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These are not comfortable days in Washington for pharmacy benefit managers, the highly consolidated group of intermediaries that sit astride the drug supply chain. The Federal Trade Commission and Capitol Hill want to know how the PBMs’ arcane business practices impact pharmaceutical costs. This is welcome news for just about everyone else, including consumers of generic drugs.

PBMs manage prescription drug benefits on behalf of health insurers, large employers, and other payers. They have become significant behind-the-scenes players in determining patients’ access to medications and how much pharmacies are paid.

As health economists, we have documented the anti-competitive practices of pharmacy benefit managers related to generic drugs. Using their positions as middlemen between drug payers, producers, and dispensers, PBMs often require pharmacies to sign contracts giving them their lowest price, which discourages pharmacies from undercutting the PBM price with cash prices even if the pharmacies could still make profits doing so. Complex and opaque business practices allow PBMs to hide their profit margins from outside scrutiny.

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The upshot is that patients and payers are being charged on the order of 20% too much for generic drugs, resulting in billions of dollars in overpayment. And this doesn’t count the overpayment that results when PBMs exclude low-priced generics from formularies — the list of medicines covered by health insurance — if the PBMs can collect high enough rebates by putting the branded version on the formularies instead.

Even though generics make up 92% of all prescriptions, they account for only 16% of retail drug spending. They are a massive success story, and the lynchpin in the pharmaceutical innovation and patent system established by Congress in 1984 via the Hatch-Waxman Act. The promise of inexpensive generics was the explicit “payback” that justified giving expensive drugs patent protection for a limited time. As such, a market that is being gamed to inflate generic prices could affect both drug affordability and drug innovation by changing the balance between returns to innovative drugs today and low-cost access to those innovations when patents expire.

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Recognizing the stakes, the FTC recently voted unanimously to launch an inquiry into how PBMs operate. The agency also vowed to “ramp up enforcement” of any “illegal bribes and rebate schemes” that prevent patients from accessing cheaper drugs. Meanwhile, a group of Republicans in the U.S. House of Representatives is urging the U.S. Government Accountability Office to investigate PBMs, and legislation introduced a few weeks ago by Sens. Maria Cantwell (D-Wash.) and Charles Grassley (R-Iowa) would give the FTC even great authority to regulate the PBM market.

These efforts come as news of a whistleblower lawsuit filed against the largest PBM, CVS Caremark, detailed a scheme involving arrangements with drug companies that allegedly sought to block generic competition for more than a dozen widely-prescribed, brand-name medicines. CVS says the lawsuit is without merit.

There is no doubt that PBMs must be reined in to protect consumers and keep markets for both branded and generic drugs healthy. The Cantwell/Grassley bill is a great start: it would prohibit certain anti-competitive practices and increase transparency by requiring PBMs to submit annual reports to the FTC on their revenue streams, and on how they treat PBM-affiliates differently than independent pharmacies.

But more can and should be done. Possibilities include:

  • Reform rebate contracting
  • Fix PBM fees per transaction rather than calculate them as a share of drug costs
  • Give employers and government purchasers stronger audit rights to understand the actual prices paid by PBMs and insurers to pharmacies
  • Reflect the actual total cost to the health system of generic placement on formulary tiers

Another option is lowering barriers to entry in the PBM market to increase competition. The three largest PBMs — CVS Caremark, Express Scripts, and OptumRx, operating respectively under the umbrellas of large insurers Aetna CVS Health, Cigna, and UnitedHealth Group — control 79% of the PBM market.

The FTC should more fully investigate the impact of consolidation and vertical integration in the PBM market. It should also pay more attention to whether other intermediaries in the drug supply chain — wholesalers, pharmacies, and health plans — are acting in the best interest of patients.

Policymakers also need to shed light on the opaque pricing and transactions occurring between distribution system participants.

It’s also time to examine a more dramatic market-based approach to keep savings flowing to consumers. A transparent, competitive cash market for low-cost generic drugs would let consumers decide whether to fill their prescriptions using insurance or cash. Cash-only pharmacies, like Blueberry Pharmacy and Mark Cuban’s Cost Plus Drug Company, cut out middlemen like PBMs, but for these approaches to expand, all pharmacies would need to be protected against PBM’s “lowest price” contracts — which actively discourage pharmacies from setting low cash prices — and variation in state-level pharmacy laws may need to be addressed.

Americans are paying too much for generic drugs due to a payment system that is manipulated by PBMs. The system needs to be cleaned up now before the leading success story in American drug pricing — generics — turns into something else entirely.

Erin E. Trish is the co-director of the USC Schaeffer Center for Health Policy and Economics. Karen Van Nuys is the executive director of the Value of Life Sciences Innovation Program at the Schaeffer Center. Robert Popovian is the chief science policy officer at the Global Healthy Living Foundation. Trish has served as a consultant and litigation expert on matters in the hospital, health insurance, health information technology and life sciences sectors. Van Nuys has served as a consultant to companies in the life sciences sector. Popovian is a consultant and advisor to the biopharmaceutical industry, health care coalitions, and PBMs, and is founder of Conquest Advisors, a strategic advisor to biopharmaceutical companies.

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