Today , Sen. Bernie Sanders, I-Vt., will haul executives from three insulin manufacturers and three pharmacy benefit managers before the Senate Health, Education, Labor and Pensions Committee for a hearing on "the need to make insulin affordable for all Americans." Sen. Sanders is sure to call the pharmaceutical executives — who represent Eli Lilly and Company, Novo Nordisk, and Sanofi — greedy, as he has repeatedly during his tenure atop the HELP Committee. This time, though, PBMs will get some heat, too. Good. PBMs have unscrupulously created an opaque drug pricing system that has yielded riches for them — at the expense of patients and drug companies. PBMs act as middlemen between insurers and pharmaceutical firms. Insurers hire them to manage their prescription drug plans — to negotiate with drug companies over whether their medicines will go on a health plan's formulary, or list of covered medicines, and at what cost. Three PBMs — CVS Caremark, Express Scripts, and OptumRx — control roughly 80% of the market. So they have a lot of leverage to demand deep discounts and rebates from drug manufacturers in exchange for a good spot on a health plan's formulary.
In a perfect world, PBMs would pass those rebates directly to patients. But the available evidence indicates that PBMs keep a sizable share of the rebates they receive.
That creates an incentive for higher list prices for drugs. The higher the list price, the greater the potential rebate a PBM can demand. PBMs and insurers don't care about those high list prices. They aren't paying them. But patients do, in a way. PBMs and insurers determine patient cost-sharing as a percentage of those inflated list prices. This convoluted process has pushed patient spending on medications progressively higher. And there's no better case study than insulin.
In 2012, the average Type 1 diabetes patient and his health plan spent a combined $2,864 on insulin per year. By 2016, that number had nearly doubled to $5,705. Between 2017 and 2018, roughly one in seven Americans who used insulin spent more than 40% of their disposable income on the medication.
Pharmaceutical companies have received much of the blame for these rising costs. At first glance, that's understandable. The list prices of some of the most widely used insulins on the market have jumped 600% over the past 20 years.
But drug companies aren't benefiting from those higher prices. Consider Sanofi's most-prescribed insulin, Lantus. Between 2012 and 2021, the medicine's list price rose 143%, even as the net price — the cost after all rebates and discounts — decreased 54%.
The reason for this mismatch? PBMs.
Over time, PBMs have demanded ever-greater discounts, calculated as a percentage of the list price, in exchange for placement in the top tiers of a formulary.
Insulin makers have responded by raising list prices and offering bigger rebates. Lantus's maker now offers an estimated discount of more than 80% off the list price.
And it's not just Sanofi. Between 2014 and 2018, the share of insulin expenditures accruing to drugmakers decreased by a third, while the share flowing to PBMs increased by nearly 155%, according to a study published in JAMA Health Forum.
Of course, PBMs don't see a problem with the arrangement. Because PBMs and insurers are paid coinsurance and administrative fees based on the list price of a drug, they're actually incentivized to put high-cost, high-rebate drugs on a plan's formulary.
That's why low-cost versions of popular insulins haven't caught on in recent years. Eli Lilly, for instance, launched a clinically identical version of Lantus in 2016 for 85% of the price. But in 2020, the medicine was substituted for Lantus only a third of the time in private health plans and under 4% of the time in Medicare Part D plans.
As long as these perverse incentives exist in the insulin market and beyond, patients will continue to pay higher prices for their medicines at the pharmacy counter.
Today's hearing represents an opportunity for lawmakers to explore the dysfunction that PBMs have sown in the prescription drug market. Addressing that dysfunction — and lowering out-of-pocket costs for patients — will require tackling PBMs' most abusive pricing practices.
The sixth paragraph of this piece has been updated for clarity.
Forbes Contributor: Sally Pipes Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute.