Blaming the Middleman Won’t Lower Prescription Drug Prices

In recent years, drug prices have risen faster than inflation. Politicians are blaming this on businesses known as pharmacy benefit managers (PBMs) and, not surprisingly, are moving against PBMs with legislation. Yet the legislation will only make drug prices rise even higher.

PBMs negotiate discounts and rebates from drugmakers on behalf of insurance companies. In exchange for their services, PBMs keep a portion of any rebate they obtain from a drugmaker. A great deal of research shows that PBMs benefit insurers and patients by lowering drug costs. But that hasn’t stopped Congress.

Sens. Maria Cantwell, D-Wash., and Chuck Grassley, R-Iowa, are pushing the Pharmacy Benefit Manager Transparency Act, which will interfere with many of the incentives PBMs have to reduce drug prices. Most Democrats are on board, as are a fair number of Republicans. Unfortunately for patients, it seems likely this bill will be law by the end of the year.

The case against PBMs is based on skimpy evidence and economic ignorance, both of which were on display at a recent Senate Committee on Commerce, Science, and Transportation hearing supporting the bill.

In his testimony at the hearing, Grassley claimed that a two-year investigation into “insulin price gouging … found that the PBM scheme encourages drug makers to spike the drug’s list price in order to offer a greater rebate.” The two examples the investigation found of such “price gouging” were drugmaker Novo Nordisk and its insulin drug Levemir and pharmaceutical company Sanofi and its insulin drug Lantus. Yet the report never makes clear exactly how PBMs influenced Novo Nordisk.

The example of Sanofi isn’t much better. The report notes that “Sanofi appears to have increased Lantus’s list price so that it could improve its rebate and discount offering to payers while maintaining net sales.” (Emphasis added.) Appears? That’s pretty weak tea. 

Interestingly, the investigation put some of the blame on Obamacare, aka the Affordable Care Act. According to the report, Sanofi raised its list price of Lantus due to changes in health insurance markets — changes that “were partly driven by the implementation of the ACA, which put pressure on [health insurance] plan margins.”

The hearing not only lacked hard evidence — it was also bereft of basic economics. In her statement, Cantwell, chair of the commerce committee, claimed that PBMs “dictate the price people pay at the pharmacy.” That sort of argument would result in an “F” in Economics 101. As any economist worth his or her weight will tell you, prices are determined by the decisions of thousands — if not millions — of both producers and consumers. No single market participant dictates prices.

Cantwell posed a question: “Since 2014, prescription drug prices have increased 35 percent, outpacing increases in wages, gas, internet service, and food. So what is causing this sharp increase?” Cantwell no doubt blames PBMs. But such inflation is always the result of too much government spending. Beginning in 2014, the federal government injected a considerable amount of new cash into the pharmaceutical market.

For starters, 2014 was the year that the Obamacare exchanges began operating. The exchanges offered health insurance consumers substantial subsidies to purchase health coverage. This increased demand for health insurance. No doubt it also increased the demand for the goods and services that insurance buys, including prescription drugs.

A year later, Obamacare began injecting more money into Medicare’s prescription drug program, known as Part D. The new funding phased out a substantial gap in coverage known as the “donut hole.” It was a direct subsidy for prescription drugs that surely contributed to price increases.

The Pharmacy Benefit Manager Transparency Act will force PBMs to reveal the prices they negotiate with drugmakers, thereby reducing the leverage they have in such negotiations. They will also be forced to give up some of the money they make via spread pricing and charging fees to pharmacies, the latter of which is derided by critics as a “clawback.” With fewer funds coming in from drug negotiations, PBMs will have much less reason to negotiate lower drug prices.

University of Chicago economics professor Casey Mulligan — perhaps the only sensible person to testify at the hearing — noted why PBMs are under fire: “Manufacturers and pharmacies sometimes refer to … [PBMs] as ‘middlemen’ as if the PBMs were supply-chain toll collectors performing no legitimate economic function.”

Indeed, middlemen make easy targets because many people think that they make money off of others without providing any value. Congress is all too eager to indulge that view. And one of the academic “experts” at the hearing was eager to get in on the act, referring to PBMs as “parasitic.”

Governments find it very tempting to interfere with middlemen or remove them from the economy altogether. It’s only when the inevitable economic disaster occurs that the value of middlemen becomes apparent. Since politicians can’t resist the urge to meddle, it will only be a matter of time before we discover the value of PBMs. In the end, it will be patients who suffer.

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