Author: Thomas Waldrop, Fellow
Earlier this year, the Federal Trade Commission (FTC) announced that it had begun taking legal action against the three largest pharmacy benefit managers (PBMs), the third-party companies that manage prescription drug benefits for health insurance companies and employers. In its filing, the FTC accused these PBMs of abusing their market power to inflate the price of insulin and make it harder for patients to afford it. The three PBMs named by the FTC—Caremark Rx, Express Scripts (ESI), and OptumRx—control about 80 percent of the market.
The FTC’s action responds to a very real threat: around 30 percent of the U.S. population struggles to afford prescription drugs, and the burden of unaffordable prescription drug prices does not fall equally. Patients with lower household incomes and patients taking multiple prescription drugs are much more likely to report difficulty affording their prescriptions than their wealthier, healthier counterparts. Similarly, patients of color and uninsured patients are more likely to report worrying about being able to afford prescription drugs than white or insured patients. These high prices have real impacts on patient health: more than 20 percent of patients have reported either not filling a prescription or taking an over-the-counter drug instead, and 12 percent have reported rationing or skipping their doses. Figures 1 and 2 highlight these issues.
The pharmaceutical industry uses PBMs as a scapegoat for patients’ struggles to afford prescription drugs, suggesting that these middlemen are the sole problem. But while PBMs play a role in high drug prices, drug companies have an outsized impact as well. This commentary examines how both drug companies and PBMs contribute to high prescription drug prices in the United States, after which it provides a few major legislative solutions that Congress should pursue during the lame duck period to reform the pricing policies relevant to both PBMs and pharmaceutical companies.
Why Are U.S. Drug Prices So High?
Numerous factors contribute to the high prescription drug prices in the United States, and they collectively result in a system in which pharmaceutical companies charge whatever price they believe the market will bear. This price is known as the list price, similar to the sticker price when buying a car.
In 2022, Americans paid list prices for drugs that were an average of 278 percent what thirty-two other industrialized countries paid. Even more strikingly, the list prices for brand-name drugs were an average of 422 percent more in the United States than in these other countries. Even after adjusting for discounts that U.S. insurers and public programs received, American prices were 213 percent of those paid abroad, and brand drug prices were still 308 percent of other countries’.
At the root of high U.S. drug prices is the ability of drug companies to charge high list prices, regardless of the value of a drug to patients. Drug companies have significant market power, allowing them to set exorbitant prices, because they often have no meaningful competitors. The first generic competitor for a given drug is typically around 40 percent less expensive than the brand-name drug, and on average, generic drugs cost 80–85 percent less than brand drugs.
One way that U.S. policy permits this concentration of market power is through granting drug companies years of exclusivity after a drug is submitted to the Food and Drug Administration for approval. These exclusivity periods are separate from and in addition to patent protection. This government-granted monopoly is meant to help drug companies recoup research and development costs. However, drug companies have found ways to extend exclusivity periods, such as through “pay for delay” agreements, under which drug companies pay their generic counterparts to delay introducing a competitor drug.
In addition to market exclusivity periods, drug companies also manipulate the patent system to delay competition. One such practice is called “patent evergreening,” in which drug companies make minor changes to a drug and receive a new patent. For example, the original patent for the EpiPen was approved in 1987, but the company that makes it has filed several patents due to changes in its delivery device, extending its patent protection into 2025—nearly four decades after its original approval. Another practice, known as “patent thicketing,” consists of developing a large, overlapping series of patents that competitors must ensure they are not violating before being able to bring a generic to market. Both of these practices also undermine competition and make it more difficult for generic drugs to come to market.
Other factors, like marketing by prescription drug companies to patients and health providers, limited public investment in later stage prescription drug research, and high executive compensation and stock market values work to drive up prescription drug spending. The high list prices that drug companies charge are the root problem; and consequently, high list prices are what allow other actors in the prescription drug supply chain to further drive up spending.
PBMs drive prescription drug spending up.
PBMs further burden patients by extracting additional revenue when performing their functions for health insurers and avoiding passing on negotiated discounts. PBMs develop and maintain the list of drugs that insurers cover, known as formularies, and formulary placement often determines the amount of cost-sharing a patient must pay. PBMs often also contract directly with pharmacies for insurers, paying the amount charged and billing insurers.
One of the major ways PBMs drive up prices is by capturing some of the savings achieved through rebates. PBMs receive these rebates from drug companies based on the list price of a drug and keep some amount of the rebate, rather than passing the entire savings on to insurers and patients. This practice both undermines the cost-saving effect of these rebates and incentivizes PBMs to drive patients to drugs with higher list prices in order to receive a larger rebate when it is set as a percent of the list price, for example. Better formulary placement lowers cost-sharing, making patients more likely to choose a drug, increasing volume and thus revenue for the PBM.
PBMs also drive up prescription drug spending by charging insurers a greater amount than they paid to the pharmacy for a drug, a practice known as “spread pricing.” Rather than driving patients to higher-priced drugs, spread pricing keeps some amount of the savings that should accrue to patients. Spread pricing may be more likely among generic drugs, as the list prices and subsequent rebates for generic drugs tend to be significantly lower.
Importantly, PBMs are already paid an administrative fee as part of their contract with insurers: these revenue-generating practices are not necessary for PBMs to operate. It is also worth noting that while PBMs exacerbate the problem, much of the ability for them to do so is facilitated by drug companies’ high list prices. If prescription drug prices were lower, the ability of PBMs to further extract revenue from patients would be limited, though spread pricing would likely remain an issue.
Making Prescription Drugs Affordable Will Require System-Wide Reform
Patients could, and should, be better protected from the practices described in this commentary, and those protections can be pursued through legislation. To truly tackle high prescription drug prices, the pricing practices of both PBMs and pharmaceutical companies must be reformed... Continue Reading
Comments