[Senate Hearing 117-836]
[From the U.S. Government Publishing Office]
S. Hrg. 117-836
ENSURING FAIRNESS AND TRANSPARENCY IN THE
MARKETS OF PRESCRIPTION DRUGS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONSUMER PROTECTION,
PRODUCT SAFETY, AND DATA SECURITY
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
MAY 5, 2022
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available online: http://www.govinfo.gov
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U.S. GOVERNMENT PUBLISHING OFFICE
54-763 PDF WASHINGTON : 2024
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
MARIA CANTWELL, Washington, Chair
AMY KLOBUCHAR, Minnesota ROGER WICKER, Mississippi, Ranking
RICHARD BLUMENTHAL, Connecticut JOHN THUNE, South Dakota
BRIAN SCHATZ, Hawaii ROY BLUNT, Missouri
EDWARD MARKEY, Massachusetts TED CRUZ, Texas
GARY PETERS, Michigan DEB FISCHER, Nebraska
TAMMY BALDWIN, Wisconsin JERRY MORAN, Kansas
TAMMY DUCKWORTH, Illinois DAN SULLIVAN, Alaska
JON TESTER, Montana MARSHA BLACKBURN, Tennessee
KYRSTEN SINEMA, Arizona TODD YOUNG, Indiana
JACKY ROSEN, Nevada MIKE LEE, Utah
BEN RAY LUJAN, New Mexico RON JOHNSON, Wisconsin
JOHN HICKENLOOPER, Colorado SHELLEY MOORE CAPITO, West
RAPHAEL WARNOCK, Georgia Virginia
RICK SCOTT, Florida
CYNTHIA LUMMIS, Wyoming
Lila Helms, Staff Director
Melissa Porter, Deputy Staff Director
George Greenwell, Policy Coordinator and Security Manager
John Keast, Republican Staff Director
Crystal Tully, Republican Deputy Staff Director
Steven Wall, General Counsel
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SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY,
AND DATA SECURITY
RICHARD BLUMENTHAL, Connecticut, MARSHA BLACKBURN, Tennessee,
Chair Ranking
AMY KLOBUCHAR, Minnesota JOHN THUNE, South Dakota
BRIAN SCHATZ, Hawaii ROY BLUNT, Missouri
EDWARD MARKEY, Massachusetts JERRY MORAN, Kansas
TAMMY BALDWIN, Wisconsin MIKE LEE, Utah
BEN RAY LUJAN, New Mexico TODD YOUNG, Indiana
C O N T E N T S
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Page
Hearing held on May 5, 2022...................................... 1
Statement of Senator Blumenthal.................................. 1
Statement of Senator Blackburn................................... 3
Statement of Senator Cantwell.................................... 47
Witnesses
David A. Balto, Antitrust Attorney, David A. Balto Law Offices... 5
Prepared statement........................................... 6
Craig L. Garthwaite, Ph.D., Professor of Strategy, Herman Smith
Research Professor in Hospital and Health Services Management,
Director of Program on Healthcare at Kellogg (HCAK), Kellogg
School of Management, Northwestern University.................. 16
Prepared statement........................................... 18
Professor Robin Feldman, Arthur J. Goldberg Distinguished
Professor of Law, Albert Abramson '54 Distinguished Professor
of Law Chair, Director of the Center for Innovation, University
of California Hastings Law..................................... 33
Prepared statement........................................... 34
Juan Carlos ``JC'' Scott, President and CEO, Pharmaceutical Care
Management Association......................................... 36
Prepared statement........................................... 38
Appendix
Prepared statement of FMI--the Food Industry Association..... 61
Prepared statement of Patients for Affordable Drugs Now...... 65
Letter dated May 5, 2022 to Hon. Maria Cantwell, Hon. Roger
Wicker, Hon. Richard Blumenthal and Hon. Marsha Blackburn from
Lina M. Khan, Chair, Federal Trade Commission.................. 87
Letter dated May 11, 2022 to Hon. Richard Blumenthal and Hon.
Marsha Blackburn from Ted Okon, Executive Director, Community
Oncology Alliance.............................................. 89
Response to written questions submitted to Robin Feldman by:
Hon. Marsha Blackburn........................................ 114
Response to written questions submitted to Juan Carlos ``JC''
Scott by:
Hon. Richard Blumenthal...................................... 117
Hon. Marsha Blackburn........................................ 117
ENSURING FAIRNESS AND TRANSPARENCY IN THE MARKETS OF PRESCRIPTION DRUGS
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THURSDAY, MAY 5, 2022
U.S. Senate,
Subcommittee on Consumer Protection, Product
Safety, and Data Security,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:10 a.m., in
room SR-253, Russell Senate Office Building, Hon. Richard
Blumenthal, Chairman of the Subcommittee, presiding.
Present: Senators Blumenthal [presiding], Cantwell, and
Blackburn.
OPENING STATEMENT OF HON. RICHARD BLUMENTHAL,
U.S. SENATOR FROM CONNECTICUT
Senator Blumenthal. The Subcommittee on Consumer
Protection, Product Safety, and Data Security will come to
order. Welcome to our very distinguished panel and to the
Senators who will be joining us. I want to thank particularly
Senator Blackburn for her collaboration on this topic, and
welcome all of you to address the anti-consumer and anti-
competitive practices that increase and drive up health care
costs for the American people.
Today we are specifically focused on pharmacy benefit
managers, or PBMs, and how the tactics they use impact drug
costs and consumer choice. This hearing is really part of a
more general discussion on how to lower costs and remove
barriers to care for patients, and we will continue to have
hearings on that topic. If you ask the average American to tell
you what a pharmacy benefit manager does or even what it is,
you are probably met with a blank stare, which is
understandable.
PBMs have long operated in relative obscurity with little
transparency, acting as middlemen between insurer, drug
companies, and pharmacies. PBMs exist to manage the drug
prescription benefits for 266 million Americans. So even if you
have never heard of a PBM, you have almost certainly been
impacted by one.
They are hired to hire--they are hired to buy health plans
to--by managing the health plans' prescription drug benefit,
lower costs to the health plan by exacting rebates from drug
companies and managing what drugs will be covered for patients
and at what cost. Then they act as the intermediary between the
health plan and the pharmacy, reimbursing the pharmacy for the
prescription drugs they dispense.
PBMs stated goal is to lower health care costs for
consumers through this complex system. The problem is that
patients rarely see or feel the benefits. Drug prices continue
to rise. Insurance costs continue to eat into incomes. And more
and more often, drug--the drugs patients need are not covered
by their health care plan at all. In this way, PBMs are part of
a broken drugs supply chain that leads to increasing profits
for drug companies, increasing profits for PBMs, and increasing
drug costs for patients.
PBMs benefit from high prices. They receive rebates and
administrative fees from drug companies that are often based on
the initial price. It is called the list price of a drug. This
means the higher the initial cost of a drug, the higher the
profits for the PBM. PBMs will argue that these rebates lower
the cost of your insurance, that they largely pass these
rebates along to insurers who use them to lower your health
care costs.
But truly, we have no idea whether this is accurate,
because PBMs shroud this information in secrecy. If these
rebates are lowering the cost of health care, that is news to
patients. Insurance premiums and deductibles have not gone
down. Instead, increasingly, they are eating into Americans'
hard earned dollars and savings. PBMs are a significant part of
the drug pricing problem, but drug companies shouldn't get a
pass.
As Professor Feldman, one of our witnesses here today wrote
in her aptly entitled article, and I am quoting here, ``driving
up prices is a win-win for PBMs and drug companies. Drug
companies can charge more for their products, while PBMs
increase their slice of the pie.'' The one who loses out is the
patient, because even though that initial price isn't what
anyone else in the drug supply chain pays, it oftentimes
directly impacts what you pay.
That is because for nearly half of people with commercial
insurance and nearly all Medicare beneficiaries, out-of-pocket
payments are based on an initial drug price, not the reduced
rate. The higher the initial price, the more you pay, and PBMs
have a financial incentive to keep that initial price high.
PBMs also limit choice. PBMs are the ones who decide which
prescription drugs your health plan will cover and which they
won't. They determine which drugs will be preferred by your
insurance plan, meaning which drugs will cost you more out of
pocket and which will cost you less. Increasingly, PBMs have
taken to excluding drugs entirely from health plans.
More and more patients who receive a diagnosis are working
with their doctors to find a prescription drug that works for
them, only to be denied access to it at the pharmacy counter.
This happened to April Flowers, a teenager from Texas, whose
family told their story to Consumer Reports. She had taken the
same medication for her seizures for years when suddenly her
family learned at the pharmacy counter that her out-of-pocket
costs was now $1,700. Her family made frantic calls to figure
out the problem.
What they learned was that her drug was suddenly dropped
with no warning. Her drug was no longer covered. They
scrambled. They enlisted her doctor. With 2 days of medicine
left, April got an exception. The stress, the threat to her
health must have been infuriating. April's situation is
shockingly common. In fact, in recent years, PBMs' refusal to
cover certain drugs has skyrocketed.
Now hundreds of drugs are excluded by the biggest PBMs
every year. Certain types of insulin, drugs to treat chronic
conditions, and in recent years, cancer drugs are all fair
game. A poll cited in the same Consumer Reports article found
that more than a third of people with prescription drug
coverage said they or someone in their home had dealt with the
same issue as April within the last 12 months.
Let's be clear, PBMs are just part of a broken system. It
is massively broken. It has left millions of Americans without
a way to afford lifesaving medicine like insulin. Drug prices
have skyrocketed, and drug companies have made record profits
while engaging in anti-competitive tactics that keep cheaper
drugs off the market. I pushed for reform, so have many of my
colleagues.
The biggest and most important priority we have is to lower
the cost of prescription drugs. And that is a health care
imperative as people feel the weight of high health care costs.
We cannot ignore the power of PBMs and their influence in drug
pricing and eroding patient and provider choice. I hope that
today's hearing will lead to action. And I turn to the Ranking
Member.
STATEMENT OF HON. MARSHA BLACKBURN,
U.S. SENATOR FROM TENNESSEE
Senator Blackburn. Thank you, Mr. Chairman. And good
morning and welcome to all and to our witnesses that are
joining us remotely today. We welcome them also. And Chairman
Blumenthal, I am so pleased that we are doing this hearing
about the issue of the PBMs and the impact that these
arrangements have on our consumers.
And when you look at the fact that the PBMs are the
middleman and over the past few decades, they have grown,
really escalated with Medicare Part D. And initially the
purpose was, save money for the employers and the insurance
companies, try to keep the costs down. But in those 20 years
since the Medicare Part D has been with us, it seems that the
role of the PBM has become really quite complicated.
Three PBM middlemen accounted for nearly 80 percent of all
the prescription claims in 2020, and that is not lost on us.
And one of the reasons we are wanting to look at the market,
the size of the market, the inefficiencies that are there--
maybe there are ways to create efficiencies and save money for
the system and for consumers who seem to be paying an ever
higher cost.
We understand and appreciate rebates are a part of this
system and are really a part of the payments that are made by
the pharmaceutical companies to the--to keep certain drugs in a
formulary. And we know that the PBM has a lot of control over
what pharmaceutical can actually reach the consumer that is on
a specific plan. And we know and are curious about some of the
other rebates that are recouped from pharmacists by the PBMs.
And pharmacists tell me that this is done without
transparency or accountability by the PBMs. Distorted
incentives within the pharmaceutical supply chain have created
a dynamic where middlemen involved in distributing and paying
for prescription medicines benefit from higher list prices and
higher rebates, and the consumer pays more.
Senators Grassley and Wyden published a two-year
investigation into the cost of insulin. I know that each of you
are familiar with this. And what they noted was how the PBMs
really stood in the way of a lot of transparency in this
process. They concluded that the PBMs have an ``incentive for
manufacturers to keep list prices high.'' And that is a direct
quote from them. Now, this is really a 180 from what the
purpose of a PBM was to be initially. In recent years, 40
states, including Tennessee, have enacted legislation to curb
some PBM practices.
The bill recently passed by the Tennessee General Assembly
includes reimbursement transparency and protects patients from
being steered to PBM-affiliated pharmacies. This shows you how
you have gotten away from a core mission with the PBM when the
states jump in and say we are going to protect our citizens.
That is why we need to look at this. You have got onerous
audits, claw back provisions, and patients steering into anti-
competitive behaviors by PBMs that have caused small pharmacy
businesses to struggle to survive. While CMS recently proposed
rule to end retroactive DIR fees, which harm independent
pharmacies and raise costs for seniors, they unfortunately
delayed implementation until 2024.
That is unacceptable. This delay gives PBMs another year to
play games that cause seniors to pay higher cost sharing and
pharmacies to face huge claw backs. As they say, sunlight is
the best disinfectant, and it is time for more transparency
about the impact of potentially anti-competitive PBM practices
on patients, small pharmacy businesses, and taxpayers.
To this end, I have introduced S. 298, the Pharmacy Benefit
Managers Accountability Act. I have done that along with
Senator Braun. The bill would require GAO to submit a report to
HHS and Congress on PBMs and their role in the pharmaceutical
supply chain. I encourage my colleagues to take a look at it
and consider co-sponsoring that legislation. I would note that
a few months ago the FTC asked for public input on PBMs and
their impact on patients, physicians, and businesses.
I am not opposed to this line of inquiry. Last year, I
sponsored a bipartisan bill with Senator Blumenthal and Chair
Cantwell and others that directed the FTC to report to Congress
on anti-competitive practices. But I want to emphasize that
this is not a blank check for the FTC. It is not for them to
move forward with any type of rulemaking that they want to
pursue without the direction of us in Congress, especially
given the need for more information and the important role of
HHS and the states in this area.
So these are all issues for our discussion today. We look
forward to hearing you. Thank you, Mr. Chairman.
Senator Blumenthal. Thanks so much, Senator Blackburn. We
have a great panel. Welcome to all of you. I will introduce you
and then ask for your statements. David Balto, who is a
Principal in the law offices of David Balto. He is an expert on
health care competition and regulation, and an antitrust
attorney with over 25 years of experience in both the private
and public sectors.
Mr. Balto served as a trial attorney in the Department of
Justice's Antitrust Division and in several senior level
positions at the FTC during the Clinton Administration,
including as Policy Director for the Bureau of Competition.
Craig Garthwaite, who joins us personally, is the Herman Smith
Research Professor and Hospital and Health Services Management,
Professor of Strategy and Director of the Program on Health
Care at Northwestern University's Kellogg School of Management.
He has a Ph.D. in economics from the University of Maryland
and is an expert in health care policy and the
biopharmaceutical sector, and I understand is a native of
Stanford, or at least has a connection there. Robin Feldman is
the Arthur J. Goldberg Distinguished Professor of Law, Albert
Abramson Distinguished Professor of Law Chair, and Director of
the Center for Innovation at the University of California
Hastings. She is an expert in the legal junction of
intellectual property, health, and medicine.
Her work illuminates how and why practices often operate to
the benefit of the pharmaceutical industry over consumers, and
she offers solutions. J.C. Scott, who joins us in person, is
the President and CEO of the Pharmaceutical Care Management
Association representing America's Pharmacy Benefit Managers.
He joined PCMA in the fall of 2018 and before that held roles
with Abiomed and the American Council of Life Insurance.
He also has held various staff offices in the House of
Representatives. We are going to go in alphabetical order,
beginning with David Balto, then Craig Garthwaite, Robin
Feldman, and J.C. Scott. Mr. Balto, if you can hear us, the
floor is yours.
STATEMENT OF DAVID A. BALTO, ANTITRUST ATTORNEY, DAVID A. BALTO
LAW OFFICES
Mr. Balto. Thank you. Good morning, Chairman Blumenthal,
Ranking Member Blackburn, and other members of the
Subcommittee. I am very grateful that you are holding this
hearing and that you invited me to speak. There is increasing
attention to PBMs, and it is very justifiable.
PBMs are an increasing source of cost increases in the
pharmaceutical area, and they are probably the least regulated
area, and they have a significant impact on health care costs
that is appropriate for attention. And unfortunately, our
antitrust and consumer protection enforcers, especially FTC,
have given them a green light and consumers have paid dearly
for that. In my written testimony, I make four basic points.
First, PBMs are probably one of the least regulated areas
of the drug supply chain. There is no Federal enforcement and
very little State enforcement, and that has left PBMs free to
engage in anti-competitive conduct. When you look at the--
listen to the complaints of the community pharmacists in your
state, what they are subject to in trying to deliver better
services to consumers is truly--[technical problems]--
tremendous power of PBMs.
Second, the--because of the lack of enforcement, the PBMs
have formed a tight oligopoly, as ranking member noted. There
are three elements you need for competition to exist in the
market. First, you need choice. You need to be able to play
competitors off against each other. Now, Mr. Scott is going to
tell you there are 70 PBMs. That doesn't matter. Three firms
dominate the market. The question of whether a firm has market
power is the ability of a customer to say no.
And when a PBM goes to a pharmacist and says, I am going to
take all these DIR fees or I am going to force you to reimburse
below cost, or when a generic drug company comes to a PBM and
says, please put me on the formulary and the PBM says, no, you
are not offering me rebates like the branded drug manufacturer
receives, that means the PBM has market power. It has the
ability to act anti-competitively. What is the result? We have
seen PBM profits more than double to over $20 billion a year.
Now, pause for a second. These aren't firms that are
producing products. These are firms that are moving information
and money and negotiating contracts, and for that, they are
taking $28 billion, adding $28 billion of cost into the system.
Why should consumers be paying so much for so little? And the
reason that happens is because of the lack of competition.
Factor two, transparency.
You have to go no further than PBMs imposing--[technical
problems]--saying that they don't want any form of transparency
in the market. Then third, conflicts of interest. PBMs--the
purpose of PBMs is to lower drug prices, but as the ranking
member noted, they make more money in rebates when prices go
up. So their interest is in seeing prices increase. And that is
why you see them deny access or provide inferior access to
biosimilars or generic drugs or some competing drugs.
It is basically an auction for shelf space in which they
say the highest cost product to the consumers is going to win
the auction. And that is why prices are increasing so
significantly. In my testimony, I outline how the FTC has
really failed at this. And nothing is worse than a decade ago
when they made the Faustian bargain to allow two of the three
biggest PBMs, Express Scripts and Medco, to merge under the
assumption that that increased market power would lead to lower
prices for consumers.
Well, they were dead wrong. What is the result? We see
skyrocketing rebates over the past decade. We see more
restrictive networks and consumers being denied their
pharmacies of choice as there has been a flood of PBM
consolidation over those 10 years. One message I want to leave
you with is consumers care a lot about their community
pharmacy.
The community pharmacist is the health care provider that
provides the greatest access to consumers, and that is vital,
vital in underserved, rural, and inner city markets. They are
the most accessible health care professional. And we saw that
during the vaccine crisis over the past several years.
My testimony ends by outlining several amendments to the
Federal Trade Commission Act, specifying anti-competitive
practices for the Commission to dig its teeth into to prevent--
to make this market competitive. And I think at the top of that
list has to be the impact on pharmacies and also this rebate
system that is leading to skyrocketing drug prices.
Thank you very much for the opportunity to testify.
[The prepared statement of Mr. Balto follows:]
Prepared Statement of David A. Balto, Antitrust Attorney,
David A. Balto Law Offices
Good morning, Chair Blumenthal, Ranking Member Blackburn, and
Members of the subcommittee: I thank you for giving me the opportunity
to testify on the concerns and the need for regulation and
accountability in the pharmacy benefit manager (``PBM'') market. My
testimony documents the tremendous competitive and consumer protection
problems in the PBM market and need for stronger antitrust enforcement,
oversight, regulation, and Federal legislation. For years PBMs have
existed with scant regulation, and consumers have paid a heavy price in
higher costs, less choice and inferior service. Congress and regulators
need to reverse this permissive stance toward PBMs to lower
prescription drug prices for patients.
My testimony is based on my 30 years of experience as a public
interest antitrust attorney and an antitrust enforcer for both the
Department of Justice and the Federal Trade Commission (FTC). From 1995
to 2001, I served as the Policy Director of the FTC's Bureau of
Competition and the attorney advisor to Chairman Robert Pitofsky.
Currently, I work as a public interest antitrust attorney in
Washington, DC. I have represented consumer groups, public interest
organizations, health plans, unions, employers, retail and specialty
community pharmacy associations, and even PBMs on PBM regulatory and
competitive issues. I led the consumer opposition to the proposed
mergers of Anthem and Cigna and Aetna and Humana and worked with
consumer groups to oppose CVS' acquisition of Aetna.
I have testified before Congress on several occasions and before
fourteen state legislatures on the need for PBM reform and regulation
and served as an expert witness for the State of Maine on its PBM
legislation.
My testimony makes the following points:
PBMs are one of the least regulated sectors of the
healthcare system and drug supply chain. There is almost no
Federal antitrust enforcement, oversight, or regulation. The
lack of antitrust enforcement and regulation has created an
environment in which PBMs are free to engage in
anticompetitive, deceptive, and fraudulent behavior that harms
patients, payors, employers, unions, and pharmacists and
significantly increases drug costs.\1\
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\1\ How PBMs Make Drug Pricing Problem Worse, David Balto, August
31, 2016, The Hill, https://thehill.com/blogs/pundits-blog/healthcare/
294025-how-pbms-make-the-drug-price-problem-worse/.
Because lax antitrust enforcement allowed the three largest
PBMs to become vertically integrated and form a tight
oligopoly,\2\ the PBM market lacks the essential elements for a
competitive market: 1) choice, 2) transparency, and 3) a lack
of conflicts of interest. PBMs leverage this lack of
competition to further their own interests at the expense of
patients, employers, and others in the system.
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\2\ Reforming Biopharmaceutical Pricing at Home and Abroad, The
Council of Economic Advisors, White Paper, February 2018, https://
trumpwhitehouse.archives.gov/wp-content/uploads/2017/11/CEA-Rx-White-
Paper-Final2.pdf.
The PBM rebate system turns competition on its head with
PBMs seeking higher, not lower prices to maximize rebates and
profits. In the past decade, PBM profits have increased to $28
billion annually.\3\ PBMs are supposed to control costs, but
because of the perverse incentives the rebate system creates,
they frequently deny access to lower cost drugs including lower
cost generics and biosimilars, to maximize rebates available
from higher cost drugs.\4\ That is why major consumer and
patient groups and unions supported the past administration's
efforts to eliminate the antikickback safe harbor for PBM
rebates.\5\
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\3\ PBM Accountability Project, Understanding the Evolving Business
and Revenue Models of PBMs, 2021, https://www.pbmaccountability.org/
_files/ugd/b11210_264612f6b98e47b3a850205
4f66bb2a1.pdf?index=true
\4\ Charlie Grant, Hidden Profits in the Prescription Drug Supply
Chain, February 24, 2018, Wall Street Journal.
\5\ Comments of Consumer Action, Consumer Federation of America,
Consumer Reports, NETWORK Lobby for Catholic Social Justice, and Public
Research Interest Group PIRG in Support of Department of Health and
Human Services Office of Inspector General's (``HHS'') proposed new
rules to eliminate the safe harbor for rebates in Medicare Part D
plans, April 8, 2019, https://docs.wixstatic.com/ugd/
1859d0_c7d2ccf1d47d4f65a8965e9bbaed989d.pdf.
Because of their market power and vertical integration these
middlemen increasingly stifle competition from this country's
most accessible and trusted health care professionals--
community pharmacies. PBMs create endless schemes to reduce
reimbursement, claw back funds, restrict networks, and
effectively force pharmacies to provide drugs below cost. In
2020 alone, PBMs took $9,535,197,775\6\ from independent
pharmacies who serve Medicare Part D participants. Community
pharmacies are crucial for consumers in underserved low income
and rural neighborhoods. These unfair and coercive tactics by
PBMs result in inferior health care, less choice and higher
costs.
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\6\ Medicare Program; Contract Year 2023 Policy and Technical
Changes to the Medicare Advantage and Medicare Prescription Drug
Benefit Programs; Policy and Regulatory Revisions in Response to the
COVID-19 Public Health Emergency; Additional Policy and Regulatory
Revisions in Response to the COVID-19 Public Health Emergency, CMS
4192-F, https://public-inspection.federalregister.gov/2022-09375.pdf.
The FTC has failed to protect consumers from unfair,
deceptive and egregious conduct in this market. Thus, the
Committee should consider amending the FTC Act to specify
unfair acts or practices and unfair methods of competition that
PBMs engage in that the FTC should address and provide a clear
mandate for strong enforcement. Consumers should no longer be
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forced to pay billions for the schemes of these middlemen.
For the PBM market to function properly for patients, employers,
unions, and other stakeholders, we need strong oversight and regulation
as well as greater antitrust and consumer protection enforcement. Any
conversation on drug pricing reform must include a discussion on how to
rein in PBMs.
The PBM Market Is Broken
Ensuring that patients can afford lifesaving and life-managing
prescription drugs is critically important to public health because
better use of medicines has been shown to help patients live longer and
healthier lives. Unreasonably high out-of-pocket costs for prescription
drugs at the pharmacy counter threaten patient access to medicines, as
some choose to stop or delay treatment because they cannot afford
it.\7\
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\7\ Press Release, Kaiser Family Foundation, Poll: Nearly 1 in 4
Americans Taking Prescription Drugs Say It's Difficult to Afford Their
Medicines, including Larger Shares Among Those with Health Issues, with
Low Incomes and Nearing Medicare Age (Mar. 1, 2019), https://www
.kff.org/health-costs/press-release/poll-nearly-1-in-4-americans-
taking-prescription-drugs-say-its-difficult-to-afford-medicines-
including-larger-shares-with-low-incomes/.
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Undoubtedly, rising prescription drug prices are a serious problem
for patients.\8\ PBMs were supposed to be a solution to this problem,
but a lack of competition, transparency and existing conflicts of
interest enable PBMs to game the system and put profits before patient
welfare.
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\8\ Leigh Purvis and Stephen W. Schondelmeyer, Brand Name Drug
Prices Increase More Than Twice As Fast As Inflation in 2018. AARP
Public Policy Institute, November 2019, https://press.aarp.org/Brand-
Name-Drug-Price-Increases-2018-Rx-Price-Watch?intcmp=AE0POL-TOENG-TOGL.
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PBMs represent themselves as ``honest brokers'' or intermediaries
between drug manufacturers, health insurers, plan sponsors, and
providers. Although PBMs in principle have great promise in terms of
their potential to control prescription drug costs, over time their
role has evolved. Now, there is a pattern of self-dealing and
anticompetitive behavior. Patients pay higher prices for drugs than
they should because PBMs are not fulfilling their cost-control
function. Consider that two of the three largest PBMs are in the
Fortune 10 and all three in the Fortune 15.\9\ The Pharmaceutical Care
Management Association (``PCMA''), the PBM trade association,
frequently says that PBMs are ``the only actors in the pharmaceutical
supply chain whose fundamental role is to negotiate lower drug prices
for patients,'' but PBMs are not ``fulfilling their primary mission to
lower prescription drug costs for consumers and health plan sponsors.''
\10\ Instead, consumers are funding profits of more than $28 billion
annually for network intermediaries that make no products and provide
no health care, but rather basically serve primarily to transfer data
and money.
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\9\ Fortune Rankings, https://fortune.com/fortune500/2021/search/.
\10\ J.C. Scott, FTC's Inquiry of PBMs Won't Lower Prescription
Drug Costs, The Hill, April 18, 2022, https://thehill.com/blogs/
congress-blog/3272225-ftcs-inquiry-of-pbms-wont-lower-prescription-
drug-costs/
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Let me be clear, the PBM market is broken because it lacks the
essential elements for a competitive market, namely: (1) choice, (2)
transparency and (3) a lack of conflicts of interest.\11\
---------------------------------------------------------------------------
\11\ ``Protecting Consumers and Promoting Health Insurance
Competition,'' Testimony of David Balto, Before House Judiciary
Committee, Subcommittee on Courts and Competition Policy, October 8,
2009, at http://www.dcantitrustlaw.com/assets/content/documents/CAP/
protecting%
20consumers.pdf.
---------------------------------------------------------------------------
First, there is a lack of choice. The PBM industry is a tight
oligopoly, which results in reduced consumer choice. According to the
Council of Economic Advisors (CEA), three PBMs--CVS Caremark, Optum Rx,
and Express Scripts--control over 80 percent of the market, ``which
allows them to exercise undue market power against manufacturers and
against health plans and beneficiaries.'' \12\ Indeed, the three
largest PBMs have a higher gross margin than any other players involved
in the drug supply chain,\13\ and in recent years, more of the increase
in spending on brand medicines has gone to payers, including PBMs and
health plans, than to drug manufacturers.\14\ PBM profits have more
than doubled in the past decade. It is hard to see what value these
middlemen have added to our healthcare system in return for the
skyrocketing profits.\15\
---------------------------------------------------------------------------
\12\ CEA White Paper, supra note 2. The Top Pharmacy Managers of
2021, the big get even bigger, Drug Channels, April 2022, https://
www.drugchannels.net/2022/04/the-top-pharmacy-benefit-managers-of.html.
I expect the witness from PCMA will note that there are dozens of PBMs.
But these firms are not competitors at least from the perspective of
competition law and economic policy. Under the antitrust laws, a
``competitor'' in a relevant market is a firm that can constrain
prices. FTC v. Staples, Inc., 970 F. Supp. 1066, 1078 (D.D.C. 1997)
(``The pricing evidence indicates a low cross-elasticity of demand
between consumable office products sold by Staples or Office Depot and
those same products sold by other sellers of office supplies. This same
evidence indicates that non-superstore sellers of office supplies are
not able to effectively constrain the superstores prices, because a
significant number of superstore customers do not turn to a non-
superstore alternative when faced with higher prices in the one firm
markets.'') None of these much smaller PBMs have either the incentive
or ability to constrain the anticompetitive conduct of the three
dominant PBMs.
\13\ Charley Grant, Hidden Profits in the Prescription Drug Supply
Chain, February 24, 2018, Wall Street Journal, https://www.wsj.com/
articles/hidden-profits-in-the-prescription-drug-supply-chain-
1519484401#: :text=Drug%20distributors%20converted%2046%25%20of,benefit%
20
from%20higher%20drug%20prices.
\14\ Brownlee A., The Pharmaceutical Supply Chain, 2013-2020,
Berkeley Research Group, January 2022, https://www.thinkbrg.com/
insihts/publications/pharmaceutical-supply-chain-2013-2020/; Van Nuys
K, Ribero R, Ryan M., Estimation of the Share of Net Expenditures on
Insulin Captured by U.S. Manufacturers, Wholesalers, Pharmacy Benefit
Managers, Pharmacies, and Health Plans from 2014 to 2018, JAMA Health
Forum, 2021, https://doi.org/10.1001/jamahealthforum.2021.3409.
\15\ PBM Accountability Project, Understanding the Evolving
Business and Revenue Models of PBMs, 2021, https://
www.pbmaccountability.org/_files/ugd/b11210_264612f6b98e47b3a850205
4f66bb2a1.pdf?index=true
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Second, the PBM market lacks transparency. PBM operations are
cloaked in secrecy, and they fight efforts to require transparency
tooth and nail. There is no better example of their efforts to hide
information than ``PBM gag clauses'' which PBMs long used to prevent
pharmacists from telling consumers about available lower-cost
alternative medications. While Congress finally prohibited PBMs from
imposing such clauses for federally funded patients (i.e., Medicare
beneficiaries), in many states, PBMs still utilize such clauses to
ensure continued receipt of substantial profits on the backs of
consumers. There is simply no pro-consumer reason to deny consumers the
necessary information to receive drugs at the lowest cost. None.
PBMs establish tremendous roadblocks to prevent payors from knowing
the amount of rebates they secure. Even sophisticated buyers are unable
to secure specific drug by drug rebate information. PBMs prevent payors
from being able to audit rebate information. As the Council of Economic
Advisors observed, the PBM market lacks transparency as ``[t]he size of
manufacturer rebates and the percentage of the rebate passed on to
health plans and patients are secret.''\16\ Without adequate
transparency, plan sponsors cannot determine if the PBMs are fully
passing on any savings, or whether their formulary choices really
benefit the plan and subscribers.
---------------------------------------------------------------------------
\16\ CEA White Paper supra note 2.
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Legislation requiring transparency or imposing a fiduciary duty
might be one solution. Yet PBMs regularly fight against any such
legislative proposals. For example, the PBMs fought against a 2014
Department of Labor consideration of transparency even though the
proposal was supported by HR Policy Association, the AFL-CIO and
Consumers Union.\17\
---------------------------------------------------------------------------
\17\ PCMA Testimony to the ERISA Advisory Council, William J.
Kilberg, June 19, 2014 https://www.dol.gov/sites/dolgov/files/EBSA/
about-ebsa/about-us/erisa-advisory-council/2014-pbm-compensation-and-
fee-disclosure-kilberg-06-19.pdf; Consumers Union Testimony, June 12,
2014, https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/
erisa-advisory-council/2014-pbm-compensation-and-fee-disclosure-quincy-
06-19.pdf. I expect that Professor Graithwaite will suggest that that
PBM transparency may be harmful because it may lead to collusion. I
firmly disagree with that suggestion. First even Professor Graithwaite
seems to admit the PBM market may not be competitive. TESTIMONY OF
CRAIG L. GARTHWAITE, Ph.D., Before the House Committee on Education and
Labor Subcommittee on Health, Employment, Labor, and Pensions On
``Making Health Care More Affordable: Lowering Drug Prices and
Increasing Transparency,'' September 26, 2019, at 21, https://
edlabor.house.gov/imo/media/doc/GarthwaiteTestimony0926191.pdf. Second,
although there may be a theoretical argument that excessive
transparency can lead to collusion, I think that is rather unlikely in
this market. It assumes that buyers will disclose the precise amount of
rebates to rival manufacturers. I represent payors and based on my
experience I doubt that would occur. Moreover, in my 15 years as an
antitrust enforcer including working as the FTC Policy Director, I
cannot recall a single case where transparency led to the type of
collusion the Professor suggests.
---------------------------------------------------------------------------
Third, PBMs create and exploit numerous conflicts of interest. PBM
rebate schemes create a clear conflict between the PBM and the payor.
The payor prefers the lowest cost drug. But to maximize its profits
PBMs often prefer the drug with the highest list price. And they often
will prevent lower cost drugs such as generics and biosimilars from
receiving preferred access on their formularies.
Conflicts of interest also abound because PBMs are vertically
integrated with health insurers, mail order operations, specialty
pharmacies, and in the case of CVS, the largest retail and specialty
pharmacy chain, and the dominant long term care pharmacy. All three
PBMs own their own specialty pharmacies, which they favor,
discriminating against rival pharmacies. These PBMs steer patients to
their own pharmacies as a requirement for patients to access their full
prescription benefit. And all three PBMs are owned by or affiliated
with the three largest insurance companies--United, Aetna and Cigna.
How can they offer fair contracts to their clients when they have a
vested interest in driving traffic to their own pharmacies? Who sets
the standards and audits the affiliated pharmacies, and do they have to
meet the same standards as the independent pharmacies? Are affiliated
pharmacies charged the DIR fees that independent pharmacies pay and
have exceeded billions of dollars annually? The fox is guarding the
henhouse, and Congress needs to ensure that patients are not paying the
price in less choice, inferior service and higher prices.
A Broken Market Leads to Escalating Drug Costs and Rapidly Increasing
PBM Profits.
The most significant conflict that leads to escalating drug costs
involves PBMs' incentives to maximize the rebates paid by manufacturers
to get preferred access on their drug formularies. PBMs were formed to
act as honest brokers to negotiate with drug manufacturers for lower
prices for payors, but when PBMs share in the rebates that they
negotiate, it creates an incentive for them to want higher, not lower,
list prices. According to a recent Senate Finance Committee Report,
``PBMs have an incentive for manufacturers to keep list prices high,
since the rebates, discounts, and fees PBMs negotiate are based on a
percentage of a drug's list price--and PBMs may retain at least a
portion of what they negotiate.'' \18\ PBMs have gone so far as to
require additional payments in the event of any reduction in
manufacturer list prices.\19\
---------------------------------------------------------------------------
\18\ Senate Finance Committee. Insulin: Examining the Factors
Driving the Rising Cost of a Century Old Drug, 2021, https://
www.finance.senate.gov/imo/media/doc/Grassely-Wyden%20
Report%20(FINAL%201).pdf.
\19\ Sagonowsky, E., UnitedHealthcare demands drug rebates even if
pharma cuts list prices: analyst, February 2019, https://
www.fiercepharma.com/pharma/letter-to-pharmas-unitedhealth
care-seeks-to-protect-drgug-rebates-from-price-reductions.
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PBMs' Demand for Rebates Results in Patients Not Having Access to the
Most Efficacious and Affordable Medicines that they Need.
PBMs base formulary access decisions on the amount of the rebates,
which encourages drug manufacturers to focus on offering higher rebates
to secure that preferred status. Focusing on rebates gives PBMs
incentives to put higher-cost drugs on their formularies, because the
rebates are based on a percentage of a drug's list price. In essence,
PBMs are making decisions on inclusion of a drug based not on clinical
research or evidence-based efficacy and safety, but on which
manufacturer offers a higher rebate payment. In pursuit of higher
rebates, PBMs routinely deny access to formularies, change drug
formularies, or require prior authorization for drugs that may be best
for a patient's condition, even in cases where a more affordable
medication is available. For example, a PBM often excludes a lower
priced generic or biosimilar because the higher priced branded drug
offers higher rebates.
As important as cost is the adverse impact on patient health. PBM
rebate schemes interfere with doctor-patient relationships, and harm
patients' health when they cannot get the drugs they need. PBMs may
exclude new innovative drugs that may be less expensive and more
effective, in favor of higher rebates.\20\ On many occasions PBMs may
require patients to go through cumbersome and health-threatening step
therapy programs in order to secure the more efficacious drug. As Robin
Feldman, a professor at UC Hastings College of Law, puts it, ``the
system contains odd and perverse incentives, with the result that
higher-priced drugs can receive more favorable health-plan coverage,
channeling patients toward more expensive drugs.'' \21\ Uninsured
patients face higher prices and insured patients pay higher coinsurance
or pre-deductible out-of-pocket costs when list prices rise.\22\
---------------------------------------------------------------------------
\20\ Mariana Socal and Gerard Anderson, Favorable Formulary
Placement of Branded Drugs in Medicare Prescription Drug Plans When
Generics Are Available, JAMA, March 18, 2018, https://jamanetwork.com/
journals/jamainternalmedicine/fullarticle/2728446.
\21\ Robin Feldman, Why Prescription Drug Prices Have Skyrocketed?,
Washington Post, November 26, 2018, https://www.washingtonpost.com/
outlook/2018/11/26/why-prescription-drug-prices-have-skyrocketed/.
\22\ American Patients First: The Trump Administration Blueprint to
Lower Drug Prices and Reduce Out-of-Pocket Costs, U.S. Department of
Health and Human Services (``HHS''), May 14, 2018, pg. 17.
---------------------------------------------------------------------------
PBMs use Their Market Dominance to Harm Community Pharmacies.
As detailed below, PBMs engage in a long list of egregious, unfair
and abusive practices that harm community pharmacies. Community
pharmacies simply have no reasonable bargaining power with PBMs who
extend contracts on a ``take it or leave it'' basis. You simply have to
look no further than pharmacy direct and indirect remuneration fees. As
noted above, the PBMs pulled in over $9 billion dollars in these fees
in 2022 alone. The foundation for these fees are the inflated price
points that were established by PBMs themselves. The fact that these
fees skyrocketed from practically nothing to over $9 billion
demonstrates the PBMs market dominance. They reap additional fees
beyond the $9 billion by way of inflated coinsurance payments by
seniors. There is simply no pro-consumer reason to inflate Medicare
Part D beneficiaries' coinsurance costs at the point of sale. Never
have seniors received a rebate from PBMs for overpayment of their
coinsurance.
Lax Antitrust Enforcement of the PBM Industry Has Led to Widespread
Anticompetitive Conduct
The U.S. antitrust agencies have effectively placed PBMs in a
regulatory free zone. The Department of Justice Antitrust Division
(``DOJ'') and the FTC have failed to take any meaningful enforcement
actions, while permitting massive consolidation and anti-consumer
practices. In the case of the PBMs' ``gagging'' of pharmacists,
preventing them from telling consumers of lower-priced alternatives.
The FTC knew about this conduct yet did not act.
As authors from the Institute for Local Self Reliance have
observed:
The FTC was designed to be a forward-thinking agency that would
use its investigatory and rule-making authority to stamp out
unfair methods of competition and protect the less powerful
from fraud and abuse. But the FTC has been quick to dismiss
concerns about the impact of concentration on small independent
businesses. The agency has presided over an increasingly
consolidated economy and has repeatedly embraced vertical
integration despite evidence that such industry structures
invite self-dealing and inflict harm on small businesses and
the communities they serve.\23\
---------------------------------------------------------------------------
\23\ Stacey Mitchell and Zach Freed, How the FTC Protected the
Market Power of Pharmacy Benefit Managers, February 19, 2021, Pro
Market, https://www.promarket.org/2021/02/19/ftc-market-power-pharmacy-
benefit-managers/.
Ten years ago, the FTC faced a critical decision--whether to
approve the merger of two of the three largest PBMs--Express Scripts
and Medco. Despite the fact the merger violated the Merger Guidelines,
and there was strong opposition by employers, unions, pharmacists and
consumer groups, and dozens of Congresspersons raising significant
competitive concerns, the FTC approved the merger. The Commission
statement is illustrative of its misguided views.\24\ The Commission
suggested that there were ten competitors in the market, yet by this
point its list looks more like a list of fossils--a record of firms
that have since been acquired or exited the market. The Commission also
suggested the concerns of pharmacies were unfounded because they
``negotiate'' contracts with PBMs, but no one with any business sense
would suggest those are anything more than take it or leave it
arrangements. The merging parties suggested that the country needed the
merger so the merged firm could force down drug prices. The FTC bought
into this Faustian bargain, but the real result was skyrocketing
prescription drug prices, rebates, and massive profit increases.
---------------------------------------------------------------------------
\24\ Statement of Commission Concerning Proposed Acquisition Medco
Health Solutions and Express Scripts, Inc., FTC File No. 111-0210,
April 2, 2012, https://www.ftc.gov/sites/default/files/documents/
public_statements/statement-commission-concerning-proposed-acquisition-
medco
-health-solutions-express-scripts-inc./120402expressmedcostatement.pdf.
---------------------------------------------------------------------------
The PBMs did secure the market power that the antitrust laws are
meant to protect against. Rather than use that market power to
effectively lower drug prices they used it to massively increase
rebates and rebate schemes. As the following two charts demonstrate,
PBMs have taken a majority of any reductions in pharmaceutical drug
costs in the form of rebates and fees over the past five years and they
are pocketing an increasing portion in profits.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
In other words, drug manufacturers are attempting to lower costs
through rebates, but an increasing portion of those rebates are being
pocketed by the PBMs. They can do that because of the lack of
competition, transparency and the conflicts of interest in the system.
Contrast the FTC decision to ``hope'' creating mega-middlemen would
benefit consumers with the DOJ decision five years later to block the
Aetna-Humana and Cigna-Anthem mergers. The insurance companies
presented many of the same arguments as ESI-Medco--there were lots of
competitors, there was little risk of monopsony power because
healthcare providers could protect themselves, and the mergers were
needed to lower healthcare costs. But the DOJ saw that approving the
mergers were a poor bargain for consumers and properly challenged them.
Consumers and providers today benefit from competition between the four
firms.\25\
---------------------------------------------------------------------------
\25\ Unfortunately, the DOJ allowed CVS to acquire Aetna, Inc. and
Cigna, Inc. to acquire Express Scripts, Inc. in 2019.
---------------------------------------------------------------------------
Unfortunately, the FTC decision to green light the ESI-Medco merger
led to a flood of additional PBM mergers as the major PBMs devoured
their smaller rivals and specialty pharmacies. None of these
transactions were challenged by the FTC, yet the underlying structural
factors were far worse.
The lack of FTC merger enforcement is only the tip of the iceberg
of misguided efforts. States have recognized the rampant consumer
protection concerns and proposed legislation to regulate PBMs. When
states tried to regulate deceptive and anti-consumer conduct of PBMs,
the FTC staff sided with the PBMs, suggesting that ``economic theory''
teaches that PBM-pharmacy and PBM-drug manufacturer relationships
result in lower prices and that regulation would harm consumers.\26\
For example, the FTC has consistently opposed PBM transparency even
though both Republican and Democratic Administrations have been strong
advocates for healthcare transparency. In many cases, the FTC staff has
relied on an outdated 2005 FTC mail order study, which Commissioner
Julie Brill acknowledged was ``antiquated.'' \27\ Ultimately, many
states rejected the FTC advocacy and adopted state regulations, but the
broad statements in the FTC's own advocacy hamper the ability of states
or Federal regulators to engage in meaningful PBM regulation.
---------------------------------------------------------------------------
\26\ FTC Press Release, FTC Staff: Mississippi Bill That Would Give
State Pharmacy Board Authority Over PBMS Likely Would Increase Prices,
March 22, 2011, https://www.ftc.gov/news-events/news/press-releases/
2011/03/ftc-staff-mississippi-bill-would-give-state-pharmacy-board-
authority-over-pbms-likely-increase.
\27\ See Commissioner Brill's Letter to the ERISA Advisory Council,
August 19, 2014, avail-
able at https://www.ftc.gov/system/files/documents/public_statements/
579031/140819erisa
letter.pdf.
---------------------------------------------------------------------------
One of the reasons the FTC advocacy and nonenforcement has missed
the mark is that it has focused on the wrong set of consumers--payors
rather than patients. With the vertical integration of the three
largest PBMs with an insurer, a lowering of cost to the insurer through
a sharing of rebates and other revenue does not directly equate to
lower prices for patients taking prescription drugs. Under the current
system, vulnerable patients are left to pay artificially high prices
when their cost sharing is tied to the undiscounted list price of a
medicine, rather than the lower net price the PBMs and insurers pay.
And uninsured patients are in an even worse predicament. That is why
consumer groups and unions supported reform of PBM rebates in the prior
Administration.
The lack of enforcement has harmed pharmacies, and this has a
direct impact on consumers. I know as a consumer advocate that
consumers place tremendous value on their access to community
pharmacies. Community pharmacists are consistently ranked as our most
trusted health care professionals. And community pharmacies are often
the most accessible form of health care services in underserved rural
or inner-city markets. Community pharmacies provide essential advice
and health care monitoring especially for patients taking specialty
drugs. Yet despite receiving hundreds of complaints from community
pharmacies for the egregious and deceptive actions by PBMs, the FTC has
never brought an enforcement action. Not even one.
Just one example of egregious non-enforcement involves the numerous
allegations that large PBMs are engaging in predatory pricing
activities through the use of retrospective Direct and Indirect
Remuneration (``DIR'') and related fees. In practice, these fees
depress reimbursement rates to pharmacies. In some cases, PBMs ``claw
back'' more than the pharmacy initially received for the prescription,
resulting in a net loss to the pharmacy.\28\ In fact, PBM claw backs of
pharmacy revenue has been increasing each year, causing significant
financial strain on these small businesses.\29\ The FTC, however, has
not prevented PBMs from engaging in these predatory acts. Congress
should ask what the basis for these fees is and how they benefit
consumers, and why they have increased so dramatically.
---------------------------------------------------------------------------
\28\ Markian Hawryluk, The Last Drugstore: Rural America is Losing
Its Pharmacies, WASH. POST (Nov. 10, 2021), https://
www.washingtonpost.com/business/2021/11/10/drugstore-shortage-rural-
america/.
\29\ Id.
---------------------------------------------------------------------------
Moreover, PBMs have engaged in a variety of practices that
fundamentally can be defined as theft from the pharmacies, ultimately
to the detriment of patients. For example, in 2018, the Ohio State
Auditor audited its Medicaid Prescription Drug Program and found that
the difference between what independent pharmacies are paid and what
PBMs report back to the plans, commonly referred to as the ``spread,''
had been growing. However, this growth in savings failed to translate
into lower costs for the state.\30\ The Auditor further described that
the spreads, which resulted in reimbursement cuts to local providers,
actually turned into PBM profits.\31\ The Ohio Pharmacist Association
explained that ``[b]eing that PBMs also own their own pharmacies, this
essentially amounts to one pharmacy company reaching into the pockets
of competitors, pulling out cash, and putting it right into their own.
Regardless of the intent, this warped incentive has absolutely no place
in a fair, competitive marketplace.'' \32\ Again, the FTC has failed to
act despite numerous examples of this type of behavior.
---------------------------------------------------------------------------
\30\ See Pharmacy Middlemen Made $223.7 Million From Ohio Medicaid,
Kaitlin Schroeder, June 23, 2018, Dayton Daily News, https://
www.daytondailynews.com/news/pharmacy-middlemen-made-223-from-ohio-
medicaid/JsPLtbs3wfKoBmaGbF9GrK/
\31\ Id.
\32\ Ohio Pharmacist Association Press Release, Ohio Auditor
releases stunning Medicaid PBM audit report, https://
www.ohiopharmacists.org/aws/OPA/pt/sd/news_article/184063/_PAR
ENT/layout_interior_details/false.
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And, because antitrust agencies have allowed PBMs to vertically
integrate with insurers, mail order operations, and pharmacies, PBMs
have financial incentives, and the necessary market power, to steer
patients to their affiliated services.\33\ Since PBMs have their own
pharmacies (indeed the largest pharmacy chain CVS owns the second
largest PBM) PBMs frequently access rival pharmacy patient data and
provide it to their pharmacy affiliate in an effort to steer patients
away from rivals. Patients may be forced into PBM-owned mail order or
1-800 specialty pharmacy operations that provide an inferior level of
service to competing community pharmacies and specialized pharmacies
like AIDS Healthcare Foundation pharmacies.\34\ Or the PBMs may engage
in egregious auditing practices to harm rival pharmacies.
---------------------------------------------------------------------------
\33\ Vertical Integration Isn't Great for Health Care Consumers or
Purchasers, PURCHASER BUSINESS GROUP ON HEALTH (Aug. 23, 2021)
available at https://www.pbgh.org/despite-claims-vertical-integration-
isnt-great-for-health-care-consumers-or-purchasers/.
\34\ Dr. Michael Wohlfeiler of the AIDS Healthcare Foundation
testified in the CVS-Aetna Tunney Act proceeding that the merger could
endanger HIV and AIDS patients because the merged firm could steer its
``patients to leave HIV and AIDS specific treatment providers for
providers that are unequipped to treat those conditions.'' United
States v. CVS Health Corp., 407 F. Supp. 3d 45, 57 (D.D.C. 2019). AHF
has created an extraordinarily successful model for delivery of care to
HIV/AIDS patients, a one stop shop model in which AHF functions as a
testing, linkage, specialist, health insurer, pharmacy, and price care
facility. Patient steering to cookie-cutter models results in
fragmentation of care, inferior quality of care, and severance of
trusted provider relationships, which is very problematic for
vulnerable patients with chronic conditions like HIV.
---------------------------------------------------------------------------
PBMs ``offer'' independent pharmacies ``take it or leave it''
contracts, where a pharmacy must choose between accepting unfavorable
reimbursement terms, or exclusion from the PBM's network (and patient
population). In some cases, pharmacies are coerced into agreeing to
below-cost reimbursement. This unsustainable choice has forced many
pharmacies to close their doors.\35\ This has caused what has been
characterized as ``pharmacy deserts'' and has disproportionately harmed
rural and urban African American and Hispanic populations that now lack
pharmacies because PBMs have driven the independents out of business,
but these PBMs do not put new pharmacies in these locations and instead
they steer patients to mail order or long distance driving.\36\ This is
a significant problem for these vulnerable patients because no group of
healthcare providers is as accessible, service oriented and dedicated
as community pharmacies.\37\ A community pharmacist is there to serve
the patients and make sure they get the right prescription at the
lowest cost. That is why consumer and patient groups have consistently
supported the advocacy efforts of community pharmacies and their
requests for PBM reform. The FTC has heard these concerns but has
chosen not to take any action to prevent PBM predatory behavior
designed to eliminate pharmacy competition. Patients lose when
community pharmacies are handcuffed in the competitive battle.
---------------------------------------------------------------------------
\35\ Markian Hawryluk, The Last Drugstore: Rural America is Losing
Its Pharmacies, WASH. POST (Nov. 10, 2021), https://
www.washingtonpost.com/business/2021/11/10/drugstore-shortage-rural-
america/.
\36\ Id., Stacy Mitchell and Charlie Thaxton, The Rebirth of
Independent Pharmacies Could Cure Rural Ills, The American
Conservative, November 5, 2019, https://www.theamerican
conservative.com/articles/the-rebirth-of-independent-pharmacies/.
\37\ See, Stacy Mitchell, Small Pharmacies Beat Big Chains at
Delivering Vaccines. Don't Look So Shocked, Washington Post, February
5, 2021, https://www.washingtonpost.com/outlook/small-pharmacies-beat-
big-chains-at-delivering-vaccines-dont-look-so-shocked/2021/02/05/6bb3
07ec-671b-11eb-886d-5264d4ceb46d_story.html.
---------------------------------------------------------------------------
And, when state legislatures try to pass basic reform laws to
protect independent pharmacies and consumers from predatory practices
of PBMs, the PBMs, without fail, bring lawsuits to challenge such
statutes based on ERISA (the Employee Retirement Income Security Act of
1974) pre-emption. Recently, such PBM reform passed by the State of
Arkansas, which guaranteed that Arkansas pharmacists would be
reimbursed by PBMs for the dispensing of drugs at least the amount of
their wholesale cost, was challenged by the PCMA. This lawsuit
culminated in a unanimous decision by the U.S. Supreme Court that such
PBM reform legislation aimed at protecting independent pharmacies in
the wake of PBM oppression is not pre-empted by ERISA. See Rutledge v.
PCMA, 141 Sp. Ct. 474 (2020). While consumers hold out hope that such
state protections could open a fair playing field for pharmacies, PBMs
have found ways to circumvent such laws resulting in more invasive
pharmacy audits, network exclusions and increased pharmacy
terminations.
Legislative Action to Prevent PBM Abuse
We are at a crucial turning point on PBMs. It is increasingly
evident that these middlemen are significantly increasing drug costs
and reducing access because of clear market failures and a lack of
meaningful regulation. We can ill afford middlemen that extract $28
billion in profits or $9 billion in DIR fees and increasingly deny
consumers access to the lowest price and most efficacious drugs and the
most effective pharmacy services.
This Committee should consider amending the FTC Act to specify
certain practices that harm consumers and competition as ``unfair or
deceptive acts or practices'' and ``unfair methods of competition.''
Congress established the FTC to use a broad range of powers including
enforcement and regulation to prevent and proscribe practices that were
harmful to the marketplace. In doing so, Congress established a
flexible standard in which it has occasionally proscribed certain
practices as an ``unfair or deceptive act or practice.''
This Committee should evaluate what practices should be considered
for potential enforcement. Some of the practices that should be
considered include:
Failing to pass on all rebates and clawbacks to payors and
patients;
Basing PBM compensation on the price of a drug;
Schemes that prevent lower priced drugs from being included
on a formulary or being placed in a disadvantageous position;
Discrimination in reimbursement to pharmacies;
Forcing pharmacies to dispense below acquisition cost;
Failing to disclose DIR and other associated fees; and
Discriminatory practices against community pharmacies.
The FTC should be given broad rule making power to address these
practices. In addition, the Commission should be instructed to use its
6b power to study past PBM mergers including the ESI-Medco merger.
Congress should use all its powers to insure this is a major priority
for the FTC.
Concluding Thoughts
The dominant PBMs play a significant role in driving up
prescription drug prices, reducing patient choice of medicines that
they need, and lessening competition among pharmacies. Patients care
deeply about rising healthcare costs, including out-of-pocket costs for
prescription drugs, as well as ensuring they can access the medicines
that they need. If PBMs continue to evade FTC scrutiny, they will
continue to engage in egregious conduct that is fraudulent, deceptive,
and anticompetitive. What health plans and employers should
fundamentally be purchasing is the service of an honest broker to
secure the lowest prices and best services from both pharmaceutical
manufacturers and pharmacies. When PBMs exist in a regulatory-free
environment, the result is misaligned incentives and inherent conflicts
of interest. Fraud, deception, anticompetitive conduct, higher prices,
and reduced choice harms payors, including the government and
taxpayers, and, most importantly, patients, who rely on access to
lifesaving and life-managing prescription drugs.
I look forward to answering any questions.
Senator Blumenthal. Thank you so much, Mr. Balto. And now,
Mr. Garthwaite.
STATEMENT OF CRAIG L. GARTHWAITE, Ph.D.,
PROFESSOR OF STRATEGY, HERMAN SMITH RESEARCH
PROFESSOR IN HOSPITAL AND HEALTH SERVICES
MANAGEMENT, DIRECTOR OF PROGRAM ON HEALTHCARE AT
KELLOGG (HCAK), KELLOGG SCHOOL OF MANAGEMENT,
NORTHWESTERN UNIVERSITY
Mr. Garthwaite. Thank you, Chairman Blumenthal and Ranking
Member Blackburn for inviting me today. As we discussed, the
high and rising price of pharmaceuticals attracts a deservedly
large amount of attention from policymakers, the press, and
citizens across the United States.
Many point to these high prices as evidence of a clearly
broken market. However, it is not clear that is obviously true.
High pharmaceutical prices represent a fundamental tradeoff
that sits at the center of the U.S. health care market. New
drugs are developed through a risky and expensive process where
we ask private firms to provide enormous amounts of capital at
risk to fund scientific progress.
Evidence of the progress in this field abounds as we now
treat huge numbers of diseases that previously would have been
death sentences. In order to generate the incentives to make
these investments, we provide innovative firms with time
limited periods of market exclusivity where they have the
ability to charge higher prices. These higher prices do
decrease access to medications today.
However, we tradeoff that lack of access today in order to
get new drugs in the future. In this way, the system provides
access in the future to people who have no treatments available
at any price today. And while there are many potential current
concerns about our existing pharmaceutical system, a critical
point is that the high prices today need to generate sufficient
returns to generate new products in the future.
If instead, these firms are captured or dissipated by other
people in the pharmaceutical supply chain, our existing system
may not provide the optimal incentives. Understanding whether
firms are capturing this value requires more context about
prices in the pharmaceutical supply chain. In the U.S., there
are many prices associated with prescription drugs, as we have
talked about already.
Of particular importance in today's hearing is that there
is a publicly available list price that is set by the
manufacturer. Payers, such as insurers or large employers, then
employ pharmacy benefit managers to, among other things,
negotiate rebates or discounts from this list price. And that
leads us to the focus of the hearing today, these PBMs or
pharmacy benefit managers.
As Chairman Blumenthal noted, most Americans have no clue
what a PBM is, but they are central to everything about
pharmaceutical distribution and insurance in the United States.
They take their relatively obscure position in the market, but
they control everything about our access to drugs. In return
for those activities, PBMs do earn revenue through a variety of
means.
A primary concern, then, is whether they capture too much
value through those means. And given the high concentration in
the market that David Balto spoke about, and increasing amounts
of vertical integration, it is logical people should be
concerned about a possibility of where the market is providing
an efficient outcome.
One primary area of concern are these list prices and
rebates in the system, which directly cause higher consumer
cost sharing payments. Given PBMs often receive their payments
as a function of the list price, the pitch--the push for high
list prices is seen as abuse by PBMs of the market. But like
many things in health care, the reality is likely far more
complex.
Plan sponsors, these insurers and these large employers,
use the system of rebates and high cost sharing as a way to
decrease the premiums for their insurance products. This is
done to make the products more competitive and to help them
gain share in the market. The result of that is that we are
witnessing, through rebates and cost sharing, a reintroduction
of the concept of medical underwriting in health insurance that
was taken away by the Affordable Care Act.
Through a combination of predictable cost sharing payments
and high premiums, individuals with chronic conditions such as
diabetes and those with expensive acute conditions such as
cancer are paying more for insurance so healthy people can pay
less. It is important to note this does not appear to be driven
independently by the PBMs. Instead, it is driven by the demands
of their clients.
PBMs have long offered contracts to these plan sponsors
where rebates were passed along to the customer at the point of
sale. Plan sponsors have routinely ignored these contracts in
favor of capturing high rebates. That fact should influence
policy. If we are worried about high list prices leading to
high cost sharing, we should attack that directly through
Congressional action.
That said, there are also features of the markets where
PBMs do appear to be exploiting a lack of transparency. For
example, we are now seeing increasingly administrative fees
that are a function of the list price. Those are often not
apparent to the plan's sponsor. They do not have insight into
the amount of money that is going between the manufacturer of
the pharmaceutical and the pharmacy benefit manager.
And given that those fees are a function of the list price,
you may be concerned that PBMs are taking advantage of that
lack of transparency. In my testimony, I identify ways in which
we can try and improve transparency to allow more complete
contract negotiations between plan sponsors and PBMs. It should
be clear that PBMs do play a valuable role in the market. They
are counterpoint to the market power of innovative
pharmaceutical firms. It is important we provide them with the
tools to negotiate these lower prices.
That said, any compensation they get should reflect their
unique contribution to the market. As a closing point, I will
agree with what the chairman and the ranking member said, we
just lack insight in many ways into the PBM market.
And so, Ranking Member Blackburn, I am heartened to hear
that you have a bill to have the GAO look more into this
because without more information about how PBMs interact with
manufacturers and PBMs interact with the plan sponsors that
they are giving rebates to, we simply are not going to be able
to develop good policy in this area. Thank you very much.
[The prepared statement of Mr. Garthwaite follows:]
Prepared Statement of Craig L. Garthwaite, Ph.D., Professor of
Strategy, Herman Smith Research Professor in Hospital and Health
Services
Management, Director of Program on Healthcare at Kellogg (HCAK),
Kellogg School of Management, Northwestern University
In contrast to other developed countries, the United States relies
more heavily on private markets to finance and provide healthcare
services. This use of economic markets is not a policy accident and
instead reflects an intentional belief that market-based healthcare
provides many advantages. A large and diverse country such as the
United States has a wide variety of preferences and meaningful
differences in the willingness to pay for quality. In this setting, the
central planning inherent to regulated prices is unlikely to maximize
welfare, and an economic market is the superior method of allocating
goods and services. This is even more true once we consider the variety
of economic actors necessary for the development of innovative new
healthcare products and services. It is hard to imagine what omniscient
actor could balance the forces necessary to promote value creating
innovations more efficiently than the market.
Therefore, despite many contentions to the contrary, a market-based
system remains the best mechanism for providing the appropriate
incentives for long term welfare maximization in the U.S. healthcare
market. However, relying on the market for the provision of such a
vital set of goods and services requires both recognizing that
healthcare markets, like any other market, can fail and that all
markets require vigilant protection of the structures and institutions
necessary to promote robust and vigorous competition.
Concerns about the appropriate role for markets in healthcare are
perhaps most frequently discussed in the world of pharmaceuticals.
These discussions are motivated by high and rising pharmaceutical
prices. While many claim these high prices provide prima facie evidence
of a market failure, in reality they are the result of the complex and
delicate balancing of incentives that sits at the center of the U.S.
healthcare market.
This delicate balance is necessary because market failures at the
center of the innovative process for developing new drugs requires some
degree of market intervention in the first place. This failure results
from that fact that the scientific advancements generated by firms
developing innovative pharmaceutical products are essentially a public
good, i.e., the knowledge is effectively non-rival and non-
excludable.\1\ Rational firms realize they will be unlikely to capture
a sufficient amount of the value generated by the large, fixed, and
sunk investments necessary to bring a product to market. This results
in an economic phenomenon known as ``hold up'' whereby firms, absent
some form of government intervention, are unwilling to make value
creating investments in the first place.
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\1\ The degree to which this is fully a public good depends on how
much information can be gleaned from the actual product, the regulatory
filings, and the published research. For example, small molecule
products can be more easily reverse engineered and therefore absent
intellectual property protections are relatively easier to copy.
Biologic products, however, have a more complex production process and
therefore copying the technology is easier than making the product de
novo but harder than for a small molecule product.
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To address this initial market failure, governments offer various
forms of intellectual property protection. Through patents or other
forms of market exclusivity, governments arm firms with time limited
periods of enhanced market power that allow them to capture a larger
portion of the value created by their innovative products. During this
limited time period, higher prices than would otherwise exist curtail
some access to valuable medicines. This reduced access is deliberately
traded off for the development of new products in the future.\2\ These
new products, however, provide access to patients for whom there would
otherwise be no available treatments.
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\2\ In considering this tradeoff it is important to consider the
role of health insurance in mitigating decreased quantity resulting
from high prices. To the extent that insurance mitigates some of this
quantity decline it is possible that the welfare loss are smaller than
would be expected. See D. Lackdawalla and N. Sood, ``Health Insurance
as a Two-Part Pricing Contract,'' Journal of Public Economics, 2013,
102: 1-12.
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In this way, policies governing the development of pharmaceutical
products involve trading off the static inefficiency of reduced access
to products today in order to create the dynamic efficiency of the
increased development of new products. To the extent the value created
by the new products exceeds the welfare losses resulting from the high
prices (and decreased quantity), the granting of these periods of
market exclusivity is welfare enhancing. This could be true even if the
prices today are quite high.
This tradeoff is a source of much of the controversy surrounding
prescription drug prices because it involves some number of readily
identifiable individuals who are unable to access existing and
potentially life-saving medications.\3\ Unsurprisingly, this particular
form of a lack of access garners large amounts of press and political
attention. However, it is critical to remember a perhaps far greater
access problem for patients suffering from conditions for which no
treatment options exist at all.\4\ For these individuals, there is no
price at which they can purchase a treatment. These patients will gain
access in the future only as a result of the dynamic incentives created
by intellectual property protection. As we consider the optimality of
policies governing the pharmaceutical market, we must balance the oft-
discussed need for access to existing products with the less-discussed
lack of access from the absence of effective treatments.
---------------------------------------------------------------------------
\3\ Garthwaite, Craig, and Benedic Ippolito. 2019. ``Drug pricing
conversations must take the cost of innovation into consideration.''
STAT. January 11.
\4\ This is particularly true because the impact of high prices on
quantity is far more complicated in a world of widely available health
insurance. Those who are insured may not suffer as much decreased
access as they would in a market without third party payment. However,
those for whom drugs do not exist certainly will not access a treatment
at any price.
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A central parameter of this tradeoff of static and dynamic
incentives is the relationship between the elevated prices paid for
prescription drugs today and the incentives of innovative firms to
develop new products in the future. Economic research has clearly
documented a relationship between increased market size and investments
in research and development.\5\ Therefore, to the extent high prices
signal expected economic returns for the providers of the risk-based
capital necessary for innovation then the prices could represent a
welfare enhancing policy choice. However, if the revenue generated by
high drug prices is instead captured by other parts of the value chain
there are valid concerns that our current policies are not providing an
optimal level of innovation to outweigh the welfare losses from the
price related reduced access.
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\5\ D. Acemoglu and J. Linn. 2004. ``Market Size in Innovation:
Theory and Evidence from the Pharmaceutical Industry,'' The Quarterly
Journal of Economics, 119(3): 1049-1090; A. Finkelstein, ``Static and
Dynamic Effects of Health Policy: Evidence from the Vaccine Industry,''
Quarterly Journal of Economics, 119(2): 527-564; Dubois et al.,
2015``Market size and pharmaceutical innovation,'' RAND Journal of
Economics, 46(4): 844-871; and Dranove, Garthwaite and Hermosilla,
2020. ``Pharmaceutical Profits and the Scientific Novelty of
Innovation,'' NBER Working Paper #27093.
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Determining the optimality of this tradeoff in today's market
requires a more careful understanding of the pharmaceutical supply
chain. In particular, it is important to understand how various firms
capture a share of the value created by innovative pharmaceutical
products. provides a broad overview of this supply chain and the flow
of funds across firms at its various stages. Perhaps most important for
today's hearing is the relationship between manufacturers, payers, and
pharmacy benefit mangers (PBM), which is depicted in the figure's upper
right corner.
While largely unknown to customers, PBMs are the private firms that
effectively manage all aspects of insurance coverage for
pharmaceuticals. Despite their relative lack of attention, these firms
occupy a central role in nearly every facet of the pharmaceutical
distribution and insurance market. At a high level, PBMs sign contracts
with plan sponsors (e.g., risk bearing health insurers or employers) to
undertake activities such as negotiating drug prices, establishing
pharmacy networks, processing pharmaceutical claims, and developing
drug formularies.
In return for these activities, PBMs earn revenue through a variety
of means. These include, but are not limited to, direct per member per
month (PMPM) fees paid by plan sponsors, the ability to keep a
negotiated share of the rebate (i.e., the discount from the
manufacturer that the PBM is able to negotiate), spread pricing (i.e.,
the difference between what a PBM is paid by a plan sponsor for a drug
and what they pay to the pharmacy to fill the prescription), and
various administrative fees from manufacturers.
The primary role of PBMs is to help manage the static inefficiency
resulting from high prices. Historically, these firms emerged to
implement some degree of managed care and negotiation to the
pharmaceutical benefit offered by plan sponsors. In particular, they
allowed relatively small insurers to pool together and negotiate as a
group against manufacturers.\6\ By constructing formularies, PBMs
negotiate lower prices and can increase access to products and
potentially to insurance overall. Of course, such activities limit
revenues to pharmaceutical manufacturers and have been shown to blunt
incentives to develop new products.\7\ This demonstrates the importance
of the role of PBMs in the tradeoff central to drug development.
---------------------------------------------------------------------------
\6\ Z. Brot-Goldberg, C. Che, and B. Handel, ``Pharmacy Benefit
Managers and Vertical Relationships in Drug Supply: State of Current
Research,'' NBER Working Paper #29959, April 2022.
\7\ L. Agha, S. Kim, and D. Li, ``Insurance Design and
Pharmaceutical Innovation,'' forthcoming American Economic Review:
Insights.
---------------------------------------------------------------------------
It is important to note that if the construction of formularies
represents the preferences of consumers for access to new products, a
reduction in innovative activity is not necessarily a problem. After
all, our goal is to maximize welfare not innovation. However, if the
reduction of revenues to manufacturers comes instead from PBMs
capturing an inappropriately large fraction of spending as profits--
there could be concerns about whether the pharmaceutical market is
operating in a way that maximizes welfare. In particular, concerns
about whether the welfare losses from the lack of access today are
sufficiently offset by incentives to develop new products in the
future. These concerns are central to today's hearing investigating the
PBM market.
Concerns about this possibility stem from features of the existing
market. For example, the PBM market is dominated by three large firms--
Caremark, Express Scripts and OptumRX. Figure 2 contains the market
share of each of these firms in 2021 and shows that these firms
comprise approximately 80 percent of all volume in this market. Beyond
concentration, there have also been changes in the vertical structure
of this industry over time as each of these PBMs is now part of a
larger firm that also owns health insurers, specialty pharmacies, and
medical providers. The degree of vertical integration can be seen in
Figure 3.\8\ These concerns are magnified by the relative opacity of
the process by which pharmaceutical prices are determined. While none
of these market features (i.e., the high concentration, increased
vertical integration, or opaque pricing) provide clear evidence of a
potential problem they are areas that should be investigated. This is
likely why this market has attracted the attention of a variety of
regulators and policymakers.
---------------------------------------------------------------------------
\8\ In earlier testimony, I discussed the potential benefits and
concerns of this vertical integration. This testimony is available at:
https://www.judiciary.senate.gov/download/garthwaite-testimony.
---------------------------------------------------------------------------
Given these concerns, I will concentrate my testimony today on the
relationships between plan sponsors (i.e., third party payers such as
insurers and employers), PBMs, and manufacturers. In particular, I will
focus on the degree to which features of these relationships may allow
PBMs to capture more value than might be appropriate or whether
negative features of the market instead reflect the actions and
incentives of firms in other parts of the value chain.
A consistent point to consider throughout my testimony is that any
analysis of this market is meaningfully hampered by a lack of
information about numerous features of the contractual arrangements
between the various types of firms. While it is easy to identify
potential areas of concern, without more information about the nature
of these arrangements it is difficult to truly understand the validity
of such concerns. Therefore, Congressional action in this area should
be initially focused on creating more insight for regulators into these
areas. That said, I will also highlight several policy options that
exist to more directly confront potentially undesirable features of the
current pharmaceutical market without generating unintended
consequences.
I. Pricing, Rebates, and Cost Sharing in the U.S. Pharmaceutical Market
In the U.S., there are many prices associated with pharmaceutical
products. Of particular importance to today's hearing, pharmaceutical
products have a publicly available list price that is set by the
manufacturer. Payers then employ PBMs to, among other things, negotiate
rebates (i.e., discounts from list prices) on the pharmaceuticals
purchased by their enrollees.
PBMs are able to secure the discounts based on their ability to
shift customers across competing therapeutic substitutes. For example,
if there are two brand-name statin medications that treat high
cholesterol, the PBM can place the product from a manufacturer offering
a lower net price on a more preferential tier of its formulary, thus
lowering the out-of-pocket payments from an individual enrollee when
they purchase the drug. This should result in this product selling
higher quantity, albeit at a lower price. In extreme cases, a PBM could
entirely exclude a product from its formulary if the manufacturer is
unwilling to provide a sufficiently low net price (i.e., they are
unwilling to pay the PBM a sufficiently large rebate). The use of
exclusion lists has grown in recent years. Figure 4 shows the number of
products that are excluded by the largest PBMs. It is this ability to
credibly threaten to move volume across products that results in larger
discounts from the list price.
The increased use of strict formularies and exclusion lists has
contributed to a growing spread between the list and the net (i.e.,
post rebate) price. Figure 5 depicts these prices from 2014--2020 and
documents a large spread between the publicly known and often discussed
list prices and the actual prices received by manufacturers. This
figure demonstrates that any discussion of list prices provides an, at
best, incomplete picture of the returns to innovative manufacturers in
this market.
The spread between list and net prices has resulted in a large
amount of total rebates in the system. Figure 6 shows that in 2016,
pharmaceutical manufacturers paid total rebates of approximately $127
billion--an increase of 108 percent ($66 billion) since 2011. The
recent rise is larger in both absolute and relative terms than the
history of this market. From 2007 to 2011, the total magnitude of these
rebates increased only 42 percent, for a total increase of $18 billion.
While the increasing magnitude of rebates in the system is often
discussed in a negative light, it is not necessarily a problem. After
all, higher rebates could simply reflect more sophisticated or
effective bargaining by PBMs. The ultimate question is which parties in
the supply chain capture the value of those rebates and what features
of the market determines the ability of those firms to capture that
amount of value. The split of the rebate between the PBM and the payer
is dictated by a contract that is the result of a bilateral negotiation
between those firms. The specifics of this contract depends on the
relative bargaining power of the two parties. Figure 7 contains
estimates of the existing contractual structure in the commercial
market with respect to rebates over time based on whether plan sponsors
are large or small employers. From 2014-2018, there has been a marked
increase in employers with PBM contracts that entitle them to receive
100 percent of the rebates. By that year a majority of both types of
employers were using such contracts.
Unsurprisingly, PBMs often point to increasing rebates as evidence
of their effectiveness. It is not clear this is accurate. After all, a
large rebate can come from a higher list price, a lower net price, or a
combination of both. If rebates are only the result of higher list
prices then the actual price paid in the market (and the return to
manufacturers) has not necessarily changed. It is tempting to think
that in that situation the high list prices have little economic
effect. However, even in contracts where 100 percent of the rebate
flows to the plan sponsor, higher list prices can negatively impact
other market participants.
In particular, high list prices can have direct and economically
meaningful impacts on consumer out-of-pocket payments. This
relationship between cost sharing and list prices results from the
desire to maintain the confidentiality of negotiated prices. Such
confidentiality provides stronger incentives for larger discounts. For
this reason, the size of rebates paid to each PBM is kept strictly
confidential, up to and including onerous audit restrictions in the
contracts that limit the ability of the payer to monitor the financial
activities of the PBM.\9\
---------------------------------------------------------------------------
\9\ Weinberg, Neil, and Robert Langreth. 2017. ``Inside the
`Scorpion Room' Where Drug Price Secrets Are Guarded.'' Bloomberg. May
4.
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To maintain this confidentiality, consumers whose cost sharing for
pharmaceutical products is tied to prices (either because of a
deductible or percentage based coinsurance) make these cost sharing
payments as a function of the list rather than the net price.\10\ Thus,
any inefficiencies that create incentives for higher list prices (even
if those are entirely offset by rebates) affect consumer out of pocket
spending.\11\ In the presence of liquidity constraints, this cost
sharing could meaningfully reduce access to drugs in ways that magnify
the static inefficiency of high drug prices. For this reason, high
cost-sharing is not simply a financial inconvenience for consumers.
Recent evidence has shown that increased cost sharing for consumers
results in the decreased use of prescription drugs and increased
mortality.\12\
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\10\ This is mainly an issue for consumers enrolled in certain
high-deductible health plans, as well as Medicare beneficiaries.
\11\ While the number of consumers with this type of cost-sharing
has grown, it should be noted that customers in the pharmaceutical
market are largely shielded from list prices.
\12\ A. Chandra, E. Flack, and Z. Obermeyer, ``The Health Costs of
Cost-Sharing,'' NBER Working Paper #28439, February 2021.
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The importance of cost sharing for prescription drugs has grown
over time. Consider the evidence in Figure 8, which contains the
average annual out of pocket payment for Medicare patients purchasing
insulin. According to these data, in 2018 nearly 30 percent of Medicare
patients purchasing insulin were paying more than $5,000 per year out
of pocket. This is a marked increase from 2010 where less than 5
percent of those customers had that level of cost sharing.
Insulin is not the only place where we see high cost-sharing.
Overall, prescription drugs enjoy far less insurance coverage than
other parts of healthcare. Figure 9 shows that insured patients are
exposed to only 3 percent of their hospital spending. In contrast,
patients directly pay 15 percent of their prescription drug spending
out of pocket.
Given the negative health and financial effects of high cost-
sharing, it is at first puzzling why such high cost-sharing persists in
the market. Cost sharing is intended to be a form of utilization
management that attempts to overcome the potential moral hazard arising
from patients that are fully insured for their pharmaceutical
purchases. This moral hazard could occur both through the
overconsumption of products where the price exceeds value or more often
from purchasing products that have less expensive therapeutic
substitutes. Both of these would be negative features of an insurance
product that cost sharing was intended to mitigate.
The ability to use cost-sharing to move patients across products is
a key tool that PBMs use to negotiate lower net prices from
manufacturers. However, we increasingly see high cost-sharing on
products that are unlikely to be overconsumed (e.g., insulin and oral
oncology products) or in areas where there are no therapeutic
substitutes. This suggests this high cost-sharing serves goals other
than simply utilization management.
It is not obvious that cost-sharing at the levels we observe is an
independent strategic choice PBMs undertake to maximize their profits.
After all, if plan sponsors desired less onerous cost-sharing they
certainly could instruct their PBMs to construct such a formulary. In
fact, in recent testimony before Senate Finance Committee, Cigna's
Chief Clinical Officer noted that formularies which pass rebates along
to customers at the point of sale have existed for many years but have
failed to gain traction with plan sponsors.\13\
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\13\ https://www.finance.senate.gov/imo/media/doc/
Cigna%20ExpressScripts%20Testimony%
20of%20Steven%20Miller%20MD.pdf
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Instead of signing contracts that pass rebates to customers, plan
sponsors increasingly demand higher rebates from PBMs--even when those
rebates are not associated with lower prices.\14\ Such rebates come
from surging list prices and contribute to higher cost sharing payments
by patients. It appears that this is because the combination of large
rebate payments and high cost-sharing for expensive products provides a
mechanism for plan sponsors to offer lower premiums to healthy patients
and higher expected costs to sick patients requiring expensive
medications.
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\14\ https://www.finance.senate.gov/imo/media/doc/Grassley-
Wyden%20Insulin%20Report%20
(FINAL%201).pdf.
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Consider the stylized example in 0 where a consumer in the
deductible period pays the full list price of the drug. This customer
does not benefit from any of the negotiation efforts of the PBM. Both
the PBM and plan sponsor, however, can profit from the consumer's
purchase of a prescription drug because these firms still collect a
rebate when one of their patients buys a pharmaceutical product. This
is true even when the product is entirely paid for by the patient. A
similar logic exists when a patient makes a very large cost sharing
payment because of coinsurance. Sponsors are then able to use those
extra rebate dollars to lower premiums or decrease the cost of employer
provided healthcare. In this way, high cost sharing combined with large
rebates reintroduces medical underwriting and unwinds the community
rating of health insurance premiums.
This stylized example is not simply an academic exercise. In a
recent Senate Finance Committee report on insulin pricing, the Eli
Lilly CFO for Diabetes noted that PBMs reacted negatively to a
potential lower list price product because their customers (i.e., plan
sponsors) reported that ``such adjustment may impair market
competitiveness (i.e., rebate levels on lower gross price levels
translating to higher plan premiums.'' \15\
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\15\ https://www.finance.senate.gov/imo/media/doc/Grassley-
Wyden%20Insulin%20Report%20
(FINAL%201).pdf
---------------------------------------------------------------------------
Understanding these dynamics is important in considering the causal
role of PBMs with respect to increasing list prices and rebates. It
suggests that much of the furor at PBMs over increasing list prices,
rebates, and cost sharing may be aimed at the wrong target. If such
contractual features are being dictated by PBM clients (i.e., plan
sponsors) than regulators should more carefully consider the incentives
of those plan sponsors when constructing policy in this area.
Furthermore, as I discuss below, if the concern about high list prices
is primarily motivated by the effect on cost sharing there are policies
that can be considered which more directly address this cost sharing.
II. Lack of Transparency in Financial Relationships in the Value Chain
While a large portion of plan sponsors have signed contracts that
allow them to collect all of the rebates associated with prescription
drug purchases by their customers, there are still many contracts where
the PBM receives a percentage of the rebate as compensation. In
addition, PBMs collect other fees that I discuss below which are also a
function of the list price. Some have proposed that this provides a
perverse incentive for the PBM to prefer higher list priced products
where there is a large rebate compared to even lower prices products
with a smaller rebate.
The concern about PBMs being attracted to higher-priced drugs can
be best demonstrated by a simple example. Consider a drug that
currently has a list price of $100. The manufacturer proposes to the
PBM a 20 percent list price increase--resulting in a new list price of
$120, which is initially paid by the payer (i.e., employer or fully
funded insurer). The manufacturer also proposes to increase the rebate
paid to the PBM by $15, resulting in a net price increase of only 5
percent (i.e., the number that is reported in charts such the one shown
in Exhibit 6). However, the PBM is only required by its contract to
transfer 50 percent of rebates to the payer, meaning it keeps $7.50 of
the rebate and the payer gets $7.50. Therefore, the payer spends $12.50
more, with $5 going to the manufacturer and $7.50 for the PBM.
Ultimately, the unanswered question is whether the $7.50 collected
by the PBM in this example represents ``too much'' surplus or instead
is the appropriate payment for its negotiating activities. In a well-
functioning competitive market, we would expect that if the $7.50 the
PBM captures from the example above represents too much of the surplus,
the PBM would ultimately face competition from another firm offering a
better contract to the payer. Such a contract would propose to decrease
the total spending to the payer. However, this requires a market with
multiple PBMs actively competing for contracts, a situation that may
not exist in the current concentrated PBM market. Price competition
between PBMs also may not emerge if the existing firms realize there
are large barriers to entry and that incumbent firms would be better
off not actively engaging in price wars to gain share.
Strong competition is even less likely to emerge if payers are
unaware of the full scope of surplus created by their prescriptions. As
discussed above, many large firms hire sophisticated benefit
consultants and increasingly demand fully transparent contracts that
provide them a complete picture of all ``rebate'' dollars. In theory,
this provides information about the surplus created by their
prescriptions. That said, there are reasons to be concerned that
despite these efforts at disclosure, payers remain unaware of all of
the funds (particularly those not labeled as rebates) flowing between
the PBM and the manufacturer. For example, in addition to rebates, PBMs
also receive various administrative fees and other payments from
manufacturers--fees that are often a function of the list price of a
drug.
The PBM and the manufacturer determine which of these payments are
classified as ``rebates'' (and therefore covered by the price
transparency and rebate sharing requirements), and what is instead an
``administrative fee'' (that does not need to be disclosed or
shared).\16\ These fees are not trivial--for some contracts they can
account for 25-30 percent of the money moving between the manufacturer
and the PBM.\17\ Furthermore, since these fees are often structured as
a function of the list price there is little economic distinction
between an ``administrative fee'' and a ``rebate.'' Describing this
system, the Senate Finance Committee report on insulin pricing said
``[a]lthough Part D plans are required to report rebates to CMS, they
are not required to report administrative fees collected and retained
by PBMs `if the fees are for bona fide services and are at fair market
value.' This basic lack of transparency in the Medicare program has
been an area of concern to HHS OIG, as has the competing interests that
PBMs and manufacturers find themselves in due to the administrative
fees being based on the WAC price.'' \18\ Figure 11 documents the
increase in such fees over time in this market.
---------------------------------------------------------------------------
\16\ Eickelberg, Henry C. 2015. ``The Prescription Drug Supply
Chain `Black Box': How it Works and Why You Should Care.'' American
Health Policy Institute. December.
\17\ Dross, David. 2017. ``Will Point-of-Sale Rebates Disrupt the
PBM Business?'' Mercer. July 31.
\18\ https://www.finance.senate.gov/imo/media/doc/Grassley-
Wyden%20Insulin%20Report%20
(FINAL%201).pdf, page 81.
---------------------------------------------------------------------------
If we consider the simple example above, the situation for the
payer could be even worse if, instead of offering a ``rebate'' of $15,
the manufacturer offers a $15 ``administrative fee'' to the PBM. In
that case, the payer would bear the full cost (i.e., $20) of the list
price increase, and the PBM and manufacturer would split the surplus.
Ultimately, manufacturers are agnostic between describing payments to
the PBM as ``fees'' or ``rebates''--they simply care about the total
amount of money they collect and distribute as a result of these
negotiations.\19\ Given the existing structure of contracts and cost
sharing, other members of the value chain are far less agnostic about
the labeling of these fund transfers.
---------------------------------------------------------------------------
\19\ To the extent manufacturers have preferences about this
labeling it is likely related to the intersection with cost sharing
discussed above. Note that high cost sharing impacts manufacturer
revenue by reducing demand for pharmaceutical products.
---------------------------------------------------------------------------
To further complicate matters, sophisticated payers hoping to
gather more information about the flow of funds between the PBM and
manufacturers that results from their prescriptions often face
meaningful restrictions on the ability to audit their PBM-payer
contracts.\20\ These can include the exclusion of particular auditors
that are deemed to hold views that are hostile to PBMs, requirements
that audits be held at the headquarters of the PBM, unwillingness to
provide contracts with manufacturers, restricted access to claims data,
and strict limitations on the number of years that can be audited.\21\
While many of these restrictions can be cast as attempts to maintain
rebate confidentiality, they also increase the amount of asymmetric
information between PBMs and payers about the amount of available
surplus. Such information asymmetries can affect the efficiency of
bargaining between these two groups.
---------------------------------------------------------------------------
\20\ Weinberg, Neil, and Robert Langreth. 2017. ``Inside the
`Scorpion Room' Where Drug Price Secrets Are Guarded.'' Bloomberg. May
4.
\21\ Advisory Council on Employee Welfare and Pension Benefit
Plans. 2014. ``PBM Compensation and Fee Disclosure.'' Report to the
United States Secretary of Labor.
---------------------------------------------------------------------------
As a result of these concerns, some have proposed policies where
PBMs are not allowed to have contracts in which they are compensated
based on the size of the rebate or the list price of a product. While
this would certainly eliminate any perverse incentives for large
rebates, it would also diminish the incentives for PBMs to push for
large discounts. If the primary motivation for such policies is an
underlying concern about the competitiveness of the PBM market,
eliminating the ability for firms to sign incentive compatible
contracts could have meaningful unintended consequences
In a similar vein, the Department of Health and Human Services
previously proposed to instead address this problem by eliminating the
safe harbor for rebates in the Medicare program. While this policy has
been abandoned, other efforts underway have the same goal of ending
confidential rebates based on the price of the drug and shift the
market to a series of up-front price discounts and flat fees negotiated
between PBMs and manufacturers.\22\ This would effectively end the
confidentiality of negotiated prices while also not decreasing the
amount of surplus captured by PBMs--after all, a PBM with market power
can calculate a flat fee as easily as the current percentage based-
rebate system.
---------------------------------------------------------------------------
\22\ U.S. Department of Health and Human Services. 2019. ``Trump
Administration Proposes to Lower Drug Costs by Targeting Backdoor
Rebates and Encouraging Direct Discounts to Patients.'' January 31.
---------------------------------------------------------------------------
It is perhaps not surprising that policies from both parties are
coalescing on attempting to end rebates. Frustrated by rising drug
prices, people are looking for a scapegoat and a system of shrouded
prices by large firms fits a convenient narrative. That said, it would
be extremely unwise to limit the ability of PBMs to negotiate large
discounts. Instead of ending the current system of confidential
rebates, I've proposed (along with Fiona Scott Morton) that we move to
a system where all payments currently paid between the manufacturer and
the PBM flow first to the payer before being split between the payer
and the PBM.\23\ PBMs and payers would be free to negotiate any split
of the rebates, fees, and other funds that are paid by the
manufacturer--including contracts that compensate a PBM as a percentage
of the savings that they generate. Importantly, under this policy these
contracts would emerge from a negotiation between two parties with
equal information about the amount of money at stake. There are variety
of ways to implement the move to such a system. One possible solution
would be for regulators to end the safe harbor for payments between
manufacturers and PBMs and instead create a separate safe harbor for
payments between manufacturers and payers. I'd note that if the current
PBM market is truly competitive, this proposed policy solution should
have little effect on the distribution of surplus.
---------------------------------------------------------------------------
\23\ Garthwaite, Craig, and Fiona Scott Morton. 2017. ``Perverse
Market Incentives Encourage High Prescription Drug Prices.'' ProMarket
Blog. November 1.
---------------------------------------------------------------------------
III. Congress Should Address Cost Sharing and Price Negotiations More
Directly
While the optimality of the existing PBM market remains unclear, it
is becoming apparent that Congress should enact some meaningful reforms
in this area. I offer some suggestions for such policies below.
As a starting point, there is a clear case for a reform to Medicare
Part D's reinsurance program. Currently, this program blunts the
incentives of firms to negotiate price discounts for the most expensive
drugs and increases consumer cost sharing. Figure 12 shows the
distribution of spending responsibilities under Part D. During the
deductible period, the beneficiary is responsible for all the spending.
Then, during the initial coverage phase, enrollees are responsible for
25 percent of their drug spending and the plans are responsible for the
remaining 75 percent of spending. If individuals spend through the
initial coverage period, they find themselves in the coverage gap where
they are responsible for 25 percent of spending, the plan is
responsible for 5 percent, and manufacturers are required to give a
discount of 70 percent. If an individual spends more than the
catastrophic coverage threshold (approximately $8,000 in 2019), then
the government is responsible for 80 percent of all additional costs,
plans are responsible for 15 percent, and beneficiaries are responsible
for the final 5 percent. Given the lack of a lifetime limit on out-of-
pocket spending by enrollees, this benefit structure is part of the
reason why beneficiaries find themselves on the hook for exceptionally
high cost-sharing for prescription drugs.
Furthermore, for high priced products the private firms empowered
to negotiate on behalf of Medicare are largely shielded by reinsurance
from the costs of most price increases--limiting the ability of the
market to lower these drug prices. Perhaps more concerning, PBMs
operating in both the commercial and the Part D markets may face
different incentives for rebates across these different markets and
could use the confidential nature of rebates to unnecessarily increase
government Part D spending. Initially, reinsurance was not a dominant
feature of Part D. This has changed. Figure 13 shows the average
national plan bid across Part D firms by its component parts--the
direct subsidy from the government, the base premium from the enrollee,
and the expected reinsurance payment. These data show that from 2007 to
2018, the reinsurance component of Part D spending has grown from a
relatively minor part of the program (25 percent of the plan bid) to
the dominant source of payments to firms under Part D (60 percent of
the plan bid).
This level of reinsurance shields plans from the costs of the most
expensive specialty drugs--a category of products that represents a
growing share of overall prescription drug spending. While such a large
amount of reinsurance may have been necessary to attract plans to the
newly established Part D market, it is highly unlikely this remains
true today. Part D is now an established market where firms have
sufficient data to make reasonable projections about potential risk.
Therefore, I propose that Congress either remove catastrophic
reinsurance entirely from Part D (and force plans to pay 100 percent of
the cost of these expensive products) or at a minimum switch the cost
sharing so that the plan is responsible for 80 percent of the spending
above the catastrophic limit and the government is responsible for 20
percent.\24\ This would provide the appropriate incentives for firms to
strongly negotiate for larger rebates and lower prices within Part D.
---------------------------------------------------------------------------
\24\ As I discuss below, very large consumer cost sharing (such as
the 5 percent of spending that patients must pay under Part D) can
decrease the efficiency of insurance.
---------------------------------------------------------------------------
Beyond changing the incentives to negotiate prices, it is clear we
should find policy solutions to pass along more of the negotiated
discounts to consumers. However, it is critical that any policy
solution saves the proverbial baby while throwing out the bathwater by
maintaining the ability of PBMs to effectively negotiate larger rebates
with manufacturers. Therefore, I propose that PBMs be required to base
cost-sharing payments on a number that more closely approximates the
net price of the product even if it is not the exact net price
associated with that purchase. For example, this number could be the
average net price across PBMs for that product, the average net price
for the therapeutic class, or the minimum price paid in the market,
i.e., the Medicaid best price. Assuming PBMs have sufficient ability to
modify their formularies, any of these options should still expose the
patient to enough of the cost of the product to address moral hazard
concerns while not exposing consumers to artificially high prices that
unwind the generosity and efficiency of the insurance contract.
Some have complained that policies that pass along rebates to
consumers at the point of sale would lead to higher premiums. This fact
is almost certainly true. However, this is not necessarily a problem.
Our current system of using cost sharing by patients requiring
expensive products to lower the premiums paid by healthier patients
subverts many popular policy goals regarding the treatment of pre-
existing conditions in the health insurance market. In addition, these
higher premiums would reflect, in part, a more complete insurance
product. It is not immediately clear consumers are fully aware of the
financial exposure they have to expensive medications, and therefore we
should not think that increasing the completeness of insurance in this
setting is clearly a negative outcome.
IV. More Information is Needed Before Implementing New Policies Aimed
at PBMs
The role of various entities in the supply chain is clearly
complicated. Pharmaceuticals move through a relatively lengthy supply
chain inhabited by private firms with differing incentives,
information, and market power. Given their central role in both
negotiating prices and establishing formularies, it is tempting to
blame PBMs for every negative feature of the system we observe. And it
is possible that such blame may ultimately be valid. However, it is
also apparent that we simply lack the information necessary to
determine the degree to which these aspects of the market are actually
caused by the independent motivations of PBMs to maximize profits
versus how much they reflect the incentives of other firms in the value
chain. For example, as mentioned above PBMs have offered contracts
where rebates are passed along to customers at the point of sale and
plans sponsors have largely avoided those plans. This suggests a more
complicated story is necessary to explain the current market dynamics.
Given the uncertainty in this area, it is incumbent on policymakers
and regulators to gather more information before attempting to develop
and implement solutions. Certainly, the recent Senate Finance Committee
investigation into insulin pricing shed some important light on the
relationships between PBMs and manufacturers. In that document we
learned more about the role of administrative fees and the views of
PBMs about the motivations of their customers, i.e., the plan sponsors.
However, that report fell short on investigating the relationship
between PBMs and plan sponsors. More information about those contracts
and whether the actions of PBMs vary based on the contractual
relationship with the plan sponsor would be useful for understanding
the degree to which potentially undesirable features of the market are
the result of the structure of the PBM market or other features of the
supply chain.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Drugchannels.net, available at: http://
www.drugchannels.net/p/about-blog.html
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: https://www.drugchannels.net/2022/04/the-top-pharmacy-
benefit-managers-of.html
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: https://www.drugchannels.net/2021/01/the-big-three-pbms-
ramp-up-specialty.html
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: https://www.drugchannels.net/2021/01/surprise-brand-name-
drug-prices-fell.html
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Drugchannels.net, available at: http://
www.drugchannels.net/2017/06/new-data-show-gross-to-net-rebate.html
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: https://www.drugchannels.net/2019/03/employers-are-
absorbing-even-more.html
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: https://www.finance.senate.gov/imo/media/doc/Grassley-
Wyden%20Insulin%20Report%20(FINAL%201).pdf
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: https://www.drugchannels.net/2021/01/latest-cms-data-
reveal-truth-about-us.html
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: https://payorsolutions.cvshealth.com/insights/consumer-
transparency
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: https://www.pewtrusts.org/-/media/assets/2019/03/
the_prescription_drug_land
scape-explored.pdf
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Blumenthal. Thank you very much, Professor. We will
now go to Professor Feldman.
STATEMENT OF PROFESSOR ROBIN FELDMAN, ARTHUR J. GOLDBERG
DISTINGUISHED PROFESSOR OF LAW, ALBERT ABRAMSON '54
DISTINGUISHED PROFESSOR OF LAW CHAIR, DIRECTOR OF THE CENTER
FOR INNOVATION, UNIVERSITY OF CALIFORNIA HASTINGS LAW
Ms. Feldman. Thank you, Mr. Chairman, and esteemed members
of the Subcommittee. Open and vigorous competition is the
backbone of U.S. markets. But we are not seeing that with
pharmaceuticals. Instead, we are seeing troubling and
persistently rising prices on everyday medications.
Now, there are many contributors to rising prices, but a
critical place to start is with the industry that sits at the
center of everything. Specifically at the heart of the drug
pricing system lies the industry known as pharmacy benefit
managers or PBMs. And historically, PBMs operated mostly as
claims processors, just handling the paperwork flow.
However, 15 years ago, when Medicare expanded to include
prescription drugs, PBMs took on an expanded role as well. They
began serving as a health plans representative for negotiating
better prices from drug companies. There are many contributing
factors, but the price increases that followed have been
dramatic. For example, the prices of 65 common medicines have
almost tripled just during those 15 years.
So how did this happen? How did PBMs, which were supposed
to help control prices, end up helping inflate prices instead?
Well, the problem has emerged because rather than act fully as
honest brokers for the health plans, PBMs, perhaps
unsurprisingly, act in their own interests. And it turns out
that their interests are not aligned with keeping prices low.
So to set the stage for how this works, consider a store that
raises the price of a jacket before putting the jacket on sale
at the old price.
When you walk in the store, the markdown looks like a great
bargain, but it is not. For PBMs, their best interests are
served when drug companies increase the starting price of the
drug. That price is known as the list price. If the list price
goes up and the PBM negotiates a rebate back down, the PBM
looks more successful. It gets paid more by the health plan
because the PBMs pay depends on the size of the rebate.
In addition, because PBMs generally get to keep a portion
of the rebate, they get to pocket even more. All this might not
be so bad if no one actually paid that high list price, but
many plans are set up so that people do pay that list price out
of pocket in various ways, and many Americans don't have
coverage for prescription drugs. I talked before about raising
the price of a jacket so you can put it on sale at the old
price, but it gets worse.
Imagine if the price jump is higher than the sale discount.
That is what is happening with medicine. Prices are rising
faster than the rebates. Between 2010 and 2017 in Medicare,
prices for drugs after rebates still rose 313 percent on
average. We are buying the same jacket, but it is costing us
more and more. And a significant portion of that increase is
going to the PBMs.
And despite the fact that PBMs should be serving as honest
brokers for health plans, PBMs also take side payments from
drug companies for providing services to the drug companies
themselves. And what can PBMs offer drug companies to continue
this payment stream of rebates and side income? Well, PBMs
stand at the center of the system. As well as negotiating
prices, they help decide if patients will be reimbursed for a
particular medicine, how much they will be reimbursed.
So PBMs can agree with the drug company that they will
exclude the competitor's product and they can also make it
harder for patients to get the competitor's medicine. That is
of great value to a drug company. Finally, PBMs and drug
companies claim that those rebate details are trade secrets and
can't be disclosed even to the health plan. Now, markets thrive
on information.
And when heavily concentrated industries tightly control
the flow of information, the end result is rarely in the
interests of consumers. Most important, from an intellectual
property perspective, simple price and price terms shouldn't be
considered trade secrets at all. Thank you, and I look forward
to your questions.
[The prepared statement of Ms. Feldman follows:]
Prepared Statement of Professor Robin Feldman, Arthur J. Goldberg
Distinguished Professor of Law, Albert Abramson '54 Distinguished
Professor of Law Chair, Director of the Center for Innovation,
University of California Hastings Law
Mr. Chairman and esteemed members of the Subcommittee, I am honored
to be here today to address an issue that is causing real pain for
consumers and for those trying to help them.
Open and vigorous competition is the backbone of U.S. markets, but
we are not seeing that in the pharmaceutical industry. Instead, we see
persistently rising prices on the medications people depend on, day
after day, to treat widespread problems such as diabetes, high blood
pressure, high cholesterol, and opioid addiction.\1\ There are many
contributors to the rising prices, but a critical place to start is
with the industry that sits at the center of everything.
---------------------------------------------------------------------------
\1\ See Ctr. for Medicare & Medicaid Serv., Fact Sheet, Drug
Spending Information Products (2018), https://www.cms.gov/newsroom/
fact-sheets/drug-spending-information-products-fact-sheet (listing the
ten drugs with highest annual price increases from 2012 to 2016 covered
by Medicare); Cal. Office of Statewide Health Planning and Development,
Prescription Drug Wholesale Acquisition Cost (WAC) Increases (2019)
(detailing wholesale price increases of more than 16 percent for
hundreds of drugs between 2017 and Q2 of 2019); Feldman, Devil, supra
note 1, at 2.
---------------------------------------------------------------------------
Specifically, at the heart of the drug pricing system lies the
industry known as pharmacy benefit managers or PBMs.\2\ Historically,
PBMs operated mostly as claims processors, just handling the paperwork
flow.\3\ However, when Medicare expanded in 2006 to include
prescription drugs, PBMs took on an expanded role, as well. They began
serving as the health plan's representative for negotiating better
prices from drug companies.
---------------------------------------------------------------------------
\2\ For additional information on pharmacy benefit managers, see
Robin Feldman, Drugs, Money, and Secret Handshakes: The Unstoppable
Growth of Prescription Drug Prices (2019) (discussing the role of PBMs
in the pharmaceutical market); Robin Feldman, Perverse Incentives: Why
Everyone Prefers High Drug Prices--Except for Those Who Pay the Bills,
57 Harv. J. on Leg. 303 (2020) (describing the incentive structures
that lead PBMs to contribute to rising drug prices); Robin Feldman, The
Devil in the Tiers, 8 J.L. & Biosci. 1 (2021) (analyzing the role PBMs
play in distorting the organization of drug formularies); Robin
Feldman, Why Prescription Drug Prices Have Skyrocketed, Wash. Post
(Nov. 26, 2018), https://www.washington
post.com/outlook/2018/11/26/why-prescription-drug-prices-have-
skyrocketed/ (discussing the role PBMs play in the pharmaceutical
market). For a discussion of potential solutions, see Feldman, Devil,
at 31-41 (suggesting that drugs should be located on formulary tiers
based on list, rather than net, price to remove the incentive for
anticompetitive formulary manipulation); Feldman, Secret Handshakes, at
95-102 (describing the significance of transparency and potential state
and Federal level responses). For an explanation of why prices and
price terms negotiated between PBMs and drug companies do not
constitute trade secrets, see Robin Feldman & Charles Tait Graves,
Naked Price & Pharmaceutical Trade Secret Overreach, 22 YALE J.L. &
Tech 61 (2020) (defining trade secrets and discussing PBM efforts to
assert that pricing arrangements should be considered trade secrets).
\3\ Feldman, Wash. Post, supra note 1.
---------------------------------------------------------------------------
Although there are many contributing factors, the rise in prices
that followed that shift fifteen years ago has been dramatic. Looking,
for example, at sixty-five common medicines that need to be taken over
a long period of time, prices have almost tripled during those fifteen
years.\4\
---------------------------------------------------------------------------
\4\ Stephen W. Schondelmeyer & Leigh Purvis, AARP Public Policy
Institute, Trends in Retail Prices of Brand Name Prescription Drugs
Widely Used by Older Americans, 2006 to 2020 1-2 (2021).
---------------------------------------------------------------------------
So how did this happen? How did PBMs--which were supposed to make
healthcare more efficient--end up helping to inflate drug prices
instead? The problem has emerged because rather than act as honest
brokers for health plans, PBMs, unsurprisingly, act in their own
interests. And it turns out that their own interests are not aligned
with keeping prices low. To set the stage for how this works, consider
a store that raises the price of a dress before putting the dress on
sale at the old price. When you walk in the store, the sale price looks
like a great bargain; but it's not.
PBMs, similarly, have discovered that their best interests are
served when drug companies increase the starting price of the drug.
That price is known as the list price. If the list price goes up, and
the PBM negotiates a rebate back down, the PBM looks more successful.
It gets paid more by the health plan, and--because PBMs generally keep
part of the rebate--it gets to pocket more.
All of this might not be so bad if no one actually paid that high
list price. But people do. Many consumers have what are called high-
deductible plans, in which they pay that high list price out of their
pocket until they reach a certain threshold\5\; other plans require
that patients pay a percentage of the high list price as what is known
as co-insurance.\6\ And many Americans still do not have coverage for
prescription drugs, even if they have health insurance. Thus, people
are often forced to pay the high list price.
---------------------------------------------------------------------------
\5\ For an example of a plan requiring that the patient pay 100
percent of the costs of drugs up to a certain limit, see the Anthem
insurance plan described at First Am. Consolidated Class Action Compl.,
at para. 13, In re Express Scripts/Anthem ERISA Litigation, 2018 U.S.
Dist. LEXIS 3081 (S.D.N.Y. 2016) (No. 16-3399).
\6\ See Medicare Payment Advisory Comm'n, Report to the Congress:
Medicare Payment Policy 408-09 (2017).
---------------------------------------------------------------------------
I talked before about raising the price of a dress so you can put
it on sale at the old price. It gets worse. Imagine if the price jump
is higher than the sale discount. That's what is happening in the case
of medicine. Prices are rising faster than the rebates are rising. For
example, between 2010 and 2017 in Medicare, prices for drugs after
rebate still rose 313 percent on average.\7\ We are buying the same
dress, but it is costing us more and more. And a significant portion of
that increase is going to PBMs.
---------------------------------------------------------------------------
\7\ Feldman, Devil, supra note 1, at 19, 21-22.
---------------------------------------------------------------------------
In addition, despite the fact that PBMs should be serving as honest
brokers for health plans, PBMs also take side payments from drug
companies for providing services to the drug companies.
And what do the PBMs have in their pocket to offer drug companies
to continue this payment stream of rebates and side income? PBMs stand
at the center of the system. As well as negotiating prices, they help
decide whether a patient will be reimbursed for a particular medicine
and how much they will be reimbursed. Therefore, PBMs can agree with a
drug company that they will exclude the company's cheaper competitors
or make it harder for patients to get the competitor's medicine.\8\
That is of great value to a drug company.
---------------------------------------------------------------------------
\8\ See, e.g., Charles Ornstein & Katie Thomas, Take the Generic,
Patients Are Told. Until They Are Not., )N.Y. Times (Aug. 6, 2017)
(describing health plans forcing patients to pay more for the generic
version of a drug or declining to reimburse for the generic at all;,
https://www.nytimes.com/2017/08/06/health/prescription-drugs-brand-
name-generic.html?mtrref=unde
fined [https://perma.cc/U4JU-4P3X]; see also Complaint, Shire U.S.,
Inc. v. Allergan, Inc., No. 17-7716 (D.N.J. 2017) (alleging bundled
rebates for the eye medication Restasis deterred health plan
formularies from including competitors); Complaint, Pfizer, Inc., v.
Johnson & Johnson and Janssen Biotech, Inc., 2018 U.S. Dist. LEXIS
31690 (E.D. Pa. 2018) (No. 17-4180) (bundled rebates for the rheumatoid
arthritis drug Remicade resulted in hospitals and health plan
formularies essentially excluding the lower-priced biosimilar).
---------------------------------------------------------------------------
PBMs and drug companies refuse to disclose the precise size of
rebates or the details of the terms given, asserting that the
information is a trade secret. Even auditors and regulators are not
given full access. Trying to reform the system--or even talk about it--
is like shadow boxing.
Finally, the PBM industry is highly concentrated. Just three PBMs
control 80 percent-85 percent of the market.\9\ They tend to offer the
same terms to health plans. Thus, if health plans want something
different, they are out of luck.
---------------------------------------------------------------------------
\9\ Neeraj Sood, Dana P. Goldman, & Karen Van Nuys, Follow the
Money to Understand How Drug Profits Flow, STAT (Dec. 15, 2017),
https://www.statnews.com/2017/12/15/prescription-drug-profits-pbm/
(``The top three pharmacy benefit managers, which negotiate drug prices
on behalf of insurers and self-insured employers, dominate 85 percent
of their market.''). See also Neeraj Sood, Transcript of Understanding
Competition in Prescription Drug Markets: Entry & Supply Chain Dynamics
Workshop (Nov. 8, 2017), https://www.ftc.gov/system/files/documents/
videos/understanding-competition-prescription-drug-markets-panel-2/
ftc_understanding_competi
tion_in_prescription_drug_markets_-_transcript_segment_3.pdf.
---------------------------------------------------------------------------
Markets thrive on information, and when heavily concentrated
industries control the flow of information, the end result is rarely in
the interests of consumers. Most important, from an intellectual
property perspective, simple price and price terms shouldn't be
considered trade secrets at all.\10\
---------------------------------------------------------------------------
\10\ Robin Feldman & Charles Tait Graves, Naked Price &
Pharmaceutical Trade Secret Overreach, 22 Yale J.L. & Tech 61 (2020)
(discussing PBM efforts to assert that price and price terms should be
considered trade secrets).
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One cannot overemphasize the major life improvements over the past
century that flow from innovation in prescription medications,
including new lifesaving antibiotics, treatments for pain,
psychopharmacological treatments and cancer drugs. However, if we don't
get a handle on the perverse incentives operating in various parts of
the drug supply chain, the burden on consumers and taxpayers will
continue to be crushing.
Thank you, and I look forward to your questions.
Senator Blumenthal. Thanks so much, Professor Feldman. And
now, Mr. Scott.
STATEMENT OF JUAN CARLOS ``JC'' SCOTT, PRESIDENT AND CEO,
PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION
Mr. Scott. Good morning, Chairman Blumenthal, Ranking
Member Blackburn, and members of the Subcommittee. My name is
J.C. Scott. I am the President and CEO of the Pharmaceutical
Care Management Association, the national trade association
representing pharmacy benefit managers. On behalf of PCMA's
member companies, I appreciate the invitation to testify today.
Mr. Chairman, we agree drug pricing and affordability is a
challenge for too many patients in America. We can and should
talk about what is driving that affordability challenge and how
we solve for it, which begins with an understanding of the
entirety of the prescription drug supply chain, from
manufacturer to wholesaler to pharmacy to those paying the
bills.
Today, the Subcommittee is focused on just one piece of
that ecosystem, understanding the work done by our companies
pharmacy benefit managers. I appreciate the opportunity to
share our perspective that our companies are delivering value
for those who pay for health care coverage for patients and for
patients themselves by making sure they have seamless, safe,
and affordable access to the medications they need.
I know that during your time in the Senate, you have met
with many people representing the health care industry. With
respect to prescription drugs, you have heard from retail
pharmacies who are essential to serving patients and providing
access to medications, and generally speaking, argue for higher
payments.
Representatives of drug manufacturers, those responsible
both for the amazing innovations that benefit patients and for
setting the prices, generally seek to justify their price
setting decisions and argue for higher, not lower prices. I am
not trying to judge either of those arguments.
I simply want to make the point that the PBM industry is
the only stakeholder in the chain dedicated to seeking lower
costs, and we are proud to play that role. PBMs do that work
for the employer, union, health plan, and Government clients
who hire them, and most importantly, the patients for whom
those plans provide coverage. PBMs return $10 in savings for
every $1 spent on their services.
PBMs will lower the cost of health care by $1 trillion this
year alone. And for many of us, that can be a hard number to
get our head around. But it comes down to savings of about $962
per person per year.
PBMs lower prescription drug costs by encouraging
competition in the market, promoting the use of generic
medications, negotiating discounts and rebates, encouraging
better pharmacy quality, and offering things like home delivery
for those on chronic medications. Understandably, stakeholders
in the supply chain want to be paid more for their services and
products.
For the plan sponsors who are paying the bills, they need a
balancing force to push for lower costs and better access, and
that is where PBMs come in. The Medicare Part D program is a
great example where seniors are able to choose among private
plans to get their drug benefits. PBMs support Part D plans by
negotiating rebates and discounts and promoting better pharmacy
quality, passing the savings from those negotiations to the
plans, who in turn use that to keep premium costs reliably low
for seniors.
It is worth emphasizing, no employer, union, pension fund,
or health plan has to hire or use a PBM, but virtually all do
choose to use a PBM to lower the cost of providing health care
and to better serve the patients they represent. PBM clients
choose their PBMs through a transparent and highly competitive
bidding process.
And Mr. Balto was right. I am going to tell you that with
over 70 full service PBMs in the marketplace, including new
entrants coming into the market regularly, plan sponsors have a
tremendous diversity of opportunity to contract with the PBM
that best meets their unique needs. Some may choose a PBM based
on their scale and ability to negotiate deep discounts and
manage the risk of price changes. Others choose to hire PBMs
based on their innovative care management programs or different
levels of service.
It is important that there is choice and the ability for
plan sponsors to decide how to set up their drug benefits to
best serve their unique populations. PCMA and the companies we
represent are committed to working with the Subcommittee and
all stakeholders to continue improving the affordability of
prescription drugs for patients.
While I have talked a lot about the work we do for those
who provide health coverage for consumers, the most important
lens through which to judge these issues are not what will best
benefit the plan sponsor or the PBM or the retail pharmacy or
the manufacturer. It comes down to what best serves the
consumer.
Through their work, PBMs are contributing to lower costs
for health coverage for consumers, lower cost for medications,
and better access, which means more people getting the
medicines they need to lead healthier lives.
I hope that this hearing is an opportunity for a continued
conversation not only about the work done by PBMs, but to look
at the entire supply chain so that we can identify solutions
for patients and consumers. Thank you again for the opportunity
to speak with you. I look forward to your questions.
[The prepared statement of Mr. Scott follows:]
Prepared Statement of Juan Carlos ``JC'' Scott, President and CEO,
Pharmaceutical Care Management Association
Introduction
Good morning, Chairman Blumenthal, Ranking Member Blackburn, and
members of the Subcommittee on Consumer Protection, Product Safety, and
Data Security.
My name is JC Scott. I am the President and CEO of the
Pharmaceutical Care Management Association (PCMA).
PCMA is the national association that represents America's Pharmacy
Benefit Managers (PBMs), which administer prescription drug plans and
operate specialty and mail-order pharmacies for more than 266 million
Americans who have health coverage from a variety of sponsors,
including through employers, labor unions, health insurers, Medicare
Part D plans, state government employee plans, Medicaid plans, the
Federal Employees Health Benefits Program, TRICARE and others.
PBMs are proud of the work they do to reduce prescription drug
costs, expand affordable access to medications, and improve patient
outcomes. PBMs negotiate with drug companies to lower prescription drug
costs. PBMs work with pharmacies to create networks of pharmacies that
provide the best value. PBMs facilitate home delivery of prescription
drugs to patients safely and seamlessly, and PBMs help patients stay on
their prescription drugs to live healthier lives. PBMs advocate for
patients in the fight to keep prescription drugs accessible and
affordable.
On behalf of PCMA's member companies, I appreciate the invitation
to testify before the subcommittee today as it seeks to understand
better the role PBMs play in the drug supply chain and our impact on
consumers, small businesses, and drug costs.
Drug pricing and affordability are a challenge for too many
patients in America. We can and should talk about what is driving that
affordability challenge and how we solve it, which begins with an
understanding of the entirety of the prescription drug supply and
payment chain, from manufacturer to wholesaler to pharmacy to those
providing health coverage.
Today, the subcommittee is focused on just one piece of that
ecosystem--understanding the work done by our companies, PBMs.
During your time in the Senate, you have met with many people
representing the health care industry.
With respect to prescription drugs, you have heard from retail
pharmacies, which are essential to serving patients and providing
access to medications, and which, generally speaking, argue for higher
payments, which lead to higher drug costs.
Representatives of drug manufacturers, those responsible for both
the amazing innovations that benefit patients and for setting prices,
generally seek to justify their price-setting decisions and argue for
higher, not lower, prices.
Understandably, stakeholders in the supply chain want to be paid
more for their services and products. That is the way the market
functions. But those paying the bills need a balancing force to push
for lower costs and better access, and that is where PBMs come in.
The PBM industry is the only stakeholder in the chain dedicated to
seeking lower costs. PBMs do that work for the employer, union, health
plan, and government clients who hire them, and, most importantly, the
patients for whom those health plans provide coverage.
PBMs return $10 in savings for every dollar spent on their
services. As a result, PBMs will lower the cost of health care by $1
trillion this year alone.i For many of us, that can be a
hard number to get our heads around, but it comes down to saving about
$962 per person per year.
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\i\ Visante. The Return on Investment (ROI) on PBM Services. An
analysis prepared by Visante on behalf of PCMA. February 2020.
Available at https://www.pcmanet.org/wp-content/uploads/2020/02/ROI-on-
PBM-Services-FINAL_.pdf.
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PBMs are able to negotiate for lower drug costs when they can bring
competition between pharmaceutical manufacturers and between pharmacies
to bear. PBMs lower prescription drug costs by using these negotiations
to deliver discounts and rebates, promoting the use of generic
medications, encouraging better pharmacy quality, and offering things
like home delivery for those on chronic medications.
Simplifying the Consumer Experience
People with insurance filled more than 6.4 billion prescriptions in
retail pharmacies in 2021.ii Every day, that amounts to
nearly 15 million prescriptions, so it is critical that patients can
pick up their prescriptions as quickly as possible at the pharmacy
counter to establish and maintain medication adherence. PBMs perform
many essential functions that combine disparate information and
expertise, as well as advanced technology to facilitate and streamline
getting a prescription filled as seamlessly as possible.iii
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\ii\ IQVIA. The Use of Medicines in the U.S. 2022. April 2022.
Available at https://www.iqvia.com/insights/the-iqvia-institute/
reports/the-use-of-medicines-in-the-us-2022.
\iii\ Pharmaceutical Care Management Association (PCMA). PBM
Technology and Expertise Improves Patient Health Outcomes. June 2016.
March 8, 2022. Available at https://www.pcm
anet.org/pbm-technology-and-expertise-improves-patient-health-
outcomes/.
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To achieve optimal PBM-patient coordination, once a pharmacy enters
a prescription into the system, it is sent electronically to the
patient's PBM, which checks the pharmacy benefit information to confirm
the patient's insurance status and cost-sharing amount, as well as the
patient's medication history for any errors and possible harmful
dangerous drug interactions. While pharmacies have records of
prescriptions filled by them or a fellow chain pharmacy, they do not
have records of prescriptions filled in other pharmacies. However, PBMs
do, as long as the patient has used insurance. Given that information
and the technology, in real-time and almost instantaneously, the PBM
can determine if the prescribed drug should not be taken by that
patient and can alert the pharmacist to any dangerous interactions
before the patient pays any cost sharing and receives any medication.
All of this happens rapidly, seamlessly, and behind the scenes to
improve patient safety and care.
Reducing Health Benefit Costs for Businesses
PBMs have an established record of negotiating with drug
manufacturers and pharmacies to reduce drug costs. PBMs work to bring
drug prices down to the lowest net cost for employers, both large and
small, and others who provide health insurance.
No employer, union, pension fund, or health plan has to hire or use
a PBM. But virtually all do choose to hire a PBM to lower the cost of
providing health care coverage and to better serve the patients they
represent.
PBM clients choose their PBMs through a transparent and highly
competitive bidding process. With more than 70 full-service PBMs in the
market, including regular new entrants, unions, and employers, health
plans have a tremendous diversity of opportunities to contract with the
PBM that best meets their unique needs.iv
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\iv\ Pharmaceutical Care Management Association (PCMA). The PBM
Marketplace Is Highly Competitive. April 2021. Available at https://
www.pcmanet.org/wp-content/uploads/2021/04/PBM-Landscape-2021.pdf.
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Some may choose a PBM based on its scale, ability to negotiate deep
discounts or manage the risk of price changes. Others choose to hire
PBMs based on their innovative care management programs or different
levels of service. For small employers, many of whom may struggle to
provide health insurance to employees, PBMs lower drug costs and
provide cost predictability, enabling them to stretch their benefit
dollars even further.
For all those sponsoring health insurance, it is important that
there is choice among PBMs and the ability to decide how to set up
their drug benefits to best serve their unique populations.
PBMs typically develop a basic preferred drug list, or formulary,
under the guidance of their pharmacy and therapeutics (P&T) committee.
P&T committees are comprised of independent physicians, pharmacists,
and other clinical experts who consider the most recent data on
prescription drugs and tell the PBM what drugs it must include, must
not include (for safety reasons), and may include on its formulary. The
drugs it ``may'' include are typically for conditions or diseases for
which there are competing therapeutically equivalent treatments, and
for which the PBM may leverage competition between drug manufacturers
to negotiate lower costs. Once the PBM has concluded its negotiations
and devised its formulary, it then recommends it to those sponsoring
health insurance, who may choose to utilize it, customize it, or go
with another approach.v PBMs create formularies of
clinically appropriate drugs, preferring ones that are the most cost
effective, including generic drugs, biosimilars, and lower-cost
alternative brand drugs.
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\v\ Pharmaceutical Care Management Association (PCMA). The
Management of Specialty Drugs. June 2016. Available at www.spcma.org/
wp-content/uploads/2016/06/sPCMA_The
_Management_of_Specialty_Drugs.pdf.
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One method that PBMs use to lower drug costs is incentivizing the
use of lower-cost generic alternatives to name-brand drugs. Indeed,
generic dispensing has grown over the past decade as more generics have
entered the market and patients have responded to health plan designs
encouraging their use, so that now roughly 90 percent of prescriptions
filled in the United States are for generic drugs, at a fraction of the
cost of their brand-name equivalents.vi PBMs also sometimes,
for some conditions, require patients to try generic drugs before
trying more expensive brand drugs, and employ other tools designed to
deliver high-quality drug benefits while bringing down
costs.vii
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\vi\ U.S. Food and Drug Administration (FDA). Generic Drugs.
February 5, 2021. Available at https://www.fda.gov/drugs/buying-using-
medicine-safely/generic-drugs.
\vii\ Pharmacy Benefit Management Institute (PBMI). Solving
America's High Drug Cost Problem: Prevent Drug Company Tactics that
Increase Costs and Undermine Clinical Quality. 2020. Available at
https://www.pcmanet.org/wp-content/uploads/2021/01/Solving-
America%E2%80
%99s-High-Drug-Cost-Problem_whitepaper_FINAL2.pdf. Pharmacy Benefit
Management Institute (PBMI). 2017 Trends in Specialty Drug Benefits.
2017. Available at www.pbmi.com/research. Pharmacy Benefit Management
Institute (PBMI). 2016 Trends in Drug Benefit Design. 2016. Available
at www.pbmi.com/research.
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As a result, PBMs have a pro-competitive influence on the
prescription drug marketplace, and PBM services provide a significant
and measurable benefit for businesses and others providing health
insurance. Without PBMs in the marketplace, those organizations would
be left to negotiate drug costs on their own or pay the full costs of
these drugs.
Lowering Drug Costs for Consumers
As mentioned earlier, PBMs, working with those providing insurance,
encourage patients through formulary design and cost-sharing incentives
to use the most affordable drugs, which are usually generics. For many
brand drugs, PBMs negotiate directly with drug manufacturers who
compete for formulary placement by offering a type of discount called
rebates.viii For drugs on the preferred tier of a plan's
formulary, consumers typically have lower cost sharing.ix As
competing products enter the market, PBMs gain the flexibility to
leverage competitor products to negotiate deeper drug discounts for
patients and payers.x
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\viii\ Foley Hoag. The History of Rebates in the Drug Supply Chain
and HHS' Proposed Rule to Change Safe Harbor Protection for
Manufacturer Rebates. April 2, 2019. Available at https://
foleyhoag.com/publications/ebooks-and-white-papers/2019/march/the-
history-of-rebates-in-the-drug-supply-chain.
\ix\ Congressional Budget Office (CBO). Prescription Drugs:
Spending, Use, and Prices. January 17, 2020. Available at https://
www.cbo.gov/system/files/2022-01/57050-Rx-Spending
.pdf.
\x\ Congressional Budget Office (CBO). Prescription Drugs:
Spending, Use, and Prices. January 17, 2020. Available at https://
www.cbo.gov/system/files/2022-01/57050-Rx-Spending
.pdf.
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PBMs have also led the industry in creating contracts that account
for the value of specialty and high-cost medications.xi
Value-based arrangements are at the forefront of new drug payment
designs and will be critical to managing the costs of next-generation
therapies like cell and gene therapies, orphan drugs, and ultra-
expensive specialty drugs. Value-based contracts will better allow
plans to manage these high costs, and health plans will need broad
flexibility to craft and employ value-based contracts.
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\xi\ Pharmacy Benefit Management Institute. Solving America's High
Drug Cost Problem: Prevent Drug Company Tactics that Increase Costs and
Undermine Clinical Quality. January 2021. Available https://
www.pcmanet.org/wp-content/uploads/2021/01/Solving-America%E2%80%
99s-High-Drug-Cost-Problem_whitepaper_FINAL2.pdf.
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The Medicare Part D program, where older Americans and those living
with disabilities can choose among private plans to get their drug
benefits, is a great example of PBM value. PBMs support Part D plans by
negotiating rebates and discounts and promoting better pharmacy
quality, passing 99.6 percent of those savings from those negotiations
to the Part D plans, which in turn use them to enhance drug benefits
and keep premium costs reliably low for beneficiaries.xii
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\xii\ Government Accountability Office (GAO). Medicare Part D: Use
of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures
and Utilization. August 13, 2019. Available at https://www.gao.gov/
products/gao-19-498.
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As another cost-saving measure, PBMs offer prescription home
delivery through highly efficient, virtually error-free mail-service
pharmacies. As with many other products, patients can safely access
prescription drugs through home delivery. Mail-service pharmacies are
convenient, dependable, and affordable. Patients will often fill the
first few prescriptions at a retail pharmacy if the prescription is for
a chronic condition. Patients may then choose to use a mail-service
pharmacy for home delivery once they are stabilized on the
medication(s). On 90-day supplies of medicines, mail-service pharmacies
result in lower copayments for consumers and improved medication
adherence overall.xiii
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\xiii\ O. Kenrik Duru, Julie A. Schmittdiel, Wendy T. Dyer, Melissa
M. Parker, Connie S. Uratsu, James Chan, and Andrew J. Karter. January
2010. Mail-Order Pharmacy Use and Adherence to Diabetes-Related
Medications. American Journal of Managed Care. Vol. 16, No. 1: 33-40.
Available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3015238/.
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Savings from PBMs benefit health plans, employers, and consumers
directly. Prescriptions cost health plans and employers an average of
$1,315 per person per year, with consumers paying an average of $180
for their prescriptions, or 14 percent.xiv Without PBMs and
the savings they generate, drug costs could be $2,000 per person per
year.xv
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\xiv\ Visante. The Return on Investment (ROI) on PBM Services.
February 2020. An analysis prepared by Visante on behalf of PCMA
Available at https://www.pcmanet.org/wp-content /uploads/2020/02/ROI-
on-PBM-Services-FINAL_.pdf.
\xv\ Visante. The Return on Investment (ROI) on PBM Services.
February 2020. An analysis prepared by Visante on behalf of PCMA
Available at https://www.pcmanet.org/wp-content /uploads/2020/02/ROI-
on-PBM-Services-FINAL_.pdf.
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The Value of Pharmacy Networks
PBMs lower pharmacy costs by negotiating with pharmacies to
establish competitive rates at which the PBM will reimburse for each
prescription that a pharmacy fills, which enables the PBM to form
preferred pharmacy networks. Through these pharmacy negotiations,
pharmacy networks enable PBMs to maximize accessibility, choice, and
quality of service, as well as hold down costs for patients enrolled in
health plans, including, among others, Medicaid, Medicare Part D, state
employee plans, and employer-sponsored plans.
Pharmacies have been willing to negotiate price concessions, some
based on proven volume, to ensure they have access to the plans and
PBMs with the largest and fastest-growing membership bases. Often, but
not always, independent pharmacies participate in preferred networks
through contracts negotiated and administered by their Pharmacy Service
Administration Organizations or PSAOs. As of 2019, all but one major
PSAO chose to negotiate for the pharmacies they represent to
participate in PBMs' preferred networks and fill prescriptions for
patients served by plans utilizing those networks.xvi Some
83 percent of independent pharmacies contract with a
PSAO.xvii Between 2011 and 2021, the number of independent
pharmacies nationwide increased by approximately 13 percent (or by
2,645), whereas chains lost around 80 stores (0.2 percent) on
average.xviii Today, there are more retail pharmacies in the
U.S. than Starbucks, McDonald's, Burger Kings, and Subways combined.
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\xvi\ Pharmaceutical Care Management Association (PCMA). Putting
the Growth of Pharmacy DIR in Context. August 2021. Available at
https://www.pcmanet.org/wp-content/uploads/2021/11/Putting-the-Growth-
of-Pharmacy-DIR-in-Context-2021.pdf; Fein, Adam. The Law of Holes: Some
Independents Skip 2019 Part D Preferred Pharmacy Networks. Drug
Channels. October 23, 2018. (Oct. 23, 2018), Available at https://
www.drugchannels.net/2018/10/the-law-of-holes-some-independents-
skip.html/.
\xvii\ Pharmaceutical Care Management Association (PCMA). Pharmacy
Services Administrative Organizations (PSAOs) and their Little-Known
Connections to Independent Pharmacies. January 25, 2021. Available at
https://www.pcmanet.org/research-pharmacy-services-administrative-
organizations-psaos-and-their-little-known-connections-to-independent-
pharmacies/.
\xviii\ Pharmaceutical Care Management Association (PCMA). Putting
the Growth of Pharmacy DIR in Context. August 2021. Available at
https://www.pcmanet.org/wp-content/uploads/2021/11/Putting-the-Growth-
of-Pharmacy-DIR-in-Context-2021.pdf.
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By creating preferred networks, PBMs are able to negotiate savings
that reduce Medicare Part D premiums by $63 per member per year. One
study estimated that preferred networks created by PBMs for Part D
health plans save Federal taxpayers at least $870 million
annually.xix
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\xix\ Pharmaceutical Care Management Association (PCMA). Putting
the Growth of Pharmacy DIR in Context. August 2021. Available at
https://www.pcmanet.org/wp-content/uploads/2021/11/Putting-the-Growth-
of-Pharmacy-DIR-in-Context-2021.pdf.
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When patients present a prescription to be filled, the pharmacies
in a PBM's network dispense prescriptions for them using prescription
drugs that they have purchased directly from wholesalers or
manufacturers. Before dispensing a drug, the pharmacy checks with the
PBM to confirm the applicable plan design for the patient to determine
eligibility, coverage, and cost-sharing information.
After the prescription is filled, the PBM reimburses the pharmacy
at a contractually agreed-upon rate minus any applicable cost-sharing
collected by the pharmacy from the patient. The PBM then separately
bills the health plan at the rate negotiated between the PBM and the
health plan.
Patients recognize potential savings and, as a result, most prefer
plans with preferred networks. For plan year 2021, 99 percent of Part D
beneficiaries chose Part D plans with preferred pharmacy networks--an
increase from 92 percent in 2020. In a survey, 85 percent of Medicare
Part D beneficiaries reported satisfaction with their preferred network
plan, and nearly 80 percent said they would be disappointed if their
plan were eliminated.xx These examples demonstrate that PBMs
are delivering value to patients through intense competition amongst
pharmacies for access to preferred networks.
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\xx\ Pharmaceutical Care Management Association (PCMA). Putting the
Growth of Pharmacy DIR in Context. August 2021. Available at https://
www.pcmanet.org/wp-content/uploads/2021/11/Putting-the-Growth-of-
Pharmacy-DIR-in-Context-2021.pdf.
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PBMs are instrumental in ensuring that patients have good options
for where to fill their prescriptions at reasonable prices, including
at independent pharmacies. In Medicare Part D, PBMs and Part D plan
sponsors use a form of value-based contracting referred to as
``pharmacy DIR'' to reward high-performing pharmacies, create high-
quality pharmacy networks, promote quality access for beneficiaries,
improve health outcomes, and reduce premiums. Pharmacies that help
Medicare beneficiaries stay on their medications, increase generic
dispensing, and improve overall patient access to care are rewarded
through pharmacy DIR.
Meaningful, Actionable Transparency
Transparency that helps patients and payers is necessary across the
entire prescription drug chain. PBMs support and practice actionable
transparency that empowers patients, their physicians, those sponsoring
health coverage, and policymakers, so that they can make informed
decisions that can lead to lower prescription drug costs. Actionable
transparency encourages consumers to shop for coverage that best fits
their health needs and budgets, and once covered, use the most cost-
effective, highest-value healthcare goods and services. It enables
prescribers and patients to avoid pharmacy-counter surprises and helps
ensure that physicians can prescribe drugs that are affordable for
patients. To that end, PBMs provide consumers and prescribers with
real-time benefit tools (RTBTs), which provide real-time information on
exactly where the patient is with respect to progressing through a
deductible or another benefit phase, what drugs are on the patient's
formulary, and exactly what cost-sharing to expect for a given drug at
the pharmacy. PBMs also provide consumers with information on in-
network pharmacies, premiums, general cost-sharing, and benefits for
their prescription drug coverage.
PBMs provide health plans, employer plan sponsors, and consumers
with a broad array of accurate, actionable information on price and
quality to make efficient purchasing decisions. PBMs' customers are
able to set the terms of the transparency and information they want to
receive, as well as their audit rights, as part of their contracts.
In recent years, Congress has added more requirements for PBMs to
report to Federal agencies, as well as public reporting in more
aggregated form, in both cases with appropriate protections for
confidential data to avoid encouraging tacit collusion, efforts that we
support. As the Federal Trade Commission has noted, there are limits to
the benefits of transparency and unintended consequences that can
result.xxi PBMs encourage Congress to focus its efforts on
actionable transparency that reduces drug costs versus transparency
that raises them.
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\xxi\ See FTC Staff Comment to the Honorable James L. Seward
Concerning New York Senate Bill 58 on Pharmacy Benefit Managers (PBMs),
FED. TRADE COMM'N. March 2009. Available at https://www.ftc.gov/sites/
default/files/documents/advocacy_documents/ftc-staff-comment-honorable-
james-l.seward-concerning-new-york-senate-bill-58-pharmacy-benefit-
managers-pbms/v090006newyorkpbm.pdf
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Promising Policy Solutions
PCMA supports efforts to increase competition in the pharmaceutical
market and increase patient access to needed medications. Generally, we
support bills by several of the committee's members and others that
would:
Increase competition in the pharmaceutical market and
eliminate patent system abuses that stifle competition.
Prevent pay-for-delay patent settlements for patent
infringement claims between brand and generic manufacturers.
Put an end to abuses of the citizen petition process that
may slow new competition by slowing applications seeking market
approval.
Improve Medicare's online pricing tools, allowing
beneficiaries to compare costs across healthcare settings.
Prohibit product hopping that would allow drug manufacturers
to switch from an expiring patent on a reference drug to a
later-expiring patent on a follow-on product.
Reimagine and modernize Medicare Part D to allow for
comprehensive benefit redesign and increased transparency while
protecting sensitive proprietary pricing information and
avoiding inadvertent price increases for patients and the
Federal government.
I want to thank Chairman Blumenthal and Ranking Member Blackburn
and Senators Klobuchar, Cruz, Peters, and others for their work on
these efforts. The PBM industry looks forward to working with the
committee's members on these policy concepts.
Conclusion
PCMA and the companies we represent are committed to working with
the subcommittee and all stakeholders to continue improving the
affordability of prescription drugs for patients. While I have spoken a
lot about the work we do for those who provide health coverage for
consumers, the most important lens through which to judge these issues
is not what will best benefit the plan sponsor, the PBM, the retail
pharmacy, or the manufacturer; it should come down to what best serves
the consumer--the affordability of their health care, the ease of their
access, and ultimately their health care outcomes.
Through their work, PBMs are contributing to lower costs for health
coverage, lower costs for medications, and better and more affordable
access for patients, which means more people getting the medications
they need to lead healthier lives.
I hope that this hearing is an opportunity for a continued
conversation not only about the work done by PBMs but a look at the
entire supply chain so that we can identify solutions for patients and
consumers.
Thank you again for the opportunity to speak with you. I look
forward to answering your questions.
Senator Blumenthal. Thanks, Mr. Scott. And this hearing
will be indeed an opportunity to continue the conversation
about all the segments of this industry. PBMs, as I indicated,
right at the start, are far from the only source of increased
costs. But they are, in fact, bedeviling many of the consumers
we represent. Whatever the abstractions and the generalities we
here in this committee room, are real life experience in
Connecticut or Tennessee or elsewhere in the country show that
PBMs can have a detrimental impact. And I will give you just
one example.
The 47-year-old woman in Norwich, Connecticut who told my
office about PBMs getting in the way of her treatment and her
access to cancer drugs that she was prescribed, an oral cancer
drug that was denied twice by the PBM before there was approval
for the generic. The problem with the generic is that it added
larger out-of-pocket costs for the patient than the brand name
drugs she was denied.
I want to reiterate, she was prohibited from using the
brand name drug that was prescribed, even though it would have
been more affordable to her, and that is because of how the PBM
set up her drug plan. Instead, she had to find assistance,
literally from a charity. This 47 year old woman in Norwich had
to go to a charity for help.
The PBMs who are responsible for creating these
formularies, the formularies are for the health care plan. It
is a core part of how the PBMs operate, but the net effect is
to deny certain drugs for patients. So if the purpose of PBMs
is to lower costs for patients, how is it possible that she was
denied access to a drug that would have cost her less out-of-
pocket?
Mr. Scott. Thank you, Mr. Chairman. I think that question
is for me, so I will jump in. And I think you are right to
focus on the real life experience. I will share briefly, if I
could, my PBM story when my dad suffered from cancer as well
and Alzheimer's disease, and at the end of his life as many
people who have family members who suffered through dementia
and Alzheimer's know, there was a constant switching of
medications that was necessary that the doctor was recommending
in order to control that process.
And the plan, the Medicare plan that he was on was
affordable. The drugs were covered. He was able to get the
access he needed, which meant thanks to that work done by the
PBM to make the system work, my mom and I were able to focus on
spending time with my dad rather than focusing on those issues
of medication access. So I am grateful for the work that was
done.
In regards to the example you raised, Mr. Chairman, about a
patient with cancer drugs and having troubles navigating the
formulary system, I will just level--say if I could, that first
of all, PBMs develop and recommend formularies, those lists of
what drugs are covered at what cost sharing amount for the
patient for the plan sponsors that hire them.
Ultimately the plan sponsors making the decision to go with
the PBM recommended formulary, make alterations to it, do
something else altogether. Those formulary recommendations are
developed with two important lenses. The very first one is
always the clinical consideration, what drugs are necessary to
cover in order to meet patients' therapeutic needs.
We employ teams of physician--of outside physicians and
clinicians to help make those determinations. And then in those
areas where there are competing therapies available that are
going to work equally well for the patient, then the lens is
the economic one where the PBM is recommending the preferred
formulary status to the lowest net cost drug.
So that, the intention is to address the clinical, address
the lowest net cost drug, which in theory should keep the
health coverage more affordable for the plan offering it and
for the patient who is getting access through that plan.
Senator Blumenthal. In theory, but in practice, what we see
in the real world is that patients don't have access to drugs
at affordable prices. And the kinds of legislation that have
been introduced, and I want to give credit to our chairman,
Senator Cantwell, for her work in this area and her interest in
this hearing, shows that all of us on both sides of the aisle
are responding to a felt need that we see in the real world.
And I might just tell you, the woman I mentioned eventually
got the drugs she needed, but it took 4 months. It is a woman
with advanced breast cancer waiting 4 months to get the
treatment she needed. Time is not on the side of a patient. It
is not a neutral factor. It is not like waiting in line for
your ticket at the movies. I have heard multiple stories of
patients being denied coverage of cancer drugs, and the problem
is only seemingly getting worse.
While there were two cancer drugs excluded from formularies
in 2017, the number now or as of 2021 is 60 cancer drugs.
Professor Garthwaite provided a graph that shows the number of
rapidly--that that number is rapidly increasing, especially in
the last 4 years. So what assurance can you give us that this
increase in exclusions isn't leading to more disturbing stories
like the one that I just gave you from Connecticut?
Mr. Scott. Mr. Chairman, first, I completely understand the
urgency of the scenario that you presented, and for any
patient. As I have heard others say, every family has a lot of
problems until someone gets sick and then you just have one
problem.
And we probably all been through that experience of feeling
that urgency. When you have a sick loved one, when you are sick
yourself, you simply want to get access to the medications that
you need. There are steps in the process that the PBM provides
to make that in theory, again, work seamlessly so that if a
doctor is recommending a different drug, if they need to go
through that step therapy process, that should work in real
time. There are times, as you pointed out, where there is that
abrasion for the patient.
I think the entire health care system could do better
making use of electronic tools and certainly in the PBM
industry's case, continuing to dive into that technology, which
we have started down that path, to make sure that that can
happen in a more real time ways, so these questions are
resolved quickly when patients need to switch their
medications.
Senator Blumenthal. Well, I am going to yield to the
Ranking Member and then come back for some additional
questions. But I just want to show you this graph. It is figure
4 in Professor Garthwaite's testimony. It is pretty--pretty
graphic, pretty dramatic. And I am going to be asking some
additional questions about the FTC and why it hasn't taken some
action to investigate. Let me yield to the ranking member.
Senator Blackburn. And thank you, Mr. Chairman. Mr.
Garthwaite, we hear from seniors all the time that are looking
for lower cost alternatives. And so talk to me about list price
erosion, what you see there, and Medicare patient out of pocket
cost, and how are they going to be--when you look at these
things, how are you going to be able to get to lower cost,
especially as you look at biosimilars that are coming into the
marketplace in 2023, and maybe they are not on the formulary,
maybe there is another rebate. So, just in the nugget, let's
touch that impact on the market.
Mr. Garthwaite. I will do my best as an academic. To speak
in a nugget, it is not really what we are good at----
[Laughter.]
Mr. Garthwaite.--but I think one thing is you want to think
about what--we say cost, what we mean, right, and there is sort
of clearly, there is out-of-pocket cost and then sort of the
cost of the plan. I think what we have seen, particularly in
Medicare Part D, is surging out-of-pocket costs for seniors.
And I encourage Congress, in my testimony, to do something to
address that.
There is no reason why we should see patients spending
thousands of dollars out of costs to get access to medication
other than using that to try and return money back to the
insurer to decrease the price of the insurance plan overall. It
is not serving anything good----
Senator Blackburn. OK, then let me ask you this. When you
look at the PBMs, is the costs the PBM inserts in the
marketplace worth the benefit to the patient?
Mr. Garthwaite. I don't think I can answer that. I am not
trying to evade your question. I think it gets back to your
point and why I think your bill is very important. We just
don't know enough about where the money is going as it flows
through the system to figure out exactly, you know, whether the
PBM is, ``worth it or not.''
What I will say, and I think the Senate Finance committee
report on insulin pricing you talked about is very instructive
on this, that so much of the demand for high list prices
appears to be coming from the plan sponsor. As I quote in my
testimony, the head of diabetes for Lily, right, saying like,
listen, we can't lower our list price because our plan sponsor
wants the rebate so that they can maintain competition in the
market.
And I think that is not the goal of insurance and certainly
not of insurance that doesn't include medical underwriting and
is supposed to be community rated. That we are taking money
from healthy--or from sick patients and transferring it to
healthy patients in the form of lower premiums. But the
politics, as I understand it, when we look sort of at the
debate to get rid of rebates are such that anything that
increases the premiums for seniors is a nonstarter. The part of
the conversation we are going to have to have here is there is
going to be a tradeoff.
If you would like to get list prices lower, if you would
like to remove rebates from the system, if you like to get drug
prices lower, access is going to be impinged somewhere, right.
It is either going to be because the PBM puts an exclusion
list, or it is going to be because prices get pushed down and
we get fewer drugs in the future.
We have to make a choice somewhere about where we want to
have reduced access if we want lower prices.
Senator Blackburn. That is true. You have got to make
choices within the system. But what Medicare enrollees tell us
is there are fewer choices for them, and the prices are higher,
and restrictions seem to increase every single enrollment
period. And we know there will be an additional impact on the
marketplace in 2023. Ms. Feldman, let me come to you.
Ms. Feldman. Yes, ma'am.
Senator Blackburn. Mr. Scott wrote an op-ed recently, and
he is with PCMA. He is here as one of our witnesses. He argues
in this that drug makers alone are responsible for setting and
raising the prices. So do you agree with this, yes or no?
Ms. Feldman. No. I think there is plenty of blame to go
around in this system. The prices are negotiated terms. That is
what the PBMs are supposed to be doing, negotiating price with
the drug companies. If there is no negotiation going on, why
are they there?
Senator Blackburn. OK. So this current rebate system that
we have, is it working to effectively lower the prices? Kind of
the same question to you that I had to, Mr. Garthwaite, is the
cost delivering the expected benefit?
Ms. Feldman. Let me just try to put it in very simple
terms. If my job is to bring prices down, however you define
price, and if we look across 15 years and we see that prices
after rebates are rising dramatically, I am not doing my job
somehow. I do want to be clear that rebates aren't the only
problem.
There are all kinds of other flows of payments from drug
companies to the PBMs. So we can call things a rebate or a flat
fee or an elephant, it is still a flow of lucrative dollars and
the influence that brings.
Senator Blackburn. OK, thank you. I would like to hear a
little bit more, but I am going to ask for it in writing. Mr.
Garthwaite to you, and Professor Feldman to you, I would like
to know what you would see a competitive marketplace be. We
know there has been consolidation.
Mr. Scott says there are 70 PBMs, but we know we have very
few players in this area. So in a perfect world, how would you
structure a competitive PBM marketplace that would indeed yield
our Medicare enrollees a lower cost? Thank you. Thanks, Mr.
Chairman.
Senator Blumenthal. Thank you. Thanks for that assignment
to the professors and other witnesses here.
[Laughter.]
Senator Blumenthal. And by the way, I would invite all of
the panelists to respond to that question in writing. It is a
big question and at the heart of what we are doing here. We
have been joined by the Chairwoman of the Committee. I
mentioned earlier her leadership in this area, and we are
grateful to her for coming today. And I recognize Senator
Cantwell for her remarks and questions.
STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
The Chair. Thank you, Chair Blumenthal and Ranking Member
Blackburn, for holding this important hearing. We know that the
lack of transparency in the marketplace is a concern to all of
us, and let's understand where we are today. Since 2014,
prescription drug prices have increased much faster than the
rate of inflation. Drug prices have gone up 35 percent, while
the cost of all goods and services have jumped just 19 percent.
So price increases for prescription drugs have outpaced wages,
gas, telephone, Internet services, food, tuition,
transportation, and personal care.
So there is a consistent issue here. We have found the
prescription drug prices have increased for 30 percent of
Americans who take prescription drugs medications, many of whom
have experienced increased annual cost of more than $100. The
worst news, however, is that many who saw such spikes in their
out-of-pocket costs were almost twice as likely not to fill a
prescription or skip their medication.
So this is of concern. We know that the average list price
for insulin has doubled over the past 10 years, even though
insulin has been available for patients for over 100 years, and
significant hike prices have become a matter of life or death
for many Americans with diabetes. In my state, Molly Stenson, a
Washington resident, used to travel from Mason County to Canada
just to purchase insulin.
That is because at the time the average price of insulin
was $450 a month. It wasn't until Washington State passed a law
and put a cap on insulin at $100 a month that she was able to
finally stop making these trips. Unfortunately, only 18 states
have this cap on insulin co-payments. So there are drug insulin
prices increasing faster than most goods and services.
According to Senate Finance Committee staff report released
by Senators Grassley and Wyden, the price increases are due in
part to the business practices of pharmacy benefit managers.
That is the subject of today's hearing. They are--PBMs are
contracted by Government programs, insurance companies, self-
insured employers to negotiate on behalf of the pharmaceutical
firms.
And the way the system works, they also make a lot of money
driving up the price on consumers. Today, fewer than five PBMs
control more than 80 percent of the drug benefit for over 260
million Americans. These companies, who most Americans know
nothing about, set drug costs, decide what drugs will be
included in your plan, and determine how drugs are dispensed.
And these companies have abused their responsibility to protect
Americans from these drug pricing crises--continued an opacity
on the drug supply chain.
So we want to shine a bright light here. We want PBMs, the
effective drug price for consumer--we want to understand how
PBMs affect drug prices for consumers. First, PBMs develop what
is known as formularies, which are a list of covered drugs on
behalf of insurers or payers. To get their drugs placed on the
formulary, manufacturers provide rebates to PBMs, some of which
are passed on to consumers, but they keep some for themselves.
And because PBMs retain a share of that rebate, they have
an incentive to keep those list price high. And who bears the
brunt of that? Consumers, particularly if their cost sharing is
based on a percentage of the list price or if they are among
the 25 percent of Americans who have a high deductible health
plan. The second way PBMs are affecting drug prices is
something called spread pricing.
Spread pricing occurs when a PBM charges an insurer a
higher price for the drug than the amount it is reimbursed by
the pharmacy, with the PBMs keeping the difference. According
to an investigative report, PBMs skimmed off $1.3 billion of
the $4.25 billion that Medicaid insurers spent on drugs in
2017.
There are examples of that. In 2015, PBMs charged Indiana's
Medicaid program $204 for a drug and reimbursed the pharmacies
only $197, with the PBMs pocketing the $7. Three years later,
in 2017, PBMs charged the Medicaid program $147, but reimbursed
the pharmacy $17, with PBMs pocketing $130.
That is right, PBMs profits increased by $123 for a single
30 day supply of a heartburn medication, all at the expense of
the American consumer. And what makes spread pricing possible?
The lack of transparency in the PBM market. PBMs affect drug
pricing for consumers by enforcing a number of post-sale fees
on pharmacies, effectively limiting the pharmacy's profits.
PBMs keep these fees--and just let me be clear, I am a big
fan of the pharmacies. There is a guy across or a woman across
the counter, when you go in to get your prescription, who tells
you some things about that medication. Oh, be careful of this,
what about this, are you taking this? So they are part of our
health care delivery system. So the notion that some people
want to have mega conglomerates control pharmacy drugs by mail
and control the market and have a continued concentration, mark
me down as not a fan.
PBMs keep these fees and really pass them on to consumers,
thereby raising the costs for pharmacy--pharmaceutical market
as a whole. Now, believe me, I am from an innovation State, and
I also worked in software for 5 years. It is easy to raise
capital if you are going to produce a product in 6 months and
ship it. It is a lot harder to raise money for a product you
have to have for 18 years.
So no one is saying that it isn't hard to get capital to
invest in new groundbreaking drugs. But the issue is, do we
have enough transparency in this market? In 2019, the
Washington legislature passed a law prohibiting PBMs from
charging phantom fees that raised the costs of dispensing
medications.
Several states have enacted laws requiring PBMs to obtain a
license to operate in their state, and some have gone further
prohibiting or regulating spread pricing and requiring PBMs to
report pricing and rebate information to promote transparency.
And they have brought enforcement actions. For example, April
13, 2022, the Louisiana Attorney General sued Optum Rx--Optum
Rx, I believe that is the pronunciation, for inflating the
price of prescription drug charges in their State's Medicaid
program, included by spread pricing and claw back money from
pharmacies without passing it back--without passing it back to
the state.
But we in Congress must do more to ensure that all
Americans and all American consumers are protected. That is why
I am so appreciative of Chairman Blumenthal holding this
hearing this morning and using your experience as a former AG
to help us work through these issues at today's hearing.
We know that we have a system where patients get--if our
system is where patients get inferior treatment and still pay
more, this is setting us back. So it is time for us to take
action on this. Mr. Chairman, I will put the rest of my
statement in the record, but I would like to turn to our
witness, Mr. Balto.
I understand that you are an attorney at the FTC for
several years and were involved in many FTC's earliest
enforcement actions involving pharmaceutical and health care
companies. Could you explain why the FTC action against PBMs
under a current authority of unfair and deceptive practices,
and what more authority could help us in moving the market to a
more transparent market?
Mr. Balto. Thank you, Senator. I think the FTC has made
some major errors in terms of enforcement in this area, and
part of it is relying a lot on economic theory and not looking
at the reality of what is going on, and also not properly
defining who the consumer is. You and I and everybody else in
the room know that the ultimate consumer is, you know, real
people. The FTC focuses almost exclusively on the question of
the first buyer, the plan sponsor, and whether the plan sponsor
is harmed, and in that way misses a lot of the anti-competitive
effects.
Just to give you one example that sort of hits the point
you are making about the service in the community pharmacist.
Assume that you are a person who needs a complex specialty drug
in which you really need the services of your community
pharmacist. The PBM engages in various tactics to drive that
community specialty pharmacist out of business or make it very
hard for them to compete.
You are forced, perhaps into an exclusive PBM owned
specialty pharmacy. And by the way, the FTC has permitted the
PBMs to acquire all these specialty pharmacies. You move then
from having--being able to see your community pharmacist,
having them monitor your health care, having them give you
advice, to all of a sudden having a pharmacist at a 1-800
number. And there is terrific testimony about HIV patients that
I testify--that I cite in my testimony, that suggest how this
is a problem.
The FTC Act is broad. And one thing that could be very
helpful besides the efforts by Senator Blackburn and other
members to compel the FTC to do well, to have the GAO do a
comprehensive study of this market, and I know Senator Grassley
and others have suggested the FTC to do a study, would be for
Congress to specify what are unfair methods of competition that
the FTC should scrutinize.
And the FTC Act is broad. It prohibits unfair methods of
competition and unfair trade practices. And Congress can
specify what some of those practices are. And when you look at
things like the gag clauses, you know, preventing pharmacies
from telling consumers where the lowest priced drug is, I mean,
that is blatantly an unfair method of competition. It blatantly
is something that harms consumers.
Consumers are in no fashion better off when a pharmacist
can't tell them where the--you know, what is the lowest price
without means of getting the drug at the lowest price. And
there is no reason for that other than for PBMs to protect
their PBM rebates. And so, you know, that is the kind of
practice that could be specified.
Also, some of the practices that prevent generics or
biosimilars from getting on the formularies because, again,
PBMs are preferring drugs with a high rebate to these lower
cost biosimilars or generics, which offer a lot of promise for
ultimately lowering drug costs.
In my testimony, I specify about five or six practices that
could be outlined in legislation to attack these unfair methods
of competition that ultimately harm consumers.
The Chair. Could you remind me, Mr. Balto, because I feel
like we had this hearing a decade ago or maybe longer, and I
thought we took action as a Congress to outlaw PBMs being owned
by drug companies, and so that some of these same practices
wouldn't be continued. What did we do before and why are we
here again?
Mr. Balto. In the Clinton Administration, we recognized
that pharmaceutical manufacturers owning PBMs was like the fox
guarding the henhouse. Unfortunately, in the past several
Administrations, we forgot that basic principle of economic
policy, you don't want foxes looking after chickens.
And so they have permitted the PBMs to acquire all of, you
know, all these major pharmacies. They all have their own mail
order pharmacies, which they prefer. They go and aggressively
audit independent pharmacies. They reduce their reimbursement
to ultimately force them to dispense below cost. They capture
these retroactive DIR fees. Do you think they do those things
with their own pharmacies? I don't think so.
And so that kind of fox owning the henhouse operation is
just a poor recipe for competition. And by the way, Senators,
you know, there is a lot of legislation going on right now to
address this problem in high tech industries where we are very
concerned about the major tech firms having their own--
preferring their own businesses.
I don't know why we should let this happen with PBMs. As
important, PBMs being able to secure part of the rebates
distorts their incentives and turns competition on its head so
that PBMs prefer higher, not lower drug prices.
And by the way, you have identified, many of you have
identified the key issue here, which is ultimately non-
uninsured consumers lose. And that is, even Professor
Garthwaite identifies that problem. And that is why consumer
groups, if you will note in footnote five of my testimony,
consumer groups supported the past Administration's proposal to
eliminate the anti-kickback safe harbor for PBM rebates.
Aggressive--and PBM rebates are just screwing up health
care decisions right now and leading to a rapid escalation in
drug prices, as demonstrated by the Grassley, Wyden report.
The Chair. Thank you. I wanted to ask you about the FTC
brought a case against ABV, I think it is. If you recall, this
was a court awarded the FTC $448 million in consumer redress,
which had been--had to be invalidated as a result of the AMG
decision. So how does the absence of 13(b) redress affect the
FTC's ability in this space?
Mr. Balto. It should be a significant priority of everybody
in Congress to pass legislation to return the FTC's power to
secure our financial redress. I know as being the former policy
director, how crucial that is to being able to effectively
enforce the antitrust laws. If bad actors, including major
corporations, know that they can engage in conduct and
basically get a slap on the hand, just stop now.
That is not going to deter them much from engaging in bad
conduct. It is only when you can stick a significant monetary
penalty on them that they know that they are going to have to
pay the piper. So I think that you absolutely have to--that
this is a major priority to strengthen the FTC's enforcement
powers here.
And certainly if the FTC had that restored, it could look
at these egregious practices that PBMs engage in and possibly
bring actions under Section 13(b) to provide redress to payers
and consumers for these egregious actions.
The Chair. So what exactly does the Committee need to do to
give the FTC the authority to properly police this market?
Mr. Balto. I think the FTC need--the Committee needs to
strengthen the FTC's powers under--well, let me start off.
First, I think the importance of a study is crucial, and I
agree with the professor that study and more information is
really vital. However, the Committee needs to instruct the FTC.
It needs to identify the right consumer.
The FTC's past studies like their mail order study two
decades ago just looked at the impact of the plan sponsor. You
know, and a plan sponsor may or may not care, you know, if the
consumers are harmed in the fashion that Senator Blumenthal and
Senator--and Ranking Member Blackburn describe. They are not
necessarily going to care. They need to do a study and actually
focus on the real consumer.
Then, I think it is vital for the Committee to consider
identifying specific practices by PBMs that are unfair methods
of competition that harm consumers. For example, the DIR--you
know, and to me the patient--the gag clauses is a very
straightforward example.
But also the DIR fees, especially DIR fees imposed by a
rival, seem relatively--seem like the kinds of things that you
could consider to be an unfair method of competition, and that
the Committee--the Commission needs its powers strengthened by
identifying some of those practices that they should look at as
unfair methods of competition or unfair trade practices.
The Chair. And you--but you think that those--in your
testimony you outline, I think it is on page 13 here,
legislative action to prevent PBM abuses. So you think there
are known practices now? Is that correct?
Mr. Balto. Absolutely, absolutely. And the fact, I mean,
the FTC has brought no actions--I mean, they have received
hundreds upon hundreds of complaints by pharmacies about some
of these actions, about PBMs going and taking information from
its PBM affiliate and sending it to its pharmacy affiliate so
that pharmacy could target and try to steal those customers, or
PBMs imposing, you know, egregious audit practices to try to
drive those independent pharmacies out of market.
Again, you know, you are going to--you know, in other
industries when you see those kind of practices occur, five
alarms go off, and they should certainly go off in these
industries because consumers really care tremendously about
their ability to access community pharmacies.
The Chair. Thank you. Thank you, Mr. Chairman.
Senator Blumenthal. Thanks very much, Chairman Cantwell,
for the excellent remarks and questions. And I want to follow
up on some of them. I think there is no question that there
ought to be a study by the FTC under 6(b) into the PBM market.
As a number of our witnesses have said, there is a lack of
transparency, there is a lack of current data. The 2005 study
is woefully out of date. That is the reason that I and others,
including Senator Grassley, six Republicans, two Democrats,
have sponsored the Prescription Pricing for the People Act of
2021, S. 1388.
There are a number of other legislative proposals in this
area that would produce more data and more authority for the
FTC to take action. You know, one of the areas that has been
mentioned is rebates. The fact of the matter is patients should
know that they have to pay co-pays and deductibles based on the
list price, not the actual price after rebates. That is a
glaring injustice here.
This arrangement is actually costing them money. So two
questions for you, Mr. Scott. How does a consumer know what
this list price is, what the basis is for that payment of
deductibles, what the rebates are to the PBMs, which is
benefiting from the higher list price, how do they know? And
did they see any direct benefit from the rebates?
Mr. Scott. Thank you for the question, Mr. Chairman. The
short answer is, yes. The individual patient, the individual
consumer does see benefit from the rebates. Again, the rebate
is simply a discount that is negotiated by the PBM from the
manufacturer to try and get to the lowest net cost for the
drug. What typically happens in the Medicare program----
Senator Blumenthal. The co-pays and deductibles are based
on the list price, correct?
Mr. Scott. Yes, sir. And I will get there very quickly. So
the Medicare example, that net--those rebates are negotiated,
fully pass through to the plan sponsor, and then the plan
sponsor makes the determination, even in the commercial market,
how to use those savings. Are they going to go to defray
premiums--?
Senator Blumenthal. So you are saying that the plan sponsor
has a kind of throttle or hand on whether or not consumers
benefit, and if out of the goodness of their heart they decide
consumers should share in the benefit, which is key to their
profits, then they will do it, but there is no automatic
benefit.
Mr. Scott. So the consumer is benefiting. The cost of the
drug itself is too expensive. That is sort of a fundamental
starting point that I think we can all agree on. What the plan
is trying to determine is where they are going to squeeze the
balloon. Is it going to be to try and bring the consumers
premium cost down? Is it going to try and bring their out-of-
pocket costs down?
We have to address the underlying cost of the drug that is
set by the manufacturer, because otherwise it is a series of
tradeoffs, and one way or the other, the consumer pays
whether--depending on the plan sponsor's design.
Senator Blumenthal. I think you have just summarized the
problem here, one way or the other, the consumer pays.
Mr. Scott. Until we address the cost of the drug----
Senator Blumenthal. Let's talk about----
Mr. Scott.--underlying drug, that is correct. Yes, sir.
Senator Blumenthal. And the incentives for higher costs of
the underlying drug, those incentives are increased by PBMs
that profit from discounts on that higher list price. Is that
true, Professor Feldman? I think that is the point you were
making.
Ms. Feldman. Yes. The interests of PBMs are aligned with
the drug companies in those moments for higher prices because
their pay is based on the difference and because they get, in
some cases, to keep some of those rebates.
Senator Blumenthal. You agree, Professor Garthwaite?
Mr. Garthwaite. There are certainly contracts where that is
true, but over half of employers now are in contracts where 100
percent rebates are going back to the plan sponsor. And so,
again, at times--we can point to negative parts of the system
we don't like and say PBMs are at fault. But I also think we
need to look at insurance companies and those plan sponsors and
we start talking about the consumer that is harmed.
There is the person buying the drug and then there is
actually the vast majority of the insurance pool that is paying
the premium but not paying for expensive medications. And they
are benefiting because they are taking money from those sick
patients and getting lower premiums.
Senator Blumenthal. So it is a lose, lose for consumers. In
fact----
Mr. Garthwaite. Well, it is a win for the consumer with a
lower premium.
Senator Blumenthal. Well, let me--let me recite to you from
Professor Feldman's journal article. ``In short, it is the
perfect lose, lose for patients. Manufacturers raise the price,
the consumer pays the higher price, the extra goes to the PBM,
and in exchange, the PBM creates competition free zones for the
drug company's drug.
In the short term, the patient pays more in the form of
higher prices. In the long term, the patient pays more in the
form of fewer competitors to offer lower priced drugs.''
Professor Feldman, that is roughly the current situation,
correct?
Ms. Feldman. I believe that is a clear summary of what is
happening for the consumer and the patient on all ends.
Everyone is benefiting other than the consumer, the drug
companies, the PBMs, and the plans themselves that may decide
to pass through some of those rebates to some of the consumers
that sometimes or may not. That could go into many other
places, including their own pay. So everybody makes off well,
except for the patient, the consumer.
Senator Blumenthal. Mr. Scott, in your prepared remarks,
you say that employers and unions, ``have a tremendous
diversity of opportunities'' to select a PBM power. As evidence
you offer that there are 70 full service PBMs in the market,
but the Council of Economic Advisers pretty recently under the
Trump Administration found, ``three PBMs account for 85 percent
of the market, which allows them to exercise undue market power
against manufacturers and against health plans and
beneficiaries they are supposed to be representing.''
All the witnesses so far have raised the issue of
consolidation, lack of competition. Among PBMs, three companies
clearly controlled the market for PBMs. How can you claim there
is tremendous diversity of opportunity?
Mr. Scott. Thank you for the question, Mr. Chairman. I
think the first point to understand is that no entity, no plan
sponsor, no employer, pension fund union is required to hire a
PBM. This is all a voluntary decision to hire companies that
they believe are going to add value in helping them to manage
the cost of their drug benefit for the patients that they
represent.
Senator Blumenthal. But let me just interrupt to say----
Mr. Scott. Yes, sir.
Senator Blumenthal. There is no principle of competition
policy that says antitrust law and requirements for competitive
conduct apply only when a consumer or some other entity is
required or mandated to buy a product, right.
Mr. Scott. So if I could address your question about the
consolidation in the market, you are correct. My testimony
cites 70 PBMs actively in the marketplace today. That is
actually about a 10 percent increase in new entrants into the
market over just the last 3 years. So we are seeing new
iterations of PBMs, new players see an opportunity to come into
the market because they believe it is competitive.
You have probably read in the headlines, Amazon is looking
to get into the space. Mark Cuban is looking to get into space.
These are sophisticated players who see opportunity in a
competitive marketplace to pick up business from employers,
pension funds, and others. Some, you know, employers who choose
to hire a PBM are doing it because they just simply want to get
the deepest discounts possible to really focus in on that
ability to negotiate.
That requires scale in the marketplace in order to be the
most effective at those negotiations. Others may be looking for
different services from their PBMs that are better offered by a
smaller, standalone company.
Senator Blumenthal. Well, let me just, again, Professor
Garthwaite, this is your graph, another graph.
Mr. Garthwaite. It is not my graph, but yes.
Senator Blumenthal. Well, I apologize. It is from Drug
Channels Institute based on 2021 data. This shows CVS Health,
Caremark 33 percent, Cigna, Evernorth Express Scripts 26
percent, United Health, Optum Rx 21 percent, and then way down
there, there is Humana Pharmacy Solutions 8 percent, and all
the others, there are only two others at 4 percent. All other
PBMs, cash pay, all of them, all those 70, or let's say 64 at 4
percent. That is not what I would call a competitive market
with a diversity of opportunities.
Mr. Scott. What we experienced in the marketplace, Mr.
Chairman, is that employers have choice. They exercise that
choice. So within those competitors that you see out there,
whether it is those with the larger market share or the smaller
ones, there is--active changes are made to over time as they
look for different types of service. And they have the ability
to do that because there is enough competition in that market.
Senator Blumenthal. Mr. Balto, I suspect you may have
something to remark.
Mr. Balto. Yes, I just wanted to point out, the question
isn't the number of competitors, the question is, can they
constrain anti-competitive conduct? And obviously they haven't
been--if you see--especially if you see their profits
increasing so dramatically. By the way, I represent union plan
sponsors and those union plan sponsors do not believe they have
many alternatives. They think it is basically these three.
I wanted to also go back to a point, just so we really get
this down about, you know, this question about rebates
benefiting all of the subscribers, and maybe there is a small
subset that are hurt. As the chairman noted, there are lots of
uninsured people. There are lots of people on high deductible
plans. Those people are all harmed.
And as a matter of just general competition policy, we
don't say that firms can engage in anti-competitive conduct
because it benefits one segment of consumers, but other
segments of consumers are harmed. If there is anti-competitive
conduct harming any consumers, that is a violation of the
antitrust laws.
Senator Blumenthal. And let me just point out a stunning
fact about this health care market and the relationships
involved here. Each of these three dominant PBMs are owned by
or own their health insurers and have financial relationships
with pharmacies and medical providers. This is a vertical
integration in a consolidated industry. It is concentrated
power through the industry, and it creates a high risk of
conflict of interest, and in effect, a take it or leave it
approach toward competitive pharmacies.
And as the Chairman rightly remarked, the pharmacies often
try to offer choices and advice and pro-consumer conduct. Mr.
Balto, in his testimony said, ``because of their market power
and vertical integration, these middlemen increasingly stifle
competition from this country's most accessible and trusted
health care professionals, community pharmacies.''
The AIDS Health Care Foundation wrote in February that
PBMs, ``steadily squeeze specialty pharmacies, preventing
patients insured by their parent companies from using
specialized pharmacies like AHF's.'' I am going to stop there.
I have a couple more questions, but I want to yield to Senator
Cantwell if she has any additional questions.
The Chair. Well, thank you, Mr. Chairman. I think I just
wanted to drill down on this a little bit more, given some of
the--your questions and the response, and certainly our
witnesses which we appreciate them being here. But, Ms.
Feldman, I saw in her testimony where she said, you know,
trying to get to the bottom of this is like shadow boxing. And
that is the point.
The point is PBMs negotiate on behalf of some consumers,
but they pocket a lot of the discount. And that is what we are
trying to get at. Like what is--we believe in buying in bulk
that, yes, you get a discount. But who is getting the discount?
And the question is they are pocketing that. And when we want
to understand what this is about, this issue of spread pricing,
there is no transparency.
So the consumer doesn't have the information to make the
choice or the plan that someone is representing who wants to
say, why should I let somebody go negotiate a deal for me and
say that they are going to give me a 30 percent discount and
then basically only give me a third of that discount and then
pocket the rest, and then when I go to the pharmacy, I end up
having to pay more because the out-of-pocket expense is
different.
So this lack of transparency is not giving us choice. So do
I have that right, Mr. Balto and Ms. Feldman on the spread
pricing, is this--do I have this correct?
Ms. Feldman. The spread pricing and the all the price in
the price terms are held as deep secrets. Both the
pharmaceutical companies and the PBMs assert that they are
trade secrets, and they are deeply hidden, even from the plans
themselves. Auditors aren't given full access to the terms.
Regulators aren't given full access to the terms. Certainly
consumers and those who might disrupt the industry don't have
access to any of these things. Markets in general thrive on
information, and you have got a throttle on information here.
Mr. Balto. I totally agree. Information is essential for
consumer sovereignty. And look, the PBMs won't even allow your
pharmacists to tell you, don't use that card, just pay cash,
you will pay less. Obviously, they are doing a lot to throttle
information so that they can protect their stream of rebates.
The Chair. I think we had a similar situation with what was
it Ticketmaster where people were going and buying all these
tickets up in bulk and then charging extra pricing and then
saying to people, here is what--you know, I am doing you a
favor because I got these tickets. But in reality, they were
just--had supply and gamed the market and then charged up,
increasing pricing.
And so I think that the issue here is where is the
transparency so that consumers can understand, or a plan who is
making a purchase, can understand because there may be other
avenues. Not saying that every PBM isn't doing something, but
at what cost, at what price should be PBMs just because they
got to go to negotiate a deal, how much should they be
pocketing instead of passing that on to the consumer?
So, Mr. Chairman, I think that is my question and it has
always been my concern, because I do think buying in bulk
should get you a discount. I just believe that most of the
money should go to the consumer. And the fact that we can't get
answers, or the consumer can't get an answer about this is very
frustrating because then they can't make decisions about these
plans, or they certainly can't make judgments as it relates to
what kind of savings that their plan is entitled to.
I do really, though, have a concern about this--where this
keeps going. And so not surprising that more people want to
jump in. Well, why not, if you can make this much money in a
dark, transparent situation, why not jump in? So that doesn't
mean anything. And the key thing, though, is by undermining the
system and undermining that line of delivery that I think
pharmacists represent as part of our health care delivery
system, then I think you really do take away part of the
system.
And there are people who are--who definitely would love
nothing other than to just have major control over a mail in
pharmacy market, and thereby have less, even less kind of
delivery system for us. So, Mr. Balto, at your time at the FTC,
did they deal with spread pricing and other areas?
Mr. Balto. No. These problems have become phenomenally
worse. And again, because you create an environment that is
sort of a petri dish for all of this anticompetitive conduct,
lack of competition, lack of transparency, and conflicts of
interests, they just have gotten phenomenally worse because
you--and then you don't regulate. And, you know, this is just--
it is a real fertile environment for this kind of anti-
competitive conduct. And----
The Chair. And what is the conflict of interest?
Mr. Balto. The conflict of interest is that they make more
money by securing higher rebates when they are supposed--and
which results in higher list prices when they are supposed to
be seeking lower list prices. That is the conflict of interest.
And if you are a payor--again, I do represent some payors. If
you are a payor and you want that rebate information, no way.
Absolutely not.
Then you want to bring your auditor in and have your
auditor check. They limit who can audit. They limit the kind of
information you can audit. This isn't like other markets, you
know--I mean, they just come out, and, you know, and they just
come up with new and novel ways of preventing the market from
working effectively.
And by the way, when you think about State regulation and
PBMs trying to require State regulation akin to the
transparency provisions that you included in the Medicare
Modernization Act, the PBMs fight those tooth and nail. They
know darkness is the best environment for them to engage in
anti-competitive conduct.
The Chair. Well, why can't we do something right now about
that, about making sure that there is a transparent market as
it relates to these rebates?
Mr. Balto. We can. You know, there are transparency
provisions that, you know, that Congress can consider enacting
so that at the very least the plan sponsors have the
information so they can properly audit and make sure that they
are getting the benefit of the rebates that are being secured.
The Chair. Thank you. Thank you, Mr. Chairman.
Senator Blumenthal. Thanks, Senator Cantwell. I have just a
few more questions and we have a vote that we will be
beginning. I am not sure of the exact time. I want to talk
about 340(b) health programs. This is a Federal law, there is a
Federal law that provides for discounted drugs to health care
providers who serve a high number of low income individuals,
community health centers.
Some of them are federally qualified community health
centers. They are safety net providers who serve some of the
lowest income patients. They are one type of provider that
benefits from 340(b) drug discounts. I have talked to a number
of them in Connecticut and have heard that PBMs are
inappropriately siphoning off these discounts and pocketing
them.
Rather than allowing the discounted savings to go to the
community health center and the patients they serve, the PBMs
force them into contracts with lower reimbursement rates,
denying the community health center and its patients the
benefit of the discount and instead keeping it. Mr. Scott, have
you heard about such practices?
Mr. Scott. Senator, at the association, we don't have a
position around these 340(b) questions. Our companies have
different business models and deal with 340(b) pharmacies in
different ways. I will say, what is important for the
processing, from the processing standpoint is having those
claims modifiers as they do in the Medicaid program, to be able
to understand which drugs are 340(b) drugs and which are not so
that we can make that distinction.
Senator Blumenthal. Well, will you commit to work with the
Committee in making sure that the community health centers, and
the patients get the benefit of the discounts?
Mr. Scott. I will be happy to continue to work with you on
that and other issues. And Mr. Chairman, if I could just take
one more minute. I am sorry that Senator Cantwell had to leave.
A number of her thematic questions were around this question of
transparency. And I just want to make sure that there is a sort
of complete understanding of how that transparency exists in
the marketplace today.
And taking it in a bit of a reverse order, important to
understand that our companies, in Part D plans already report a
lot of this information to CMS when it comes to the Medicare
program, and we have supported legislation to make that
information available to you in Congress through MedPAC, your
Congressional advisors.
Congress actually enacted new transparency requirements
recently that will kick in at the end of this year. So a lot a
whole lot of additional commercial market reporting to HHS,
Department of Labor, the Treasury Department on rebates, fees,
impact on out-of-pocket costs, premiums, and the like.
Most importantly, when it comes to the clients, the
customers who hire us, and the consumers that they serve, for
the client base, it is essential that they are informed, able
to shape their contracts, get the information that they want.
We want informed choice and so that they can best manage cost
and manage risk.
And for the consumer and the physician who is prescribing
their drug, it is essential that they understand what is
covered, how expensive it is going to be, what the out-of-
pocket is going to be. So that information is available right
on hand through tools that our companies provide, electronic
tools, real time benefit tools, so that that information is on
hand and the prescribing decision can factor in those costs
questions specific to the consumer.
So we are happy to continue to work with you to make sure
you have the information you need.
Senator Blumenthal. Thank you. I assume, then, that you
would support the Prescription Pricing for the People Act of
2021?
Mr. Scott. And can you refresh that? That is calling for
further FTC examinations----
Senator Blumenthal. Would require an FTC study.
Mr. Scott. You know, we have actually engaged, and I think
that the scope of the study that is contemplated there makes
sense because it looks not only at PBMs, but other parts of the
supply chain as well, which to me is really important for
getting under the hood and understanding these questions.
Senator Blumenthal. I take that as a yes?
Mr. Scott. We would not be opposed to that study, Senator.
Senator Blumenthal. OK. That is not exactly the answer that
I was looking for. I would like your endorsement of a study.
You said you are for more transparency.
Mr. Scott. If that legislation is enacted as move forward,
we would not oppose it. If that study is commenced, we would
engage in making sure we provided information. We--as I
articulated before, there is a lot of reporting that already
happens in the marketplace. If more is required for better
understanding here at the Committee or----
Senator Blumenthal. Here we are. What is really required is
more facts, more transparency, more sunlight on a process that
is invisible to a lot of consumers. And to go back to where we
began, most consumers have no idea what a PBM is. They don't
know what a pharmacy benefit manager is, which is the reason
why currently we have absence of competition, potential
conflicts of interest, and excessive profits, and prices higher
than they should be in prescription drug.
PBMs are not the only cause of drug price inflation and
excessive pricing. But they are integral to this system. In
fact, they are part of an increasingly integrated,
uncompetitive system involving PBMs owned or owning insurers
and constraining pharmacies in the amount of information they
give to consumers.
That is just one slice of a broken system. And the effort
to repair the system often runs into armies of lawyers and
lobbyists hired by those actors that currently profit from it.
So I am seeking to enlist the PBMs.
If they are blameless they should cooperate fully in
uncovering every aspect of this system, full transparency, and
endorsing full throatily a study into the entire system,
including PBMs. I hope for the cooperation of PBMs in the work
that we have ongoing. I will be submitting additional questions
for the record. We are at the end of the time we have for this
hearing.
And the hearing record will remain open for two weeks. Any
Senators that would like to submit questions for the record
should do so by May 19. We ask that your responses be returned
to the Committee as quickly as possible, and in no case later
than two weeks after you receive them. I apologize that we are
going to have to end this hearing.
There is a lot more to discuss here, and I hope that we
will continue this conversation. I appreciate all the
witnesses, Mr. Balto, Professor Feldman, Professor Garthwaite,
and Mr. Scott, thank you so much. This has been a very valuable
session and I hope to continue it. Thank you. This hearing is
concluded.
[Whereupon, at 11:50 a.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of FMI--the Food Industry Association
On behalf of the food industry and the many thousands of
supermarket pharmacies operated by our member companies, we at FMI--the
Food Industry Association thank Chairman Blumenthal, Ranking Member
Blackburn and the Senate Commerce Subcommittee on Consumer Protection,
Product Safety, and Data Security for holding this hearing to further
discussion around this important topic. FMI strongly agrees with the
Subcommittee that pharmacy benefit managers (PBMs)--from how they
operate to the lack of transparency surrounding their operations--have
contributed to higher drug prices for consumers. For years, PBMs have
leveraged their concentrated market power and lack of oversight to the
detriment of supermarket pharmacies and other providers, health plans
and consumers. With that in mind, FMI strongly supports the Federal
Trade Commission (FTC) moving forward with a 6(b) study of the PBM
industry, including the relationship between large PBMs and pharmacies
and the impact of PBM anticompetitive practices on both drug prices and
pharmacies, and we ask the Subcommittee to help ensure this is a major
priority for the FTC. We wish to highlight for the Subcommittee the
following information, which reflects not only FMI's insight, but also
the expertise of FMI's Pharmacy Operations Task Force.
As the food industry association, FMI works with and on behalf of
the entire industry--from retailers who sell to consumers, including
supermarket pharmacies, to producers who supply the food and other
products sold in grocery venues--to advance safer and more efficient
consumer supply chains for both food and pharmaceuticals. In total, FMI
member companies, which range from independent operators to the largest
national and international players, operate roughly 33,000 grocery
stores and 12,000 pharmacies, ultimately touching the lives of more
than 100 million U.S. households on a weekly basis and representing an
$800 billion industry with nearly 6 million employees. Throughout the
ongoing COVID-19 health emergency, our members have been and continue
to be a critical component of ensuring the availability of food,
pharmacy and health care services in communities across this Nation.
Moreover, supermarket pharmacies have played an outsized role in the
COVID-19 vaccination effort while also serving as a bridge between our
communities and other providers, offering patients immediate care that
is close and convenient to home. www.fmi.org
Background
PBMs were originally formed in the late 1960s, initially to assist
with processing claims. Insurance plans were offering prescription drug
benefits and PBMs filled out the paperwork, ensuring that
reimbursements were passed along to pharmacies. Over time, PBMs
portrayed themselves as cost-reducers who could form large patient
networks, negotiate discounts from drug companies and pharmacies, and
pass savings through to health plans and consumers. They claimed to be
simple intermediaries between the health care entities. However,
today's reality is very different as the PBM industry has grown and
consolidated rapidly in recent decades. For perspective, in 1989,
roughly 60 million prescription drug customers had their coverage
administered by PBMs. Currently, however, PBMs control nearly 80
percent of the market share for prescription drug access and around 180
million prescription drug customers. Additionally, these PBMs are also
vertically integrated with health insurance companies, rebate
aggregators and retail, specialty and mail-order pharmacies, giving
them unprecedented power.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Frier Levitt, LLC. All rights reserved.
This situation, coupled with a lack of transparency, enables PBMs
to enjoy multiple hidden revenue streams from other stakeholders
throughout the health care system. The hidden revenue streams include,
but are not limited to, the difference between the amount a pharmacy is
reimbursed and the amount the PBM bills to the health plan (spread
pricing), post-adjudication fees that are charged to pharmacies and
often referred to as Direct or Indirect Remuneration Fees (DIR fees),
and manufacturer rebates that pharmaceutical companies pay to have
their drugs placed on preferred formularies. The post-adjudication DIR
fees are described by the PBMs as ``performance-based pharmacy
incentive'' fees designed to incentivize pharmacies to perform better,
yet there is typically no transparency to the process and pharmacies
are not told what metrics are being used.
Importantly, this market concentration empowers the PBMs to offer
supermarket pharmacies of all sizes take-it-or-leave-it contracts. The
pharmacy must either accept the PBM's mandated contract terms
(including, among other things, allowing the PBM to set prices for
certain drugs unilaterally and then later impose retroactive DIR fees
based on an opaque methodology), or give up the ability to serve the
many customers whose health plans contract with the PBM; importantly,
this would include existing customers who have longstanding
relationships with their pharmacists. Furthermore, given PBMs also
operate their own pharmacies, FMI pharmacy members are effectively
forced to accept contractual terms from their direct competitors--a
clear conflict of interest.
PBMs Leverage Concentrated Market Power to Force Pharmacies to
Accept Below-Cost Pricing and Other Financially Oppressive
Practices
PBMs' profit model is dependent upon their ability to dictate
prices and impose upon pharmacies arbitrary and often below-cost
reimbursement terms for generic drugs through maximum allowable cost
(``MAC'') price lists. Unlike with on-patent drugs, where PBM
reimbursements typically are based on the actual prices paid by drug
wholesalers to manufacturers, PBM reimbursements to pharmacies for
generic drugs are based on PBMs' ``proprietary'' MAC lists, which bear
no necessary relation to pharmacies' acquisition costs. Additionally,
one of the many ways PBMs profit is by maximizing the difference
between what they pay pharmacies for a drug and the inflated amount
they charge a health care plan for that same transaction. To take just
one reported example, an Iowa county was billed by its PBM $198.22 for
a drug that the PBM reimbursed the dispensing pharmacy just $5.73--a
markup of more than 3,400 percent.\1\
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\1\ Robert Langreth et al., The Secret Drug Pricing System
Middlemen Use to Rake in Millions, Bloomberg, Sept. 11, 2018.
---------------------------------------------------------------------------
PBMs frequently assert that below-cost reimbursement is a problem
only for poorly run pharmacies, and that low PBM reimbursement rates
create an incentive for such poorly run pharmacies to improve their
purchasing practices. However, the PBM industry has resisted attempts
to force price transparency that would reveal the basis for these
claims. Furthermore, pharmacies of all sizes--not just ``poorly run''
ones--are suffering as a result of PBMs' below-cost MAC pricing. Even
FMI's largest members--Fortune 500 companies with efficiencies,
expertise in supply chain logistics, and economies of scale--struggle
to operate financially viable pharmacies.
Below-cost pricing is just one way that PBMs systematically
leverage their market power. They also impose on pharmacies unfair and
exorbitant retroactive DIR fees. PBMs charge these fees to pharmacies
without warning or market justification weeks or months after the
pharmacy dispenses a drug to a beneficiary. The Centers for Medicare &
Medicaid Services (``CMS'') tracks DIR fees and recently reported an
increase in such post-sale fees charged to pharmacies by PBMs of more
than 107,000 percent from 2010 to 2020.\2\ There is no competitive
market justification for such an exponential growth in these fees. As
with MAC pricing, PBMs tout these post-sale fees as disincentives to
``poor performance'' by pharmacies. In reality, however, they are just
another example of PBMs leveraging their market power to maximize their
profits. Charges for ``poor performance'' far exceed incentive payments
to pharmacies intended to reward ``high performance.'' As a result,
beneficiaries pay higher costs and drug prices become even less
transparent. Additionally, FMI members cite these retroactive fees as a
key reason for their pharmacies' financial struggles, forcing some to
close their pharmacies altogether.
---------------------------------------------------------------------------
\2\ Medicare Program; Contract Year 2023 Policy and Technical
Changes to the Medicare Advantage and Medicare Prescription Drug
Benefit Programs
---------------------------------------------------------------------------
Moreover, with DIR fee reform proposals being considered by
policymakers, PBMs have started including contingencies in their
pharmacy contracts that would allow them to impose upon pharmacies even
more aggressive rates and less favorable reimbursement terms if
retroactive DIR fees become prohibited. Case in point, the following
clause was recently included by a PBM in a take-it-or-leave-it contract
that was offered to an FMI member. Although it cleverly does not
reference ``DIR fees,'' that is clearly the focus:
Change in Law. In the event [guidance is released] that
prohibits or materially alters the economics of a Participating
Sponsor's Program (the ``Change in Law''), the parties agree to
promptly renegotiate the effected provisions of this Schedule,
to the extent feasible, in order to preserve the relative
economics of the Members, the Participating Sponsor, and
Provider to that which existed immediately prior to such Change
in Law.
Although PBMs claim the purpose of DIR fees is to encourage better
health outcomes by incentivizing pharmacies to perform better, this
clause clearly demonstrates that DIR fees are being used as a profit
stream.
PBM contracts often require the pharmacy to relinquish ownership to
all data and information sent from the pharmacy to the PBM. The data
and information transmitted represents essentially the entire record of
the dispensing event and claim(s) for coverage and reimbursement. This
not only gives PBMs access to a pharmacy's competitively sensitive
information, it also enables the PBMs to utilize the information to
manipulate reimbursements and fees while steering patients to PBM-
affiliated pharmacies.
In addition, PBMs typically include broad confidentiality language
in their contracts to prohibit pharmacists from discussing their own
drug costs, services, business practices, or the undefined term ``other
information'' contained in the contract or provider manuals with third
parties.
PBM Practices Are Driving Food Retailers Out of the Pharmacy Business
Unlike independent pharmacies, FMI members that operate supermarket
pharmacies are not dependent solely on their pharmacy operations for
survival. Therefore, PBM abuses may not threaten to force integrated
food retailers to close their doors. Instead, PBM practices make it
likely that food retailers will be forced to continue leaving the
pharmacy business--either by outsourcing their pharmacy operations to
the biggest players in the market, or worse, by abandoning pharmacy
operations altogether.
Neither of these scenarios is merely hypothetical as several FMI
members have already sold their pharmacy operations to PBM-operated
chains. The number of pharmacies in supermarkets decreased by more than
seven percent between 2007 and 2017\3\, while food and mass-market
retailers accounted for more than 45 percent of the pharmacy closures
during the year from July 2018 to July 2019.\4\ Supermarket pharmacy
closures, and abandoned expansions, thus contribute to the overall
trend of decreased access to pharmacies and ``pharmacy deserts.'' The
effect of such closures is particularly acute in some rural
communities, where closures are more prevalent and more detrimental to
a community's access to health care. The closure of pharmacies in
recent years has created ``pharmacy deserts'' in some underserved urban
communities as well.
---------------------------------------------------------------------------
\3\ Sharon Terlep & Jaewon Kang, The Pharmacist Is Out:
Supermarkets Close Pharmacy Counters, Wall St. J., Jan. 27, 2020.
\4\ Xil Consulting, Payers and PBMs Profit from Obscure Pharmacy
Fees, While Seniors See No Relief in Prescription Costs (Feb. 11, 2020)
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PBMs' Concentrated Market Power Harms Health Care Plans and
Beneficiaries
As employers that sponsor plans to provide health care coverage to
their employees, FMI members also see how PBM practices exploit
inherent conflicts of interest to the detriment of health care plans
and beneficiaries. For example, PBMs are often responsible for
developing health care plan formularies, or lists of drugs that a plan
will cover, and drug companies compete to have their drugs listed on
those formularies by offering compensation to PBMs in the form of
rebates. PBMs may be incentivized to obtain more expensive drugs, to
the extent their rebates correlate with the cost of the drugs they
include on formularies. FMI members' health plans typically have little
visibility into these rebates, making it difficult for them to monitor
whether their contracted PBMs are choosing drugs to reduce plan costs
or to increase the PBMs' own compensation.
Additionally, since PBMs own and have financial interests in
pharmacies, they frequently steer patients to those outlets as the sole
source for pharmaceuticals. By steering patients to their own
pharmacies, PBMs reduce competition and have additional incentive to
provide patients with more expensive drugs. As CMS has recognized,
``[m]arket competition is best achieved when a wide variety of
pharmacies are able to compete in the market for selective contracting
with plan sponsors and PBMs,'' not when PBMs can simply direct patients
to themselves.\5\
---------------------------------------------------------------------------
\5\ 83 Fed. Reg. 62,176 (Nov. 30, 2018)
---------------------------------------------------------------------------
Conclusion
PBMs have been allowed to operate without oversight, shrouded in
secrecy. Increased regulation and transparency are necessary to help
curb existing and prevent future abusive practices, while controlling
consumers' drug costs and preserving their access to supermarket
pharmacies. Moreover, the Supreme Court's unanimous decision in the
case of Rutledge v. Pharmaceutical Care Management Association--which
reaffirmed the states' rights to regulate PBMs--provides a strong vote
of confidence to achieve greater oversight of PBMs.\6\
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\6\ Brief for FMI as Amicus Curiae, p. 9-17, Leslie Rutledge v.
Pharmaceutical Care Management Association, available at https://
www.supremecourt.gov/DocketPDF/18/18-540/134582/20200302123959805_18-
540%20tsac%20FMI.pdf
---------------------------------------------------------------------------
Again, FMI thanks the Subcommittee for the opportunity to provide
input on this critically important topic. If you have questions about
these comments or would like additional information, please feel free
to contact me at [email protected] or (202) 452-8444.
Sincerely,
Peter Matz,
Director, Food and Health Policy.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Commissioner Noah Phillips,
Commissioner Christine Wilson,
Federal Trade Commission,
Washington, DC.
May 5, 2022
Dear FTC Commissioners Noah Phillips and Christine Wilson,
Pharmacy Benefit Managers (PBMs) work to jack up the price of life-
saving drugs like insulin, steal from community pharmacies until they
go bankrupt, and turn pharmacy care--one of the most important (and
often only) sources of health care for rural patients--into a living
nightmare.
FTC Commissioner Noah Phillips and Commissioner Christine Wilson,
please stop blocking efforts to open an investigation into PBMs.
Signed,
2,406 of your constituents, including:
Katelyn, C (20002)
Paula, B (99517)
Kimberly, D (17981)
Ron, P (97402)
James, F (97520)
Russell, N (53705)
Norm, S (92399)
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Frank, B (90630)
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______
Federal Trade Commission
Washington, DC, May 5, 2022
Hon. Maria Cantwell,
Chair,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.
Hon. Richard Blumenthal,
Chairman,
Subcommittee on Consumer Protection, Product Safety, and Data Security,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.
Hon. Roger Wicker,
Ranking Member,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.
Hon. Marsha Blackburn,
Ranking Member,
Subcommittee on Consumer Protection, Product Safety, and Data Security,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.
Dear Chair Cantwell, Ranking Member Wicker, Chairman Blumenthal, and
Ranking Member Blackburn:
I write to express my strong support for the Senate's ongoing work
and upcoming hearing on pharmacy benefit managers (PBMs) entitled,
``Ensuring Fairness and Transparency in the Market for Prescription
Drugs.'' \1\
---------------------------------------------------------------------------
\1\ Ensuring Fairness and Transparency in the Market for
Prescription Drugs: Hearing Before the Subcomm. on Consumer Protection,
Product Safety, and Data Security of the S. Comm. on Commerce, Sci.,
and Trans., 117th Cong. (May 5, 2022), https://www.commerce.senate.gov/
2022/5/ensuring-fairness-and-transparency-in-the-market-for-
prescription-drugs.
---------------------------------------------------------------------------
I believe that PBMs play a critical and under-examined role in
determining the price and availability of prescription drugs to
patients at the pharmacy counter and clinic, and I am concerned that
certain incentives and the surrounding lack of transparency means that
PBMs' interests may not always align with patients and others who pay
for prescription drugs. I am also concerned that PBMs' vertical
integration and dominant market position may allow them to under-
reimburse independent pharmacies and steer business to PBM-owned mail-
order and specialty pharmacies, which may threaten the long-term
viability of independent pharmacies in both urban and rural
communities.
Addressing dominant intermediaries such as PBMs has been a top
priority during my tenure at the FTC.\2\ In line with this priority,
FTC staff has been working since last year to use the FTC's 6(b)
authority to conduct an inquiry into PBMs, and I am hoping that the
Commission will vote to initiate a study as soon as possible.\3\ Given
the life-and-death stakes of this work, I believe the FTC has a moral
imperative to act swiftly.
---------------------------------------------------------------------------
\2\ Memorandum from FTC Chair Lina M. Khan to Commission Staff and
Commissioners Regarding Vision and Priorities for the FTC, at 3 (Sept.
22, 2021), https://www.ftc.gov/system/files/documents/
public_statements/1596664/agency_priorities_memo_from_chair_lina_m_khan
_9-22-21.pdf (``The second area I'd like us to prioritize addressing is
dominant intermediaries and extractive business models.'').
\3\ Remarks of Chair Lina M. Khan Regarding the 6(b) Study on
Pharmacy Benefit Managers (Feb. 17, 2022), https://www.ftc.gov/news-
events/news/speeches/remarks-chair-lina-m-khan-regarding-6b-study-
pharmacy-benefit-managers.
---------------------------------------------------------------------------
As part of this effort, the FTC has issued and recently extended a
Request for Information seeking public comments on PBM business
practices.\4\ Hundreds of unique comments have been submitted to date
on how PBMs are impacting patients, doctors, and pharmacists. The
comments touch on a range of issues, including Direct and Indirect
Remuneration (DIR) fees, inadequate pharmacy reimbursements,
unnecessary prior authorizations and step therapy requirements,
detrimental formulary exclusions, and the steering of patients to PBM-
owned pharmacies.\5\
---------------------------------------------------------------------------
\4\ Solicitation for Public Comments on the Impact of Prescription
Benefit Managers' Business Practices, FTC-2022-0015, https://
www.regulations.gov/docket/FTC-2022-0015/comments (last visited May 5,
2022).
\5\ Id.
---------------------------------------------------------------------------
While the FTC will continue its work in this important area, I also
welcome legislative action on PBMs, including efforts to ensure that
these intermediaries are serving the interests of American patients and
contributing to a fair and accountable prescription drug system.
Sincerely,
Lina M. Khan,
Chair,
Federal Trade Commission.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
Response to Written Questions Submitted by Hon. Marsha Blackburn to
Robin Feldman
Question 1. Can you elaborate on how PBMs' consolidation within the
pharmaceutical supply chain has been able to go unchecked?
Answer. Markets should be fair, open, and efficient. Unfortunately,
the PBM market lacks these essential qualities. The level of
concentration within the market is concerning, with just three PBMs
controlling 80 percent-85 percent of the market.\1\
---------------------------------------------------------------------------
\1\ Neeraj Sood, Dana P. Goldman, & Karen Van Nuys, Follow the
Money to Understand How Drug Profits Flow, STAT (Dec. 15, 2017),
https://www.statnews.com/2017/12/15/prescription-drug-profits-pbm/
(``The top three pharmacy benefit managers, which negotiate drug prices
on behalf of insurers and self-insured employers, dominate 85 percent
of their market.''). See also Neeraj Sood, Transcript of Understanding
Competition in Prescription Drug Markets: Entry & Supply Chain Dynamics
Workshop (Nov. 8, 2017), https://www.ftc.gov/system/files/documents/
videos/understanding-competition-prescription-drug-markets-panel-2/
ftc_understanding_competi
tion_in_prescription_drug_markets_-_transcript_segment_3.pdf.
---------------------------------------------------------------------------
Competition issues also arise regarding consolidation between PBMs
and other players in the pharmaceutical supply chain, such as PBMs
merging with pharmacy chains and specialty pharmacies. A discussion of
a variety of competition concerns when PBMs merge with pharmacies can
be found in my most recent book,\2\ but as one example, PBMs can drive
patients towards their own pharmacies. Specifically, some health plan
formularies restrict patients from purchasing a 90-day supply of
medicine from any pharmacy other than the one owned by a particular
PBM--and, of course, it's the PBM that helped write the formulary.
Activities such as these can dampen competition at other parts of the
pharmaceutical supply chain, as well as reducing patient choice and
harming access to medicine.
---------------------------------------------------------------------------
\2\ See Robin Feldman, Drugs, Money, & Secret Handshakes: The
Unstoppable Growth of Prescription Drug Prices 46-50 (Cambridge 2019).
---------------------------------------------------------------------------
The negative impact of concentration at many levels of the supply
chain for medicine has various causes, but governmental gaps and
failures have certainly allowed concentration to go unchecked. These
include: 1) the need for regulatory enforcers to take a ``second look''
post-merger to determine if their competitive predictions proved
accurate, take appropriate measures, if not, and to adjust future
merger and acquisition protocols accordingly; 2) the failure of
insurance regulators and legislators to protest that PBMs have breached
their duty to act in the best interest of health plans and, by
extension, plan enrollees; and 3) the failure of insurance plans,
regulators, and courts to push back against PBMs' baseless reliance on
trade secret law to shield their pricing data from public and
regulatory scrutiny.\3\
---------------------------------------------------------------------------
\3\ See Robin Feldman & Charles Tait Graves, Naked Price &
Pharmaceutical Trade Secret Overreach, 22 Yale J.L. & Tech. 61 (2020)
(examining PBM efforts to assert that pricing arrangements should be
considered trade secrets).
Is the consolidation in the PBM market ultimately working
to lower drug prices for patients?
Answer. A heavily consolidated market is rarely in the interests of
consumers. In the PBM market, the Big Three tend to offer the same
terms, preventing the customers of those three from having meaningful
options and avoiding the challenge of true competition. None of this
has been helpful for lowering drug prices for patients.
What would a competitive PBM market do for the consumer
at the counter?
Answer. A PBM's job is to negotiate better prices for the benefit
of patients. However, the perverse incentives operating in the PBM
market have helped to inflate profits for PBMs instead of appropriately
driving down prices for consumers. Although there are many contributors
to rising prices, true competition in the PBM market could help drive
down the prices that consumers pay at the pharmacy counter, as well as
the dollars they pay for insurance plan premiums.
What are some ways we can spur innovation within the PBM
market?
Answer. As noted above, markets should be fair, open, and
efficient. To spur competition and innovation in the PBM market, I
would recommend four key approaches related to Fiduciary Duty,
Transparency, and Concentration:
1) First, clarify that PBMs have a fiduciary duty, certainly to the
health plan if not the patients, themselves.
2) Second, clarify that price and price terms in this context are
not trade secrets.
3) Third, ensure that competition agencies have the proper tools to
reduce concentration in the PBM and related industries. We
won't see price improvements until we improve competition.
4) Fourth, encourage regulators to adopt a robust ``Second-Look''
policy. Rather than relying on crystal-ball predictions of what
will happen after a merger or acquisition, competition agencies
should establish a system of post-merger review to ensure past
decisions had the intended results and to improve future
evaluations.
Question 2. What is your view of copay accumulators that prevent
patient support from counting toward a patient's deductible or maximum
out-of-pocket costs. Do you know where these revenues are going?
Sometimes, a gift is a Trojan horse. It seems like a wonderful
offering--even a blessing--but, beware of what lies within. That can be
the case with patient assistance programs. And, as I will describe
below, the patient is always the one who loses out.
For patients who are struggling to afford tremendously expensive
medication, providing a coupon seems heaven-sent. Even more so if the
coupon pays for a life-saving drug. But the costs to the patient, not
to mention the health care system, are carefully camouflaged.
With a coupon, or other form of patient assistance program, the
brand-name company agrees to pay all, or a significant portion, of
the patient's out-of-pocket costs. Thus, the patient sees tremendous
relief in the form of out-of-pocket costs. But it can be an illusion.
The health insurance plan pays for the more expensive, brand-name drug,
rather than a less expensive competitor. The extra amount that the plan
pays for the drug is then reflected in the cost of the annual premium
patients pay. If this happens enough, premiums can rise for everyone in
the plan, including the specific patient.
In 2020, a U.S. House Oversight Committee report provided an inside
view of how pharma companies themselves think about patient assistance
programs. The report examined reams of documents from Novartis,
relating to its blockbuster oncology drug Gleevec. The company's
documents showed that co-pay assistance programs were a crucial piece
of its strategy to encourage patients to stay with the brand-name drug
after generics entered the market. The company even calculated that
beefing up the strategy 6 months before generics entered the market
would be the timing that provided the greatest return on investment by
keeping the maximum number of patients attached to the drug before the
generics made it to market.
The return on the company's investment was impressive. Company
documents showed that the company's patient assistance on the drug
provided a return on investment of $8.90 for every dollar spent on the
program. When a company is making nine additional dollars for every
dollar it hands out with a coupon, the company is not acting out of the
goodness of its heart.
In response, health plans have created policies that prevent such
programs from counting towards a patient's deductible or out-of-pocket
maximum. Their theory is that the patient did not pay that amount out-
of-pocket; the pharma company did. These health plan limitations are
being called co-pay accumulators or co-pay maximizers. They are
intended to save money for the plan which, in the best of
circumstances, would flow through to keep the premiums lower for
patients. I have not studied, however, whether that actually happens.
Nor am I aware of academic studies concluding that these savings do,
indeed, flow through to create lower premiums for patients.
In the process of handing out patient assistance, of course, brand
companies purchase brand loyalty.\4\ The patient--who is now wedded to
an expensive brand-name drug, rather than a generic, biosimilar, or
less expensive alternative--may be reluctant to change. When the
maximum value of the company's coupon is reached, the patient is socked
with the extremely high out-of-pocket cost of the drug. That is, yet
again, another hidden price that patients must pay.
---------------------------------------------------------------------------
\4\ Studies show that these patient assistance programs increase
brand-name drug sales by 60 percent, mostly by reducing sales to
generic competitors. See Leemore Dafny, Christopher Ody & Matt Schmitt,
When Discounts Raise Costs: The Effect of Copay Coupons on Generic
Utilization, 9 Am. Econ. Jl.: Econ. Policy 91, 93 (2017).
---------------------------------------------------------------------------
As always, the patient is caught in the middle of the struggle, and
no matter what, the patient seems to lose out.
Question 3. I am concerned that copay accumulators may negatively
impact prescription drug access for vulnerable patients. How can we
best address this issue to help patients and caregivers?
Answer. As noted in my response to the prior question, the patient
is always the one who loses in these struggles. In particular, brand
companies can begin handing out copay coupons before the generic or
biosimilar has arrived on the market--an effective method for ensuring
that patients have continued loyalty when the generic or biosimilar
does arrive.\5\
---------------------------------------------------------------------------
\5\ See U.S. House of Representatives, Staff Report: Committee on
Oversight and Reform, Drug Pricing Investigation: Novartis--Gleevec
Selected Investigation Documents (2020) (finding that Novartis made
significant changes to its copay assistance program for the blockbuster
oncology drug Gleevec six months before generics entered the market,
offering patients the allure of steep reductions in out-of-pocket
payments, a strategy that convinced patients to stick with Gleevec once
generics were on the market).
---------------------------------------------------------------------------
If the health plan and the brand company truly wanted to help a
vulnerable patient, the drug could be provided to the patient's health
plan at a severely reduced cost with the agreement that the particular
patient would enjoy a low out-of-pocket cost. Congress could help by
clearing any regulatory hurdles in the way. Moreover, programs such as
these should be designed so that they provide a long-term benefit for a
vulnerable patient, rather than as a limited-time offering of free
samples that reel in a patient, who will then be stuck paying large
sums for a long time.
And, of course, the best help for vulnerable patients--as well as
access to medicine for all patients--would be to inject transparency
and competition into the PBM system. I am heartened to see the
Subcommittee's work on these important issues.
______
Response to Written Question Submitted by Hon. Richard Blumenthal to
Juan Carlos ``JC'' Scott
Question. As you know, the dynamics of the 340B program are always
complicated. There has been a lot going on over the last couple of
years with respect to contract pharmacy, and I am hearing often from
South Dakotans with concerns about actions taken by both PBMs and
manufacturers. At the end of the day, these actions are harmful to the
program that is meant to help our hospitals support their communities.
Resolving these issues will take some time, so I just ask for your
commitment to be willing to be part of the conversation.
Answer. Thank you for taking the time to share your concerns about
the 340B program. I appreciate the opportunity to respond, and I am
always willing to contribute to the discussion. While PCMA is neutral
on the 340B program, we are aligned fully with the program's goal of
helping safety-net entities provide better care to vulnerable
populations. Our members process claims in support of the program, but
PBMs cannot always determine when a claim is related to a 340B
transaction, which causes complications for PBMs, pharmacies,
manufacturers, and individuals paying for health insurance. To maintain
eligibility to sell drugs to state Medicaid programs, manufacturers
must agree to participate in 340B. While Medicaid eligibility and 340B
participation are linked, the programs are separate, and Federal law
prohibits duplicate discounts--mandated Medicaid rebates do not apply
to drugs obtained at 340B pricing. To support efforts to avoid
duplicate discounts for 340B pharmaceuticals, claims modifiers, like
those used in the Medicaid program, are needed to better understand
which drugs are 340B and which are not. PCMA welcomes the opportunity
to continue working on this and other issues in the 340B program to
ensure fairness and transparency in the prescription drug marketplace.
______
Response to Written Questions Submitted by Hon. Marsha Blackburn to
Juan Carlos ``JC'' Scott
Question. (Blackburn) I would like to know what you would see a
competitive marketplace be. We know there have been consolidations. Mr.
Scott says there are 70 PBMs, but we know we have very few players in
this area. So, in a perfect world, how would you structure a
competitive PBM marketplace that would, indeed, yield our Medicare
enrollees a lower cost? (Blumenthal) I would invite each panelist to
respond to that question in writing. It is a big question and at the
heart of what we are doing here today.
Answer. To foster a more competitive market for prescription drugs,
Congress should focus on increasing competition to promote consumer
accessibility and affordability and enhance the value of dollars spent
on health care. Last year, PCMA announced a three-part policy platform
focused on lowering prescription drug costs by updating Medicare Part
D, increasing competition, and moving consumers toward a more value-
driven health care system.\1\ Our policy platform outlines concrete
policy steps to make prescription drugs more affordable for all
consumers, and the PBM industry's vision for a health care system that
delivers more value to all Americans. If fully implemented, PCMA's
policy platform would reduce prescription drug costs, make
pharmaceutical care more accessible to all Americans, and save
taxpayers $257.5 billion to $398.7 billion over ten years.\2\
---------------------------------------------------------------------------
\1\ PCMA. The Critical Path Forward: Rx Policies to Reduce Patient
Costs, Improve Access. June 2021. Available at https://www.pcmanet.org/
pbms-solutions-to-lower-patient-rx-costs-improve-access/.
\2\ PCMA. PCMA's The Critical Path Forward Will Save Taxpayers
$255.5 Billion Over 10 Years. July 2021. Available at https://
www.pcmanet.org/wp-content/uploads/2021/07/pcma_criticalpathforward_7-
6-21.pdf.
---------------------------------------------------------------------------
The first set of policies propose modernizing Medicare Part D. PCMA
suggests specific policy options to make Medicare Part D more
affordable, including capping out-of-pocket costs, eliminating
misaligned incentives that keep drug prices artificially high, building
on Part D's record of choice and competition, allowing plan sponsors
access to additional tools for managing costs, repealing the rebate
rule to protect seniors by preventing significant premium increases,
and preventing taxpayers from paying substantially more for Part D.
Additionally, we support enhancing manufacturer liability throughout
all phases of the benefit to ensure that manufacturers bear a fair
share of the responsibility to provide American seniors with high-
quality coverage.
The second set of policies would prevent patent abuses like patent
thickets, evergreening, product hopping, and misuse of citizen
petitions that drug manufacturers use to prevent fair competition from
generic and biosimilar drugs. As we work together to bring greater
savings to Medicare beneficiaries, we must also focus on real solutions
to lower drug costs for everyone. Consequently, PCMA supports policies
aimed at reducing market distortions, like those aimed at limiting
patent and exclusivity abuses that stifle competition and keep drug
prices high. We also need solutions to ensure drugs compete fairly,
including the production of more cost-effective generics and
biosimilars.
The third and final set of policies would foster broader adoption
of value-based purchasing and the acceleration of consumer-focused
pharmacy care. More health care spending does not automatically result
in better outcomes. To promote the use of high-value treatments and
reduce the use of those which do not provide the necessary or expected
benefit to patients, PCMA proposes policies to accelerate value-based
and consumer-centered care. We also support bringing the same value-
driven tools used by employers to Medicare and Medicaid and promote the
production and use of rigorous evidence of drug performance in the real
world. Improving health outcomes requires the treatment of patients
based on their individual needs. Therefore, PCMA supports driving a
concerted effort to reduce health care disparities and inequities.
Value-based care arrangements for consumers would be made possible by
granting Part D drug plans access to Medicare Parts A and B claims
data, establishing safe harbors for value-based contracting, and
allowing Part D and state Medicaid plans greater flexibility to adopt
private-sector formulary management techniques.
Question. I have been hearing about new PBM programs called copay
accumulators that impact certain patients in high-deductible health
plans. These programs prevent patient support from counting toward a
patient's deductible or maximum out-of-pocket costs. As a result,
patients face sudden and often unexpected higher out-of-pocket costs
when their patient assistance runs out, and they discover their
deductible has not been met. Can you please explain to me how these
programs impact patients?
Answer. Copay accumulator programs are health-plan programs
designed to prevent drug manufacturers from using copay coupons to
steer or coerce employers, unions, and government programs to pay for
expensive, unnecessary brand medications. Under Federal law, the use of
copay coupons to obtain healthcare services under Medicare and Medicaid
is prohibited as marketing tools to induce a consumer to purchase a
particular brand they might not otherwise purchase. Similarly, copay
coupons for prescription drugs are an inducement to obtain a particular
drug even when a lower-cost therapeutic alternative is available.
Therefore, legislation seeking to stop payers from managing their costs
by prohibiting the use of accumulator programs would eliminate a
crucial tool in their fight against rising drug costs. If drug
companies are concerned about patients accessing medications, they
should simply lower their prices; this is the simplest, most effective
way to reduce patient costs for drugs.
[all]