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Pharmacy Benefit Managers Are Not the Cause of High Prescription Drug Prices

June 6, 2018 in Economics

By Ike Brannon

Ike Brannon

The press has found no shortage of villains for the high cost of
prescription drugs today. While the pharmaceutical companies
typically receive the lion’s share of the blame, of late the
Pharmacy Benefit Managers have come under fire for their supposed
role in high drug prices.

Pharmacy Benefit Managers work on behalf of health insurance
companies to help them negotiate prices with the pharmaceutical
companies, and the price breaks they obtain typically come in the
form of rebates paid to the companies.

Some aver that the rebates solely benefit the health insurance
companies, that they do nothing to reduce drug prices, and that
they should be abolished. Even Scott Gottlieb, the FDA
commissioner, has suggested that Congress consider legislation that
would limit rebates in some way.

However, blaming the system of rebates for high drug prices
completely misdiagnoses the prescription drug market, and
eliminating them would accomplish nothing. In a recent
I wrote with Tony Lo Sasso of the University of Illinois
at Chicago, we argue that tying the hands of PBMs could very well
raise drug prices.

Pharmacy Benefit Managers arose simply because there was a
lacuna in the healthcare market: put simply, nothing constrained
the price of prescription drugs; Doctors would prescribe the drugs
they thought necessary, pharmaceutical companies would charge
whatever they wishes for drugs still on patent, and the insurance
companies would foot the bill without any real recourse other than
to raise their prices the following year.

Pharmacy Benefit Managers do two principal things: First, they
negotiate prices for on-patent drugs. The high prices reported for
new drugs are appropriately shocking, but those are not what
insurance companies pay: they frequently negotiate a steep
discount, which in turn allows insurance companies to keep premiums

The second thing PBMs do is encourage competition in the drug
market. They steer doctors to prescribe generic equivalents or
other substitutes when available. For instance, while many
activists decry the production of “me too” drugs that
merely seek to duplicate existing drugs, rather than spending
resources developing new drugs for other illnesses, such drugs
allow PBMs to put pressure on the pharmaceutical company that makes
the original drug to lower its prices.

The recent plethora of drugs that cure Hepatitis C bear this
out: When Gilead put out Sovaldi at a list price of $84,000, the
brunt of the media attention was not on the amazing accomplishment
of curing an illness that had heretofore been incurable absent a
liver transplant, but on the enormous cost. However, that list
price was not anywhere near what insurance companies paid,
precisely because of PBMs, and as other companies introduced their
own Hepatitis C drugs—anxious to …read more

Source: OP-EDS

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