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The Cantwell-Grassley PBM Bill Is Much Needed But More Can Be Done

Health Affairs

Senators Maria Cantwell (D-Wash.) and Chuck Grassley (R-Iowa) recently introduced legislation that aims to shed light on the pharmacy benefit manager (PBM) market. The new proposal would prohibit a PBM from engaging in commercial practices known as spread pricing and pharmacy clawbacks unless it passes all rebates and concessions received from drug manufacturers to health plans and discloses all cost, price, and reimbursement information and all fees, markups, and discounts charged to health plans and pharmacies. It would also mandate greater transparency by requiring PBMs to submit an annual report to the Federal Trade Commission (FTC) about the aggregate revenues they take in from spread pricing and clawbacks, their reasons for specific changes in formulary placements, and business practices related to treating pharmacies affiliated with PBMs differently than unaffiliated pharmacies.

What Problem Does The Bill Address?

The first question one might ask is whether the bill will solve a critical problem or whether it is an example of burdensome regulation with little public benefit. Research from the USC Schaeffer Center for Health Policy & Economics suggests that the bill is much needed.

Many PBM commercial tactics leverage the current system’s opacity and complexity in ways that increase their profits while avoiding scrutiny. For example, PBMs may retain manufacturer rebates as profits rather than passing them through to their health plan clients. When health plans lack full transparency and cannot see how much manufacturers paid in rebates, they do not know how much their PBM retained as profits.

“Spread pricing” is another practice that leverages opacity in the system to allow PBMs to secretly collect large margins. When a beneficiary fills a prescription, the PBM reimburses the pharmacy one price while charging the health plan sponsor a higher price and pockets the difference or “spread.” Because neither the plan nor the pharmacy knows what the other side was paid or charged, the practice hides the PBM’s margins. In 2018, Ohio’s auditor found that the average spread on generic prescriptions filled by Medicaid managed care beneficiaries was 31.4 percent, costing taxpayers of Ohio $208 million in one year.

In a third controversial practice, PBMs withhold reimbursement or charge pharmacies “direct and indirect remuneration” (DIR) fees and “clawbacks” after a claim has been settled, with many pharmacists complaining that these practices are arbitrary and applied unfairly. Some claim that, by imposing smaller fees and clawbacks on pharmacies in their corporate family than those imposed on unaffiliated pharmacies, PBMs are driving unaffiliated pharmacies out of business, further consolidating pharmacy markets. But pharmacies have little recourse given the dominant position of major PBMs.

Many stakeholders question whether PBMs are using practices like these to benefit patients and payers, or to earn excess returns on their own account. If the latter, then the current drug distribution system is inefficient, failing to get medicines to the patients who need them for the lowest possible total expenditure.

Our research shows that of every $100 in spending on drugs sold in retail pharmacies about $41 goes to intermediaries in the supply chain, such as PBMs. These intermediaries are earning excess returns compared to the average firm in the S&P 500, and these excess returns are rising over time. Our recent analysis of the market for insulin underscores these findings – we find the share of spending going to intermediaries is rising rapidly while overall insulin spending changed little.

Part of the reason PBMs and other intermediaries can earn excess returns is the lack of competition and transparency in these markets. Our analysis shows that state efforts to improve transparency in drug costs have largely fallen short. At the same time the top three PBMs in the US have been gaining market share and now control 80 percent of the market nationally. They have further consolidated their dominance by vertically integrating with health plans and pharmacies.

To understand whether PBMs and other intermediaries are making the system more efficient while earning these large profits, Schaeffer researchers compared the price Medicare Part D plans paid for common generic drugs to prices paid by Costco members filling the same prescriptions with cash. (Part D plans are administered through private PBMs and insurers.) We found that Medicare overpaid on 43 percent of claims analyzed. This amounts to $2.6 billion in overpayments in 2018 alone.

In short, PBMs lack incentives to deliver low prices to consumers or reduce costs to the system. Instead, their interests are aligned with increasing their own profits.

How Does The Bill Address The Problem?

This bill is a big step forward in making pharmaceutical distribution more efficient. There are several things to like about it. Most importantly, it puts transparency front and center, removing much of the current opacity that allows PBMs to hide profits from health plans and pharmacies. It prohibits tactics like spread pricing and clawbacks that use opacity in the existing system to create hidden profits for PBMs, unless PBMs disclose the kind of detailed financial information about those tactics that would effectively reveal those profits.

Furthermore, if PBMs choose to continue engaging in clawbacks and spread pricing, they must also pass all manufacturer rebates on to their health plan clients, eliminating yet another source of hidden PBM profits. This should lower costs for health plans by either reducing the excessive PBM margins that plans are currently paying for, or by revealing information about spreads and other mark-ups so that health plans can comparison shop for PBM services with more complete information, pharmacies can have more information about reimbursements, and both can negotiate better contract terms with PBMs. If health insurance markets are competitive, the majority of these savings should be passed on to consumers as lower premiums.

The bill also promotes competition in the pharmacy market by requiring PBMs to report how much they claw back from pharmacies, including any differences in reimbursement rates or clawbacks charged to affiliated versus non-affiliated pharmacies. Such information will limit the ability of PBMs that are vertically integrated with pharmacies to inhibit competition by giving more favorable terms to their affiliated pharmacies.

The greater transparency promoted by the bill can highlight areas of inefficiency and spur policy solutions to address them. Analysis of the profits earned by players in the pharmaceutical distribution system are currently limited because of the existing lack of transparency and data limitations that prevent researchers and policymakers from discovering how widespread or intensive different practices are.

What More Could Be Done?

The fundamental problem in the PBM market is lack of competition. As noted, the top three PBMs in the US control 80 percent of the market. We need to lower barriers to entry in the PBM market with such changes as harmonizing state and federal regulations to make it easier for a PBM to enter the market in several states simultaneously. In addition, the FTC should more fully investigate horizontal mergers in the PBM market and also vertical mergers among PBMs, health plans, and pharmacies. More attention should also be paid to other intermediaries in the supply chain. The FTC should also investigate whether wholesalers, pharmacies, and health plans, particularly those that are vertically integrated with PBMs and other intermediaries, are acting in the best interest of patients.

We need new value-based payment models that improve access to drugs and at the same time preserve incentives for innovation. Schaeffer Center researchers have proposed some of these new models, including drug licenses for innovative therapies and performance-based reimbursement for drugs of uncertain efficacy. However, adoption has been hindered by regulatory hurdles such as Medicaid best-price rules.

Finally, even greater data transparency than what is proposed in the new bill is needed. While reporting aggregate spreads, DIR fees, and clawbacks annually to the FTC may alert the commission to potentially anticompetitive practices, disaggregating those data to the drug or drug-class level would provide insight into how well specific drug or drug-class markets are working, and enable more targeted interventions to address anticompetitive behavior.