States Are Coming for Pharmacy Middlemen
PBMs are trash, and state lawmakers know it.
This is Boondoggle, the newsletter about corporations ripping off our states, cities, and communities. If you’re not currently a subscriber, please click the green button below to sign up. Thanks!
The U.S. has some of the highest prescription drug prices in the developed world, high enough that, according to the Centers for Disease Control and Prevention, millions of Americans forego needed medications because of the cost. There are a lot of factors behind those high prices, but one of them is the existence of a nasty set of corporate middlemen leeching off the prescription drug industry: Pharmacy benefit managers, usually referred to as PBMs.
PBMs stand at the nexus of health insurers, drug manufacturers, and pharmacies. They determine which drugs are covered by insurance, how much pharmacies are reimbursed for selling those drugs, which pharmacies are in a given insurer’s network, how much to charge public programs such as Medicaid for certain drugs, and therefore, ultimately, the cost that’s passed onto patients at the cash register.
The three largest PBMs in the U.S. — Caremark, Express Scripts, and OptumRx — handle 80 percent of the drug claims in the country. In addition to being an oligopoly, they are all part of corporate conglomerates that also own health insurance companies and pharmacies. For example, Caremark is owned by CVS, which is one of the largest pharmacy chains in the country, and which also owns the insurer Aetna.
The PBMs use this power to systematically shortchange independent pharmacies in favor of their own corporate sisters, leading to a spate of independent pharmacy closures across the country, even as patients pay more for drugs. For example, late last year, Express Scripts and UPMC, a cartoonishly nasty hospital monopoly in Western Pennsylvania that is also a major insurer in the region, up and cut off loads of pharmacies from UPMCs insurance network, instead pushing patients into Express Scripts own mail-order pharmacy service.
And the cost increases go every which way, with a recent study also finding that insurers raise premiums after they acquire a PBM from a rival.
So consolidation beats price hikes and anticompetitive tactics, which beats more consolidation. The whole system winds up rife with conflicts of interest that corrupt the process of getting drugs from manufacturers to patients and drive up already wildly high American health care costs, with everyone paying more to receive less. And there the PBMs are, skimming off of all the transactions and pocketing loads of cash for simply being in-between the people who make medication and those who need it.
Fortunately, state lawmakers are stepping up to do something about this mess thanks to a useful Supreme Court decision. And they recently received a vital assist from the Federal Trade Commission. More states should — and I expect will — step up in the coming years and go even further to rein in this out of control industry.
In 2022 alone, 135 bills to regulate PBMs were introduced in state legislatures, and 19 were enacted across 12 states. Over the last three years, more than half of states have taken some sort of step to regulate PBMs.
Part of the reason this flood was unleashed is that, in 2020, the Supreme Court upheld a 2015 Arkansas law requiring PBMs to fully reimburse pharmacies for their costs dispensing drugs, instead of shortchanging them with only partial reimbursements, which was a key tool PBMs used to take down independent pharmacies. Lower courts said the Arkansas law was preempted by federal law (preemption is often a concern for state lawmakers, since federal law trumps state law in a variety of policy areas), but the Supreme Court reversed that ruling and let Arkansas’ law stand, thereby reassuring states they could charge ahead in regulating what PBMs can and can’t do to pharmacies.
Another helpful thing occurred last month, courtesy of the Federal Trade Commission. For years, the FTC has intervened in state legislatures on behalf of PBMs, arguing against efforts to rein them in. Former New York Gov. Andrew Cuomo even vetoed a 2019 PBM bill that he had previously supported, on the grounds that it conflicted with FTC guidance.
A lot of Washington policymaking in recent years, from Obamacare on down, was encouraging health care consolidation at the time on the grounds that it would bring down consumer prices — which of course didn’t happen at all. And the FTC, sometimes tacitly but other times overtly, was part of that dedication to a more corporatized health care system.
On July 20, though, the FTC changed course, essentially saying that previous commission work and policy advice on PBMs should be junked in favor of a new, ongoing study of the industry that is currently underway, and that state lawmakers should not let previous FTC work, guidance, or advocacy on PBMs stop them from advancing new rules.
“Advocates continue to cite prior Commission work in opposition to efforts by lawmakers, enforcers, and regulators to mandate PBM transparency requirements. We believe this reliance is misplaced in light of significant changes in market conditions,” the FTC said. So the FTC went from a roadblock to an ally for those seeking to regulate PBMs.
Like so many things when it comes to corporate power, taking on PBMs is also politically potent. Once voters find out that PBMs exist and what they do, they are strongly in favor of regulating them, which makes perfect sense. No one like an opaque set of middlemen they’ve never heard of driving up the costs of the medications by gaming a system that patients have nothing to do with.
State lawmakers, then, have all kinds of powers to clean up PBMs, from requiring that they reimburse pharmacies fully for the costs of dispensing drugs, as Arkansas did, to cutting them out of public programs as West Virginia did in 2017, to requiring that they do business with any pharmacy willing to meet their general standards, which prevents the PBMs from playing favorites with their own parent corportation’s pharmacy services. And lawmakers have a good political reason for stepping into this policy area.
It’s time to just do the thing, and save patients some money by taking on corporate middlemen.
Thanks for reading this edition of Boondoggle. If you liked it, please take a moment to click the little heart under the headline or below. And forward it to friends, family, or neighbors using the green buttons. Every click and share really helps.
If you don’t subscribe already and you’d like to sign up, just click below.
Thanks again!
— Pat Garofalo
You're doing good work, Pat.