California could lead the way on bipartisan prescription drug reform

OPINION – California State Senator Scott Wiener, D-San Francisco, recently introduced a bill aimed at reining in pharmacy benefit managers (PBMs), the middlemen largely responsible for the dysfunction plaguing our nation’s prescription drug market.

Wiener’s effort should attract the support of lawmakers on both the left and right. By cracking down on the activities of PBMs, they can deliver real savings for patients at the pharmacy counter.

It’s no secret that Americans are frustrated with what they’re paying for prescription drugs. According to one recent poll, more than eight in ten Americans say prescription drug costs are unreasonable. Here in California, nearly one-quarter of residents did not fill a prescription, skipped doses, or cut pills in half for cost-related reasons in the past year.

Most people blame drug companies for this state of affairs. But PBMs deserve the lion’s share of the blame.

PBMs are hired by insurers to negotiate with drug manufacturers over whether and how their medicines will appear on a health plan’s formulary, or list of covered drugs.

Where a drug shows up on a formulary can make or break its sales. If a health plan puts a drug at the bottom of its formulary and imposes a significant amount of cost-sharing, then beneficiaries are unlikely to opt for that drug. But if a health plan places a drug at the top of its formulary, with low copays, then the manufacturer is likely to see higher sales.

In exchange for prime placement on a formulary, PBMs demand discounts and rebates from drug manufacturers. They have little choice but to comply, especially because just three PBMs — Express Scripts, CVS Caremark, and Optum Rx — control roughly 80% of the market.

Those discounts and rebates are huge, amounting to $334 billion in 2023.

This insistence on rebates and discounts warps pricing incentives in the prescription drug marketplace. Here’s how.

PBMs have an incentive to prefer inflated list prices from which they can extract significant discounts or rebates from manufacturers. The higher the list price, the greater the possible discount — and thus the greater the payday for the PBM.

PBMs and health plans don’t tell beneficiaries about the lower price net of discounts and rebates they’ve extracted from a manufacturer. They point to the list price — and calculate beneficiaries’ cost-sharing or coinsurance responsibilities relative to that artificially high list price.

Imagine a drug with a $1,000 list price. A PBM might secure a 50% rebate, so the cost to the insurer is $500. Beneficiaries are totally unaware of these negotiations. If they have 20% coinsurance, they’ll have to send $200 to their insurer, rather than the $100 they’d pay if their cost-sharing obligations were assessed on the lower net price enjoyed by their health plan.

This warped market structure helps explain why, even though the discounts secured by PBMs have grown by nearly 60% since 2019, patient out-of-pocket drug spending has also increased.

Wiener’s bill would help address some of this dysfunction by requiring PBMs to disclose the real value of the rebates they negotiate with drug companies — and to pass those rebates on to payers or patients at the pharmacy counter. It would prohibit spread pricing, whereby a PBM charges a health plan more for a drug than it pays a pharmacy. And it would ban PBMs from engaging in self-dealing by steering patients to pharmacies they own. Patients could choose to fill their prescriptions at the in-network pharmacy that meets their needs.

Californians would understandably like to see the cost of prescription drugs come down. Tackling PBMs’ worst abuses would help accomplish that objective without distorting the incentives for drugmakers to develop new medicines, as blunt instruments like price controls would. Democrats and Republicans alike should be able to get behind Sen. Wiener’s effort.

Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute, a Pasadena-based think tank advocating free-market policy solutions.