WASHINGTON — Today, we are witnessing a strategic alliance between pharmaceutical manufacturers and independent pharmacies—groups that typically have different interests—against PBMs.
Pharmaceutical companies are motivated to weaken PBM influence because they reduce pharmaceutical company pricing power and profit margins. Meanwhile, independent pharmacies have their own grievances with PBMs, in part because they set limits on prices and because they increase competition in drug sales through mail-order services.
Success for pharmaceutical companies and independent pharmacies in this policy conflict depends, in part, on the mystery of the role of PBMs in containing drug costs, though perhaps more so on the powerful pharmaceutical and pharmacy lobbies that exercise considerable influence over the political system by crafting narratives based largely on anecdotes and emotion than on empirical evidence. To provide some much-needed clarity to this debate, in a new economic analysis released today entitled A War on Low Prescription Prices: Regulating PBMs and the Effect on Drug Prices, the Phoenix Center’s economic staff describe the PBM industry and explain its role in reducing drug costs for Americans. The Phoenix Center’s economists also demonstrate the advantage of PBMs over direct negotiations by the plan sponsors (who employ PBMs) with pharmaceutical manufacturers.
The Phoenix Center’s economists highlight a simple but powerful economic principle: entities do not pay for services that increase their costs. Insurance companies, employers, and government programs voluntarily hire PBMs specifically to reduce pharmaceutical expenses—a fact that fundamentally contradicts claims that PBMs raise drug prices. Their analysis explains that PBMs achieve price reductions by negotiating with pharmaceutical manufacturers from positions of greater leverage than individual insurers could achieve alone. By representing multiple health plans, PBMs secure substantial price concessions, particularly for medications with limited therapeutic competition.
Government studies confirm these benefits: The Government Accountability Office has found that PBMs reduce drug costs by 17% to 47%. When West Virginia eliminated PBMs from their Medicaid programs, an audit revealed that costs increased rather than decreased.
“If PBMs raised prices for insurers and other plan sponsors that employ them, then no entity would seek PBM services as high drug costs reduce their bottom line. It is absurd to argue otherwise,” says study co-author Phoenix Center Chief Economist Dr. George Ford.
The study also challenges the claim that PBMs have high profit margins, noting that PBMs’ average operating margin of 4.4% is dramatically lower than pharmaceutical manufacturers’ margins of 20-26%, contradicting claims of excessive PBM profits.
The Phoenix Center’s analysis concludes that regulatory proposals aimed at restricting PBM practices would undermine their effectiveness at cost containment, ultimately resulting in higher prescription drug prices for consumers, increased profits for pharmaceutical manufacturers, and reduced market efficiency.
“Policymakers should recognize that regulating PBMs in ways that constrain their ability to negotiate effectively will inevitably lead to higher prescription drug prices,” the study warns. Higher prices harm consumers to the benefit of pharmaceutical manufacturers. The authors explain that the effort to reduce the effectiveness of PBMs at lowering drug costs is “a classic example of how regulatory battles often involve complex, multi-sided conflicts where each stakeholder can claim to be advocating for patients while simultaneously protecting their economic interests within the highly regulated healthcare marketplace.”
A full copy of Phoenix Center Policy Bulletin No. 74, A War on Low Prescription Prices: Regulating PBMs and the Effect on Drug Prices, may be downloaded free from the Phoenix Center’s web page by clicking here.
