Congress on the Brink of Disrupting the PBM Market
Alex Brill | Commentary
During much of 2024, the prevailing view in Washington was that some policies related to pharmacy benefit managers (PBMs) would be included in the end-of-year continuing resolution. However, the PBM industry was coincidentally saved from a series of costly government intrusions when then-president-elect Trump derailed the oversized legislative package for containing too many extraneous issues. Among the original bill’s 1,500 pages were provisions that would have restricted PBMs in Medicaid (a ban on “spread pricing”), Medicare Part D (a prohibition on contracts that tie PBM revenue to drug price discounts), and private group health plans (mandated transparency requirements).
Of particular interest is a provision that would have mandated that PBMs pass 100 percent of all price concessions (“rebates, fees, alternative discounts, and other remuneration related to utilization of drugs or drug spending”) to their commercial plan sponsor clients. PBMs would continue to be permitted to collect what the government defines as “reasonable payments” from health plans for “bona fide services.” In evaluating the appropriateness of a policy such as this, it is reasonable to ask two questions: First, what problem does this federal intervention and series of mandates seek to address? Second, will this intervention achieve its objective?
While many pharmacies and drug manufacturers would certainly prefer that PBMs have less authority and independence in running their business, there is no compelling evidence that it is more efficient for the market for PBMs to pass all drug savings to their clients before then recouping some.
To the extent such a change has any overall impact, it may alter the perspective of the health plans in two ways: First, it would make transparent to the health plans the share of rebates, fees, and discounts required by PBMs to perform their function, though these details may already be in contracts between a health plan and their PBM. Second, it would frame for the health plans the amount of absolute fees paid to the PBM for their services. Notably, it tells health plans nothing at all about the value of the service being provided or the profits earned by the PBM in exchange for providing their services.
What impact may this change have on the PBMs themselves? Two concerns should be considered. First, this additional degree of transparency with health plans may stifle PBMs’ willingness to offer more attractive contracting terms to larger plans. On net, the consequence may be fewer discounts and higher overall average fees to PBMs.
Second, such a change may temper PBMs’ incentives to deliver customers low net prices. To the extent that this policy diminishes PBMs’ existing ability to structure “shared savings” programs for themselves and their customers, total rebates, fees, and discounts would decline. The beneficiaries of such a consequence would be obvious: the drug manufacturers who pay these rebates, fees, and discounts.
Quantifying these effects precisely is challenging as there is little or no precedent from which to draw. But we know with confidence that preserving the incentive for PBMs to negotiate for lower net drug prices is critical for them to do so aggressively. Previously, I estimated that banning incentive structures among commercial plans could lead to health plan premiums increasing by $8.4 billion–$26.6 billion. While the magnitude of the risk associated with the policy discussed here is more modest, the direction of the impact can be expected to be the same. Plans will, on average, pay more, not less.