Middlemen Are Inflating the Cost of Prescription Medicines

To paraphrase Winston Churchill, Democracy is the worst form of Government, except for all those others. It could be said the same is true for America’s healthcare system. There is no doubt that parts of it are broken, but our free-market delivers more, new drug innovation than all the rest of the world combined.

However, when it comes to actually treating patients, the U.S. ranks last among our peer nations in terms of high costs and poor outcomes. Americans spend nearly twice as much on health per person as comparable countries. By far, the biggest chunk of health spending in the U.S. is the cost of direct patient care. This includes payments to hospitals, clinics, and doctors.

This is interesting when you consider that talk of high healthcare costs always seems to focus on prescription medicines. In truth, pharmaceuticals account for around 12 percent of total U.S. health spending. As you drill down further within the numbers, you find that more than half of total spending on brand-name medicines goes to players who have nothing to do with research, development or manufacturing.

These other stakeholders – including Pharmacy Benefit Managers (PBMs), insurance health plans, hospitals, government programs, and pharmacies – all tack on administrative fees as they play their role in the supply chain that gets the medicine to you. Suffice it to say, this network and the impact it has on prices is incredibly complex and lacks transparency.

By far, the most problematic stakeholder within the bunch are PBMs. Over 80% of pharmaceuticals in the U.S. flow through these middlemen on their way to patients. In their simplest form, PBMs are giant buying networks for drugs, that in theory have the power to drive down costs. The reality is that PBMs are driving up drug costs by an estimated 30% as they charge ever-growing fees and rebates from manufacturers, while also billing pharmacies and health plans at inflated rates.

Government regulation is a cornerstone of a healthy free market, and when reasonable oversight of an industry sector is lacking, profit tends to trump corporate responsibility. The business practices of three large PBMs that dominate the market are increasingly called into question. Lobbyists for the PBMs have even gone so far as suing the federal government to block a rule requiring them to provide clarity around the prices they negotiate with drug companies.

Medicare and Medicaid are currently considering a rule that would improve transparency within their programs, however it stops short of effective measures to ensure cost savings reach consumers at the pharmacy counter. Increasingly state legislatures are stepping up to drive the change that is needed. As an example, West Virginia recently passed a first-of-its-kind state law that requires savings negotiated by PBMs be shared directly with patients. This bipartisan solution represents a solid framework for other states looking to lower prescription costs for patients.

As policymakers work to curtail healthcare spending, they need to consider which reforms will truly bring value to the broader health care system. Transparency into PBM business practices and regulation that properly directs billions of dollars in rebates and discounts on to patients will address one of the most broken components of our healthcare system.

Consumers can benefit when middlemen exist to secure the best prices for medications, though as it stands now PMBs look more like the problem than the solution.