Small businesses -- your favorite local coffee shop, boutique, salon and florist -- punch way above their weight in the U.S. economy.
Making up 99.9% of all U.S. businesses, they've created nearly two in three new jobs and employ nearly 62 million Americans. But as small businesses navigate recent challenges stemming from inflation and labor shortages, entrepreneurs are increasingly wary over the skyrocketing health insurance costs they face. And they are becoming increasingly aware that the middlemen who sit between insurers and drug companies are a big cost driver.
These pharmacy benefit managers, or PBMs, have devised ingenious ways to exploit the system.
The key conduit between drug manufacturers and patients, PBMs create the "formularies" of covered medicines for insurance plans. With their large purchasing power, they are able to extract substantial rebates and other discounts and fees from drug makers in exchange for favorable formulary placement -- that is, more sales. Those discounts are passed along to insurers (once the PBM pockets a portion) and then, at least in theory, to employers and their employees in the form of reduced premiums.
You have to say "in theory" because in practice, the process is a black box: major PBMs keep their negotiated discounts secret. Worse, perverse incentives plague the industry to the detriment of small businesses, working families, and the American taxpayer.
Thanks to a wave of mergers and acquisitions over the past decade, the ten largest PBMs now control 97% of the national market for their most common services, according to a report from the American Medical Association. The four largest PBMs gobble up two-thirds of that market. Most alarmingly, the top three -- CVS Caremark, Express Scripts, and OptumRx -- have established vertically integrated ownership structures that align their profit incentives with those of their affiliated insurers and specialty pharmacies.
Here's an important point to keep in mind: Under employer-provided health plans, the money to pay for care comes from two sources -- businesses, through their contribution to insurance premiums, and employees, through their premium costs, copays and coinsurance.
The middlemen administer the collection of this revenue and the payments to healthcare providers. Through their interlocking ownership structure, PBMs, insurers and pharmacies each pile on more administrative costs. Their common goal is to extract as much revenue as possible while paying as little to providers as possible. Drug maker discounts and rebates never get to where they would make a difference for patients -- with lower costs at the pharmacy counter.
These PBM goliaths have every incentive to exploit the businesses and employees paying for health insurance -- and they have the buying power to do so. Studies show that PBMs routinely mark up generic drugs around 20% and often exclude generics from their formularies when they can pocket higher rebates with name-brand drugs.
Another recent study demonstrated that PBMs dramatically increased their profits with a 51% increase in administrative fees and pharmacy fees. With these obscure, anti-competitive practices, PBMs manage to divert billions into their own coffers at the expense of businesses, employees, and also taxpayers, in the case of public programs like Medicare and Medicaid.
As every small business owner knows, competition helps keep prices low and customers satisfied. But the modern PBM landscape is anything but competitive.
Thankfully, there's hope on the horizon for small business owners.
One innovation is the rise of cash-only pharmacies, like Mark Cuban's Cost Plus Drug Company or Blueberry Pharmacy. These pharmacies buy from drug makers and sell to patients at a modest flat markup, offering full price transparency. A study illustrates the massive cost savings in this approach, showing that if Medicare had relied on the Cost Plus Drug Company's drug pricing in 2020, the program could have saved $3.6 billion.
For small business owners operating with thin margins, new approaches like this can help them offer the benefits employees need without the black-box pricing schemes of PBMs, insurers and affiliated pharmacies.
Bottom-up changes in business practices also point the way forward for policymakers looking to support small business. There's an emerging bipartisan consensus among lawmakers in Congress to pass a suite of PBM reforms, including reporting requirements to achieve price transparency, mandated rebate pass-throughs to drive down out-of-pocket costs at the pharmacy counter, and delinking PBM compensation from the list price of drugs to remove harmful pricing incentives.
These reforms will provide substantial relief to small businesses across America. Congress should act now.
Author: Angela Dingle
Angela Dingle is acting president & CEO of Women Impacting Public Policy, a national nonpartisan organization that advocates on behalf of women entrepreneurs.