With health care costs on the rise, prescription pricing practices are being scrutinized to a whole new degree. Policymakers have expressed ongoing concern regarding payment rates among the majority of prescription drugs distributed throughout the U.S. Pharmacy benefit managers (PBMs) are responsible for the negotiation of these payment rates, and while they are quick to point the finger at drug manufacturers, it is not yet clear who is to blame for rising prescription drug prices. Regardless, improving the value of pharmaceutical spending remains a primary goal for policymakers seeking to reform pharmaceutical reimbursement beyond the use of rebates.
Common PBM Practices
According to the National Community Pharmacists Association, PBMs use a number of common practices to drive up health care costs. While these practices can vary, one of the most common include classifying some generic drugs as brand drugs while continuing to charge brand drug prices. PBMs have also been found to use spread pricing by charging health care plans more to reimburse pharmacies, and then pocketing any difference in cost.
Another common PBM practice is the promotion of drugs based on the rebate obtained by the pharmacy benefit manager. This is typically not in the best interest of the consumer and instead reflects a focus on profit. PBMs tend to prefer brands that offer the highest rebates, even if there is a drug that is cheaper for the consumer. Other common practices to be aware of include abusive audit practices. Pharmacies are often penalized for minor claim errors that do not directly affect the claim which forces them to forego certain reimbursements.
A Look at Drug Pricing
Recently, two U.S. senators inquired about a practice used by some PBMs known as spread pricing. The inspector general of the Health and Human Services Department, who is in charge of examining the operations of certain government health programs, was asked to look into this concerning issue. Based on spread pricing practices, PBMs are paying a set price to pharmacies for a certain drug, but are then charging health care payers like Medicaid more for the same prescription.
Following a hearing in February that consisted of feedback from seven large pharmaceutical companies, five executives from PBMs, including UnitedHealth Group, CVS Health Corp, and Cigna Corp, testified in the April hearings on drug costs in front of the Finance Committee. During these hearings, the PBM executives claimed that their companies are doing their part to keep drug costs down, and in turn, saving their clients millions of dollars.
The large number of pharmaceutical drug manufacturers make it challenging for pharmacies to purchase the drug products they need directly from the factory instead of from third parties. The supply of prescription drugs involves a complex chain of wholesalers that help distribute prescription medications to pharmacies, who then provide the drugs to patients. Wholesalers are able to purchase these drugs in large quantities from drug manufacturers and then sell them to pharmacies at a higher price.
This business model is beneficial for pharmacies as it prevents pharmacies from having to coordinate drug pricing directly with drug manufacturers. They can also benefit from maintaining a reduced inventory. In the modern prescription drug market, most patients are enrolled with third party plans, such as insurance companies, that use PBMs to help manage prescription drug pricing and sales. However, lower copays help hide the actual costs of the medications which in turn increases patient demand.
The Role of Drug Rebates
PBMs receive prescription drug rebates from manufacturers after the point of sale which can account for up to 40 percent or more of the prescription drug list price. The value of these rebates can differ significantly based on a number of factors, such as the amount of competition that the drug currently has. To address the rising costs of drug prices set by brand-name pharmaceutical manufacturers, PBMs commonly use rebates as a negotiation tool.
PBMs are partially reimbursed for any drug rebates that they obtained. However, many have come to the conclusion that PBMs have more incentive to make high-priced prescription drugs a priority over more affordable options that could better benefit consumers.
Under a new Trump administration rule, a proposed regulatory change would ultimately end the practice of using PBM rebates in both Medicaid and Medicare programs as of January 1, 2020. If this change occurs, any discounts negotiated by PBMs with drug manufacturers would instead apply to the list prices paid by patients that use those drugs instead of being used in the form of rebates designed to reduce premiums. The end of PBM rebates should result in a higher use of low-cost generic or biosimilar drugs.
Premiums and Drug Prices
While new changes to prescription drug pricing is certain to reduce out-of-pocket costs for many consumers who pick up their prescription drugs from U.S. pharmacies, the premiums paid for drug coverage would inevitably rise. It would be the responsibility of Congress to develop new laws that banned the use of rebates in commercial plans that cover Americans of working age. If a proposal is finalized, Medicare beneficiaries may see an increase in total out-of-pocket costs and premiums.
The impact of the new rule is likely to hit Medicare beneficiaries the hardest. If rebate payments were to be eliminated, the payments in Medicare Part D would result in certain adjustments by PBMs and drug manufacturers. These changes would affect Medicare Part D premiums, as well as cost-sharing that is paid by pharmacy patients. If rebate revenue is lost, Part D premiums would increase with beneficiaries paying a small percentage and taxpayers taking on the remaining costs.
Changes in Prescription Pricing
Changes in the prescription drug pricing model are coming. However, it may take longer than you think. In early May, the Congressional Budget Office stated that the rule proposed in January by the HHS that aimed to lower out-of-pocket costs on drug prescriptions would actually cause federal spending to increase without resulting in the reduction of drug prices. Instead, the proposal would shift costs among the consumers.