M University (B.B.A) and Seattle University School of Law (J.D. cum laude).
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