Ron Klink: Congress cracks down on shady PBM middlemen — and not a moment too soon

Congress is considering more than half a dozen bills that’d curb the power of pharmacy benefit managers. The increased, bipartisan scrutiny of these rapacious drug supply chain middlemen is welcome. In fact, it’s overdue. For years, they’ve been inflating pharmaceutical prices and bilking patients while providing little value to the health care system at large.

PBMs arose in the 1960s, around the time health insurers started offering prescription drug coverage. Historically, insurance companies hired PBMs to negotiate prices with drug makers and to construct “formularies,” or lists of which drugs the insurer covers.

In theory, PBMs should save health plans and their beneficiaries money. For the most part, though, that isn’t happening. Modern PBMs have strayed far from their intended purpose, contributing to a distorted incentive system that inflates drug prices.

Why is the PBM market so broken, and what hope do we have of fixing it?

First, there’s practically zero competition in the PBM market. The top six PBMs control 96% of the market, with the biggest three accounting for 80% of all prescriptions doled out.

Today’s “mega-PBMs,” which often own or are owned by insurance companies, use their market share to extract enormous fees and rebates from drug companies, who have little choice but to comply.

It’d be one thing if these PBMs were using their leverage to reduce patient costs and promote efficiency. But due to a distorted incentive system, the exact opposite is happening.

The biggest problem is that the fees and rebates PBMs collect are typically calculated as a percentage of each drug’s “list price,” or the price before any discounts are applied.

Because of this dynamic, PBMs can be incentivized to favor higher-priced medicines, even if cheaper or more clinically valuable alternatives exist. PBMs can even favor pricey brand-name drugs over generic copycats simply because they mean higher profits.

PBMs actually incentivize drug makers to raise list prices. Consider two pharmaceutical firms that sell comparable heart disease medications. Basic economics would suggest that both companies would continually lower the cost of their medicines in a bid to win market share.

But in today’s broken market, the same firms might be compelled to compete upwards on price, to appease the PBMs who ultimately determine which of the two drugs an insurer will cover. The insurers aren’t going to complain about higher list prices, since they’re ultimately receiving secret, negotiated discounts.

But patients aren’t privy to those discounts. Patients’ copays and coinsurance rates are usually based on a medicine’s list price, so they wind up overpaying as a result.

Lawmakers and regulators have a duty to repair the broken incentive system that’s driving up drug costs in the first place. A good first step would be requiring PBMs to charge pre-determined fees based on the services they provide, rather than the list prices of medicines.

Second, lawmakers could continue investigating the unprecedented consolidation of PBMs and insurers, paying special attention to how these mergers impact what patients pay at the pharmacy counter. This work would complement the Federal Trade Commission’s ongoing inquiry into PBMs and their business practices.

For too long, PBMs have unfairly distorted the prescription drug market — and fleeced patients at the pharmacy counter. It’s time for lawmakers to end the abuse.

Former Democratic Congressman Ron Klink served four consecutive terms representing Pennsylvania’s 4th Congressional District.