Blame the game or the players? Regulating pharmacy benefit managers

Pharmacy Benefit Managers (PBMs) have received a lot of attention from Congress, the media, and the public. The original continuous resolution of 1,547 pages account contained numerous provisions to regulate these; The New York Times has conducted a series titled “The middlemen‘to criticize them; and Elon Musk asked“What is PPE?” to his 210 million followers on X Tuesday.

PBMs, hired by insurance plan sponsors to manage prescription drug benefits, compete by lowering premiums to generate revenue. For example, the average annual growth rate of Medicare Part D premiums was only 0.7% from 2010 to 2023, well below inflation. This remarkable stability is thanks to PPE.

The PPE business model dictates that they are opponents of drug manufacturers and pharmacies. PBMs influence the revenues of brand-name drug manufacturers by controlling the placement of their drugs on forms; well-placed drugs have high sales volumes. PBMs also influence pharmacies’ revenues by determining the reimbursement amounts they receive.

For branded medicines, PPE earn money by withholding discounts. Congress established protection of safe havens which exempt drug rebates from the federal anti-kickback statute. If the net price remains the same, PBMs would prefer drugs with a high list price and high discount to drugs with a low list price because PBMs can maintain larger discounts. The safe harbor is the root cause of rising list prices and high patient cost sharing (when tied to list price).

For generics, PBMs benefit spread prices—charging plan sponsors a high price while pharmacies pay a low price. This is similar to intermediaries in other industries who charge upstream players more than downstream players. However, due to the administrative complexity inherent in insurance transactions, generic drugs, with their low cost and predictable nature, are not insurable and action must be taken directly between patients and pharmacies, just like the way oil changes are paid for.

Insurance regulations mandate the coverage of generic medicines, including some over-the-counter medicationsAnd to limit the use of health savings accounts. These regulations invite PBMs to take advantage of tiered pricing, which leads to higher expenses, premiums and cost sharing, as well as lower reimbursements to pharmacies. Unsurprisingly, cash prices on instant pay platforms are often the same lower then the prices for insurance and PPE.

PPE-related provisions in the original Bill continuing the resolutionincluding decoupling PBM revenues from drug prices and banning spread pricing, aim to support pharmacies and align incentives between PBMs and plan sponsors. However, they fail to address the root causes of rebate withholding and spread pricing: Safe Harbor protection and insurance regulations, respectively.

Moreover, some provisions would do so weaken PBMs’ ability to keep premiums in check leads to higher expenses for both plan sponsors and patients. As professors Joey Mattingley, David Hymanand I discussed JAMA Health ForumEvery player in the drug supply chain is trying to make money, and there is no concrete evidence that weakening PBMs would benefit patients, except in cases where insurance and PBMs are completely bypassed for certain drug transactions.

Questionable behavior by healthcare players is often caused by poor rules of the game – unintended consequences of well-intentioned laws. Our new Congress, which takes office Friday, should focus on removing bad rules to improve the PPE game rather than applying band-aid solutions to the players.