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Nearly half of every dollar spent by Medicare drug plans goes to private health insurers' pharmacy benefit managers and wholesalers

As members of Congress get back to business after the holidays, they seem to be poised to pass legislation that would address some of the abuses of pharmacy benefit managers (PBMs), the middlemen who extract so much money from the pharmaceutical supply chain. 

Recent research adds more urgency to the need to rein those companies in. And it’s important to point out that the three biggest PBMs, all of which are owned by big for-profit insurance companies, control 80% of the market. That’s far more concentration than in the pharmaceutical industry, as you’ll see below. 

As Ge Bai, Ph.D., CPA, professor of health policy and management at Johns Hopkins Bloomberg School of Public Health and professor of accounting at Johns Hopkins Carey Business School, explained in a recent episode of the excellent Relentless Health Value podcast, PBMs take far more money out of the supply chain than any other entity, including the drug makers.

Bai told podcast host Stacey Richter that researchers at Hopkins and the University of Utah looked at the 45 most commonly used generic medications taken by patients enrolled in a Medicare Part D pharmacy plan in 2021. They found that for every $100 spent by the Part D plans, $41 went to the PBMs, $30 to the manufacturers, $17 to the pharmacies that dispense the drugs, and $12 to the wholesalers. 

In other words, more than half of every dollar paid by Part D plans went to intermediaries (middlemen), and many of those middlemen–the big insurers that own the big PBMs–also operate Part D plans

In fact, as the researchers noted in an October 2023 article in JAMA: “All but 29.9% of Medicare Part D dollars spent on 45 high-utilization generic drugs went to intermediary gross profit.”

And then there is this: Those insurers/PBMs make Part D enrollees pay varying amounts of money out of their own pockets–in some cases significant amounts–before their Part D plans will pay a dime. No wonder so many people on Medicare walk away from the pharmacy counter without their medications because of what they have to shell out. It’s money many of them simply do not have. They’re seniors and disabled people, and many if not most have little or no income besides their Social Security checks. 

As Bai and Richter point out, 90% of the medications Americans take are generics, which are far cheaper than brand-name drugs. And Bai says generics should be cheaper in America than in other countries. Manufacturers, she explains, “get, in general, lower revenue in the United States for generic drugs than from other countries. We have very affordable generic drugs then from the manufacturer’s perspective, but probably not from the patient’s perspective.” 

And here’s another stunning fact uncovered by researchers at the University of Toledo College of Pharmacy and Pharmaceutical Studies: Because of a common practice in the PBM business called “spread pricing,” 79% of the time Part D patients who haven’t yet met their deductible can get their drugs cheaper by paying cash than by using their insurance and paying the price “negotiated by their PBM.” Keep in mind that patients often have to pay the total cost of their medications–or a copayment that in many cases is higher than what their PBM pays for the medications–until they reach their deductibles, which are determined by their Part D plan. As Richter says, “Getting PBMs in the mix just seems to make the drug prices higher for patients.”

How crazy is that? And here’s the thing: many if not most people never reach their deductible. Patients not only pay the Part D plan a premium every month, but they might also have to pay the entire amount of the medication–at a price inflated by the PBM. Now you see why PBMs have become one of two big cash cows for Big Insurance. The other is Medicare itself: The so-called Medicare Advantage plans insurers own and market aggressively are also exceedingly profitable, as are their Part D plans.

As noted above, the three biggest insurers–UnitedHealth, CVS/Aetna and Cigna–own the three biggest PBMs, and those companies’ PBMs made $27.6 billion in profits in 2022. And those companies are far bigger than any of the big drug makers, which themselves are quite profitable. 

There is far less concentration among pharma companies compared to the PBMs. All three of the insurer/PBM companies rank higher on the 2024 Fortune 500 list of American companies than any of the drug makers. United is now #5, CVS/Aetna is #6, and Cigna is #15

The big wholesalers are also bigger than any pharma company. McKesson is #9, AmerisourceBergen is #11 and Cardinal is #14. Elevance (previously known as Anthem), which also has a PBM, is #22 and Centene is #25. The biggest pharma companies on the list are Pfizer at #38 and J&J at #40.  

Bottom line: The PBMs and wholesalers extract far more money from the supply chain than drug makers and pharmacies, and seniors and disabled Americans on fixed incomes are being fleeced to make PBMs’ outsized profits possible.

Lawmakers need to know this and do something about it. If they could end PBM’s profiteering, there would be billions of dollars available to fund other important programs, including Community Health Centers, which provide care for millions of low-income Americans across the country. Getting adequate funding for those centers has been one of Senate HELP Committee Chair Bernie Sanders’ major causes for years. 

He and Republican senators agree on the need but haven’t come to terms on how much should be allocated for the centers. Sanders has proposed $200 billion, far more than Republicans have agreed to, in large part because they say Sanders and advocates haven’t figured out where to find the money in the federal budget. 

Last fall, Sanders and Sen. Roger Marshall (R-Kansas) issued a press release announcing their agreement on a plan to fund the centers at a level that would be “fully paid for by combating the enormous waste, fraud and abuse in the health care system, making it easier for patients to access low-cost generic drugs and holding pharmacy benefit managers accountable.”

As members of Congress take up PBM reform, they need to understand how PBMs are ripping off taxpayers, seniors and disabled Americans to enrich their shareholders and executives.

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Wendell Potter is an expert at exposing the gross underbelly of the health insurance industry. This article shows how the private sector has figured out how to fleece the govt and to deplete Medicare funds at a faster rate.

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