While the media pores over a Trump budget proposal that died before even getting to Congress, another administration document might deserve more scrutiny. Last Friday, the Council of Economic Advisers (CEA) released its blueprint for making prescription drugs more affordable. And one of the biggest proposals would break up the pharmacy benefit manager (PBM) industry, a small group of middlemen that administers drug benefits in health plans, providing dubious assistance on lowering prices while extracting outsized profits.
It may strike you as surprising that an administration so devoted to doing the bidding of big business would call for one of the largest and most profitable industries in America to be dismantled. But in context it makes a lot of sense. This report on lowering drug prices scrupulously avoids nearly everything that would lower the pharmaceutical industry’s profits. And drug companies have been pointing to pharmacy benefit managers as a source of high prices, to deflect blame away from themselves.
That doesn’t mean the drug companies are wrong, however. PBMs do contribute to high drug prices in numerous ways, skimming as much as 1 in 5 dollars out of every prescription. That’s precisely why the CEA report presents such an opportunity. Sadly, this is often how policy advances in Washington: when special interests are pitted against one another. And with turnover at the key federal agency that oversees the PBM industry, this is one case where the stars could align for an improbable weakening of corporate power under Trump.
For someone who has often lamented that drug companies are “getting away with murder,” Trump’s actual policies on stopping prescription drug price gouging align with the pharmaceutical industry. Almost nothing has been done and even less has been proposed until very recently. And even those proposals often hold harmless or even benefit the industry.
For example, the budget blueprint calls for patients to partially share in rebates that drug companies offer to health plans. But the pharmaceutical industry supports this, because it would lower the heat over high prices while not asking them to give up anything, as it merely redistributes the rebates they’ve already agreed to. The bipartisan budget deal drew notoriety for forcing drug companies to move one year quicker to close the “doughnut hole” in Medicare Part D plans, protecting seniors from price spikes. But the industry happily traded that for blocking a harsher measure that would have stopped brand-name manufacturers from delaying generic drugs from reaching the market.
Similarly, the CEA report begins not by stressing that U.S. drug prices are too high, but that foreign prices are too low for the innovative treatments they receive, repeatedly calling other countries “free riders.” It apologizes for six-figure expenditures on treatments by emphasizing how medications that extend lifespans reduce the cost of overall health. Nearly everyone in the drug supply chain comes in for criticism except the companies that make the drugs.
Even when the CEA identifies the main problem—government-granted monopoly patents which allow drug companies to charge whatever they want, often exclusively, for their products—its solutions are mindful of the industry’s concerns. For example, the report endorses speeding generic drugs through the Food and Drug Administration, with an expedited review when the treatment has a monopoly provider. However, it counsels phasing these reforms in slowly, “so that current drug manufacturers of single-source drugs would retain the value of their efforts to be the first in a given therapeutic space.”
When it comes to PBMs, however, the CEA doesn’t hold back. Like my feature on PBMs for the Prospect last year, it points out that three companies (Express Scripts, CVS Caremark, and Optum Rx) control 85 percent of the market, enabling significant market power. It notes that the drug supply chain is completely opaque, with only the PBM truly knowing the size of the rebates they negotiate with drug companies, and where the money goes. It explains how the system pushes list prices higher, because the higher the price, the more money for rebates from which PBMs can skim. The CEA relies heavily on a June 2017 report from USC that is unsparing about the industry, noting that PBMs pull in as profit over 20 percent of total spending on prescription drugs.
Ultimately, CEA writes, “Policies to decrease concentration in the PBM market and other segments of the supply chain (i.e., wholesalers and pharmacies) can increase competition and further reduce the price of drugs paid by consumers.” That’s effectively a call to break up the industry.
The skeptic would say breaking up PBMs would reduce their leverage to negotiate with powerful drug companies, and could perversely raise prices. But another way of reading the CEA’s argument is that no real value exists among PBMs, and their function could easily be folded into insurance companies or government plans, with the middleman profits accruing to consumers instead of executives and shareholders. Plus, the references to transparency suggest that just making clear to health plans and pharmacies how much the PBM is negotiating on rebates and how much they actually receive would lead to positive change. Competition from transparent PBMs that transfer all rebates to health plans for a flat negotiation fee may benefit consumers, even if the rebates were less robust.
Busting up PBMs wouldn’t solve every problem with prescription drugs. Having the government negotiate directly through Medicare to get bulk discounts, or price caps on what drug companies can charge, are other possibilities. But with a powerful actor like Big Pharma in support, the PBM breakup might actually be achievable in the near term. And once that’s out of the way, it gives drugmakers one less excuse to address their own price-gouging activities.
The key to all of this lies with the agency empowered to carry out any breakup of the PBM market. That would be the Federal Trade Commission (FTC), which has done far too little in this area historically, allowing merger after merger that led the industry to oligopoly. By properly applying the antitrust laws—including in a retrospective analysis that would look critically at past mergers and the vertical relationships between PBMs and pharmacies like with CVS Caremark—the FTC could accomplish the CEA’s wishes without going through Congress.
It so happens that the FTC is undergoing a total makeover, with all five commissioners changing. Four of the nominees—three Republicans and one Democrat—face confirmation hearings in the Senate Commerce Committee on Wednesday. This should be the very first question they all have to answer: Do you support the analysis of the administration that nominated you for this position that the PBM industry requires significantly more competition and transparency to fulfill its goals of lowering drug prices?
The Trump administration backing for breaking up PBMs puts members of both parties in position to demand change at the FTC. Senators could even hold up the confirmation of these nominees without commitments to deal with PBMs. Both the chair and the ranking member of the antitrust subcommittee, Mike Lee and Amy Klobuchar, sit on the Commerce Committee and can ask questions of these nominees Wednesday. Will they speak up on one of the biggest—and most fixable—antitrust issues in America?