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This week, committees in both the Senate and House of Representatives used their power to shine a light on one of the most complex and opaque parts of the prescription drug equation: the practices of pharmaceutical benefit managers.

These third-party companies are hired by Medicare, Medicaid, and commercial health plans to create and manage pharmaceutical benefits for more than 266 million Americans. They determine what drugs are covered in their formularies, negotiate prices for these drugs with their manufacturers, set copays for consumers, determine which pharmacies will be included in prescription plans, and decide how much pharmacies will be reimbursed for the drugs they sell.

The committees were particularly interested in two confusing and potentially troublesome PBM tactics: the rebates they negotiate with drug companies and the way they pay pharmacies.


Rebates work like this: To be sure that their drugs are included in the formularies that PBMs create and that they are offered with low copays, drug makers essentially pay pharmacy benefit managers for preferred status. The “payment” comes in the form of a rebate the drug company offers the pharmacy benefit manager once a patient purchases a drug. The more expensive the drug, the bigger the rebate.

Here is where the problems lie. Pharmacy benefit managers keep part of the manufacturer’s rebate each time a patient buys one of that company’s drugs, while some of the rebate goes to the insurance company that hired the PBM. Because pharmacy benefit managers’ share of the rebate is a major source of revenue, there is a financial incentive for manufacturers to increase drug prices and for pharmacy benefit managers to prefer high-price, high-rebate drugs over equally effective lower-priced drugs.


A recent study of ours raised additional concerns about pharmacy benefit managers and rebates. Small insurers and employers report not receiving 90 percent of the rebates that PBMs claim to pass on to them. And since rebates are kept confidential between the drug company and the PBM, even health insurers can’t always determine whether they are receiving the maximum savings from rebates. As acknowledged in the congressional hearings, transparency is needed to know if pharmacy benefit manager formularies encourage the most cost-effective drugs for patients or if they prioritize more expensive drugs at the drug companies’ behest.

After focusing on rebates, senators also challenged the way pharmacy benefit managers pay pharmacies. PBMs currently decide which pharmacies are included in a prescription drug plan and how much they pay these pharmacies for each drug dispensed to patients. The catch here is that the pharmacy benefit managers don’t tell the health plan how much it is reimbursing the pharmacies for the drugs dispensed, making it possible for them to profit on the higher prices it charges health plans for those drugs. For example, a pharmacy benefit manager could pay a pharmacy $12 for a drug that is dispensed to a patient and then charge the health plan $15 for that drug. The PBM then keeps the remaining $3. It is likely that this practice, called spread pricing, is causing Medicare and Medicaid to substantially overpay for prescription drugs.

Spread pricing, like rebate negotiations, happens behind closed doors. There is no transparency, no commitment from pharmacy benefit managers to take into account the cost effectiveness of a drug, and no communication with Medicare, Medicaid, and health plans to let them know if they are getting a fair deal. This is a major shortfall of the current prescription drug system and a driver of high costs.

How can we best take advantage of this time of bipartisan accountability to help slow prescription drug spending growth and assure we are getting the best possible deal for our money?

First, policymakers should continue to focus on rebates to pharmacy benefit managers. They should demand to see contracts between PBMs and health plans for Medicare and Medicaid enrollees to better understand how rebates work. While it is important for Congress to focus on insulin, it should also investigate drug-specific rebate data for the most commonly prescribed drugs — the top 100 drugs would be a good place to start — as well as information on their placements in formularies. The data, which could be kept confidential, should be used to perform rigorous analyses to determine the impact that rebates ultimately have on the growth rate of pharmaceutical spending.

Second, policymakers should request data on how much pharmacy benefit managers pay pharmacies for Medicare and Medicaid enrollees to better understand how much money the federal government and state Medicaid departments might be losing in the pharmacy spread. This tactic has shown results: In Ohio, the state’s Medicaid department used it to determine that the state was losing $200 million a year to spread pricing.

Third, policymakers must realize there are no easy fixes — simply mandating the end of rebates or spread pricing would likely lead pharmacy benefit managers, drug manufacturers, and pharmacies to create new systems of discounted prices that would be just as opaque and confusing.

Instead, it is essential that any attempt to disrupt the long-criticized pharmaceutical pricing system in the U.S. be replaced with mechanisms that tie payments to health outcomes — something already being done in the broader health care system. The need to improve the value of pharmaceutical spending in the U.S. was the key concept missing in this week’s hearings.

There are a variety of ways to do this, all of which include a more robust and systematic evaluation of the costs and benefits of prescriptions drugs. Only then can we be more confident that we are spending the right amount of money on the right prescription drugs.

Elizabeth J. Seeley is an adjunct lecturer on health policy and management at the Harvard T.H. Chan School of Public Health. Shawn Bishop is vice president of the Controlling Health Care Costs and Advancing Medicare program at The Commonwealth Fund.