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Drug Companies and PBMs Are Both Major Reasons for High Drug Costs

As November turns to December, consumer advocates, stakeholders, legislative staff, and legislators are getting ready for the next Congress. They would do well to read this new article by Professor Robin Feldman of UC Hastings, which helps explain why prescription drugs cost so much and spells out the role drug companies pharmacy benefit managers (PBMs) play in increasing these costs.

In recent years, drug prices have gone up at an astonishing rate, far exceeding the rate of inflation or even other health care spending. Specialty drugs are the most expensive. For example, Novartis is planning a $475,000 price tag for its Car-T drug Kymriah, and therapies that treat hemophilia cost $580,000 to $800,000 per year, making them unaffordable for all but the wealthiest patients. But generic drugs and commonly used medications have seen their prices increase as well. American consumers are now paying higher prices for drugs that treat diabetes, asthma, and high cholesterol.

The United States has a very confusing and needlessly complicated system for negotiating drug prices and rebates, and to make matters worse, this system is not transparent. In fact, drug companies, PBMs, and health insurance companies have actively fought efforts to make it more transparent! And PBMs are one of the chief reasons drug prices are so high and getting higher. Originally PBMs were just supposed to process claims and perform routine management, but in recent years they have taken on additional roles for health plans, and reaped greater profits. They help health plans set formularies and negotiate prices from drug companies, and they claim to be reducing costs.

But if PBMs are really reducing costs, they are not doing a very good job. From 2006 to 2014, drug prices increased by an average of 57%. And this trend has continued in recent years. Drug companies have raised their prices to make more profits, and the structure encourages them to do that. And there are no penalties to doing so-Medicare doesn't negotiate lower prices, and most states don't have the power to hold companies accountable for excessive price increases (with the partial exception of Maryland). Plus, drug companies offer rebates, which often serves as incentives to prescribe certain drugs, and PBMs reap greater profits as well.

Professor Feldman observes that "in exchange for lucrative payments, a drug company can ensure that more expensive drugs receive a favorable reimbursement position and less expensive drugs are shut out." This has several bad effects: 1) it ensures that everyone pays higher prices for more expensive drugs, especially consumers, 2) it discourages innovation, since many drugs are effectively blocked from markets and consumers can't get them, and 3) it harms efforts to lower drug prices, since powerful corporations have a strong incentive to promote more expensive drugs.

Drug companies and PBMs are often manipulating markets and using patents and exclusive measures to stifle competition. Drug companies raise prices, and the money created by the rebate goes to other entities-PBMs, hospitals, and doctors-who extend competition free zones for certain drugs. The results are higher prices and less competition.

In order to fix these problems and lower drug prices, we must take several steps. First, make the system completely transparent so we can understand what drugs cost, and where the money is going. Second, end the perverse incentives that encourage drug companies and PBMs to promote expensive drugs. Third, promote competition and faster and easier development of generic drugs, and end market manipulation that reduces consumer choices. Fourth, impose stronger regulations on both drug companies and PBMs, and hold them accountable for their misbehavior, with lawsuits, substantial fines, and other punishments if necessary. And fifth, federal and state governments should have the power to negotiate drug prices and to stop excessive price increases, at all parts of the supply chain.

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