Pharmacy benefit manager limits make little sense
Uncertainty seems to be the mood du jour for the economy: increasing inflation, political unrest, high gas prices, a war in Europe, and the ongoing shockwaves of the COVID lockdown have made the last few years remarkably unsettled and unpredictable. People trying to plan for their lives and their businesses need stability — in markets, regulations or governance — anywhere it can.
However, proposed legislation aimed at pharmacy benefit managers threaten to inject prescription drug markets with new uncertainties, along with higher prices.
PBMs administer prescription drug coverage programs, and they exercise their market power to negotiate drug discounts from pharmaceutical companies for their clients.
Drug companies don’t like to give discounts, so they’d rather not have to deal with PBMs. To sideline them, they lobby the government to restrict their tools. Independent drug stores also dislike PBMs because they often implement home delivery for their clients’ patients, which saves money and improves health outcomes (fewer people forget to take their drugs if they arrive in their mailbox every month).
While these industries actively misconstrue the role played by PBMs, it’s obvious that limiting them would drive up prescription drug costs.
PBMs offer clients a variety of pricing plans, and a popular plan among small employers is the cost predictability model (sometimes called spread pricing). It allows the employer to pay a flat rate for each drug prescribed to their employees, no matter where the drug is dispensed.
Here’s an example of how it typically works: A PBM and an employer agree that for every certain drug dispensed, the employer pays $10. If an employee chooses to go to a pharmacy where the cost of the drug is $12, the employer just saved $2. But if an employee goes to another pharmacy where the drug is priced below $10, the PBM collects $10 regardless, and the difference is used to fund the PBM’s clinical programs and pay for administrative expenses. This model gives PBMs a financial incentive to save their clients money and keep their own cost of doing business low since the amount the employer will pay is not going to change. This type of contracting is not unique to PBMs, other segments of health care, including the pharmacies, have similar types of contracting.
The cost predictability model also helps protect businesses from drug list-price inflation that could happen during the course of their contract with a PBM.
However, another pricing plan is the fee-for-service model, where pharmacy benefit managers are paid a simple administrative fee for processing the transaction, in addition to paying whatever the pharmacy charges for the cost of the drug. This plan is inherently riskier and places the responsibility of encouraging employees to lower cost pharmacies on the employer.
Larger businesses with Administrative Service Only plans will choose fee-for-service plans because they can better bear the risk, but small businesses typically cannot. Small businesses can’t afford the “surprises” that are inherent in a fee-for-service model. If one person in an organization of 1,000 has a devastating medical problem, the other 999 can help cover the cost, but that doesn’t work well in a company of 10 people.
Due to pharmacy and manufacturer insistence that the cost predictability model chosen by small employers is costing them money, there is an effort to ban it: Senate Bill 127 — supported by Sen. Jackie Rosen — would all but prohibit this practice.
Such a prohibition would be a mistake: Small businesses should be able to choose for themselves which contractual agreement they would like to sign with PBMs. What’s more, banning the cost predictability model or spread pricing will increase costs. The status quo lowers drug costs because it gives PBMs and pharmacies a financial incentive to negotiate the best price possible for drugs.
Legislators in Nevada and beyond should support preserving employer choice with regards to drug benefit plans. The uncertainties of the modern era have piled up on small business. More than 70 percent of small-business owners say more certainty about the operating environment would make them more likely to invest in their business. Businesses trying to plan for the future need any strand of stability they can find, and passing a bill that would increase prices and reduce price certainty makes little sense.
Jared Whitley is a former Congressional adviser, White House staffer, and winner of the “Best in the West” journalism award for his political analysis.