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White House takes a stab at lowering drug prices, but ignores a big piece of the puzzle

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White House takes a stab at lowering drug prices, but ignores a big piece of the puzzle

Feb 08, 2024 | 4:50 am ET
By Marty Schladen
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White House takes a stab at lowering drug prices, but ignores a big piece of the puzzle
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The Biden White House continues to promote its effort to lower prescription drug prices by going after “Big Pharma.” But while that industry is guilty of well-documented abuses, the effort so far mostly ignores another important part of the supply chain.

That would be drug middlemen known as pharmacy benefit managers. Each is part of a corporation that also owns a top-10 health insurer, and each corporation is one of the 15 largest in the United States.

The effort the White House is talking up is part of President Joe Biden’s landmark legislation, the Inflation Reduction Act of 2022. Amid sweeping policies aimed at incenting clean energy and going after wealthy tax cheats is a long-talked about attempt to slow the rising cost of prescription drugs: by using the huge purchasing power of Medicare to negotiate directly with drug manufacturers.

The administration started by capping the cost of insulin for Medicare recipients at $35, and by selecting 10 other drugs for which to negotiate prices. That list is expected to expand, and meanwhile, the White House last week kicked off negotiations by making initial offers for the original list of drugs.

“A new era in Medicare has begun with the U.S. Department of Health and Human Services and the Centers for Medicare and Medicaid Services launching negotiations for better, fairer prescription drug prices,” HHS Secretary Xavier Becerra said in a conference call with reporters. “… This effort is a direct result of President Biden’s commitment to lower drug costs for the American people.”

Superficially, it makes sense. If the cost of prescription drugs is high, the obvious culprits would seem to be the companies that make them.

The statements issued by the White House reinforce that notion.

“After decades of opposition, President Biden enacted a law that finally takes on Big Pharma and gives Medicare the power to negotiate drug prices,” a White House memo dated Feb. 1 says.

A Dec. 7 fact sheet goes even further, seeming to imply that drugmakers are solely responsible for inflating prescription costs.

“President Biden believes that health care should be a right, not a privilege,” it says. “For too long, corporate special interests and trickle-down economics have allowed Big Pharma to make record profits, while millions of Americans struggle to afford health care and prescription drugs to treat common and chronic conditions.

However, that ignores another huge player in the drug supply chain. 

The fact sheet noted that the 25 top drugmakers control about 70% of revenue in that sector. But it didn’t even mention pharmacy benefit managers, or PBMs. In that sector, just three companies — CVS Caremark, OptumRx and Express Scripts — control an estimated 80% of that marketplace, and they play at least as large a role in setting drug prices as the drugmakers themselves.

That’s because they represent insurance companies in drug transactions. Each is also part of a corporation that owns top-ten insurer: CVS/Aetna, Cigna/Express Scripts, UnitedHealth/OptumRx.

When the PBMs represent those and other insurers, they have great leverage negotiating with drugmakers. 

Pharma companies abuse the system through stratagems such as “product hopping.” As the patent on one drug winds down companies sometimes make meaningless changes, extend the patent, and quash competition from generics. 

But in their negotiations with drugmakers, the big PBMs wield an even bigger weapon — access to tens of millions of patients.

As insurers’ representatives, the PBMs control drug “formularies” — the lists of drugs that are covered by insurance and which get the most favorable treatment. In exchange for such treatment, drugmakers pay them huge rebates and give other discounts in a system that is far from transparent, so it’s hard to know how much PBMs are pocketing and how much they’re passing along to payors such as Medicare, Medicaid or private insurers.

It’s long been suspected that to pay for those discounts, manufacturers increase the “list price” of their products. That’s what you pay if you don’t have insurance. In addition, copayments and coinsurance are often based on list prices.

Research has shown a correlation between increasing rebates and list prices. In 2020, researchers at the University of Southern California’s Schaeffer Center found that a $1 increase in rebates on a drug was associated with a $1.17 increase in its list price. In other words, however quickly the rebates drugmakers give manufacturers grow, list prices grow even more quickly. 

However, the Biden administration has said next to nothing about PBMs as it touts its efforts to lower drug costs. During last week’s conference call, a senior administration official didn’t seem to want to even talk about the industry.

“We are talking today about the implementation of a statute that gives (the Centers for Medicare and Medicaid Services) the power for the first time ever to negotiate prescription drug prices, and that is what CMS is focused on and those are the announcements we are focused on today,” she said. “Those announcements don’t stand in isolation. The president has been focused on stimulating competition throughout the health care sector and we look forward to continued conversation about how to lower health care costs.”

The White House didn’t respond to a follow-up question asking whether it would require PBMs to give equitable formulary treatment to the drugs for which the government is negotiating with manufacturers.

However, pharmacy benefit managers are being scrutinized by another arm of the government. In 2022, Biden appointees to the Federal Trade Commission led the way in opening a major investigation into possible anticompetitive practices by the industry. 

But the administration might have a financial incentive not to get too tough on PBMs. That’s because Medicare gets a portion of the rebates PBMs extract from drugmakers. In 2022, the Congressional Budget Office estimated that the federal government would net about $180 billion in such rebates over the course of a decade.