By: Abe R. Emile

Over the last 19 months attorneys general in Washington, Minnesota, and New Mexico have issued civil investigations to consider anti-competitive business dealings from insulin manufacturers. The reason? Hidden players in the pharmaceutical supply chain, called Pharmacy Benefit Managers (PBMs) that may be abusing their relationship with pharmacies to drive up the price of diabetes drugs.

The repeated increases for decades-old drugs like Novolog, Novolin, and Levemir demonstrate the ongoing price gouging of pharmaceutical products in America. While consumers with Type 1 diabetes like Hunter Sego, a college football player, pay upwards of $487 for each vial of insulin every month, various elements in the pharma supply chain (manufacturers, PBMs and insurers, among others) are pointing the finger at one another. The public typically knows about drug manufacturers, largely due to ubiquitous direct-to-consumer advertisements and the past year’s political debate about the Affordable Care Act. Very few people know about the financial middle-man between drug manufacturers and insurers: pharmacy benefit managers. If you don’t know them, now would be a good time to learn.  

PBMs play a crucial role in establishing the net price of prescription drugs paid by consumers. A typical pharmacy value chain consists of a goods continuum (prescription drugs and services) capital, and information. PBMs are funded by payments through consumer health plans and beneficiary co-payments, with an eye towards managing consumer health plan drug benefits. PBMs send requests for proposal to manufacturers on annual or short-term basis that are, in reality, secret bids for drug prices – the pharma company usually agrees to complete non-disclosure. Manufacturers submit several forms of payments and rebates to PBMs for meeting contractual terms such as placements of drugs onto insurers’ drug benefit packages and access to large markets of consumers. In the recent civil investigations, allegations of PBMs selling access to their formularies by demanding that drug manufacturers offer not the lowest price, but the highest rebate is speculated as being one of the cost drivers in rising insulin list prices.

PBMs were not always meant to be so secretive, or self-serving. They were initially designed to eliminate overhead costs by managing exhaustive claims of drug coverage offered by insurers in the 1960s. They often touted their negotiating power in the 1990s to combat the escalating consumer drug prices that occurred throughout the 1970s and 1980s. Today, PBMs are highly concentrated, with just three multi-billion dollar firms – Express Scripts, CVS Caremark and Citizens – controlling 80% of the market in the U.S. The PBM industry argues their practices spur competition among pharmaceutical firms to produce the lowest prices and save consumers money. Critics, however, argue that due to an asymmetry of information, lack of price transparency, and discounts negotiated to their own advantage, PBMs are not serving the best interests of beneficiaries (that is, people like Hunter Sego, you and me). I agree with the critics. Luckily, state prosecutors and Congress are beginning to take notice, at least those not bought out by the pharmaceutical industry. Congress currently has a law known as C-Thru Act that fights to have PBM’s contracts open to the public to show if their negotiations on behalf of the health insurances/consumers are leading to cost savings. It would also disclose just how much money PBM’s are collecting in formulary payments and market share performance incentive payments and rebates.  Lobbying our local congressional representatives that are not being bought out for inertness on affordable drugs is crucial.

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