By David Wainer
Tucked into the bipartisan budget deal that President-elect Donald Trump's allies torpedoed earlier this month was a rare and significant attempt to reform the mechanics of America's drug-pricing system.
Americans are broadly aware of how big pharma profits from high drug prices, but few understand the market distortions introduced by pharmacy benefit management $(PBM)$ companies that negotiate prices on behalf of employers, insurers and government programs.
The failed budget bill included provisions that would have addressed some of the misaligned incentives within the PBM business model. But health conglomerates Cigna, CVS Health and UnitedHealth Group, which own the three largest PBMs, caught a break when Elon Musk, Vivek Ramaswamy and other Trump allies began agitating against the bill. This set off a frantic effort in Washington to pass a stripped-down version of the legislation that no longer contained many extraneous measures, including the PBM changes.
While the PBM provisions in the 1,547-page stopgap bill are now dead, they are far from buried. The bipartisan agreement highlighted a growing consensus that PBM business models are flawed, with both Republicans and Democrats -- and even Trump himself -- signaling intent to take action. In recent weeks, Trump has twice criticized PBMs, declaring in a press conference his intention to " knock out the middleman."
At the core of the failed reform effort was a push for greater transparency and alignment in PBM operations. Among the proposed measures were requirements that PBMs disclose more data and decouple their compensation in Medicare from the rebates they negotiate with manufacturers, addressing accusations from states and the Federal Trade Commission that PBMs give priority to high rebates, which inflate drug prices.
In today's model, PBMs often take a cut of rebates as well as fees for negotiating down prices, motivating them at times to give priority to drugs with higher list prices. The bill also would have forced PBMs to pass through 100% of the rebates they collect from drug companies to employer health plans. Critics, including entrepreneur Mark Cuban, have argued that employers and government agencies are complicit in this high-rebate system, enabling a structure that often saddles sick patients with exorbitant out-of-pocket costs.
Meanwhile, an unlikely alliance between Senators Elizabeth Warren (D., Mass.) and Josh Hawley (R., Mo.) resulted in a separate bipartisan bill that would force PBMs to divest their pharmacy businesses, a measure designed to address conflicts of interest. "PBMs now seem to have a 'kick me' sign on their backs," wrote Michael Cherny, an analyst at Leerink Partners.
PBMs, once obscure entities in the drug supply chain, are increasingly the focal point of policymakers tackling America's ballooning healthcare costs. While public ire still primarily targets big pharma -- underscored by the rising popularity of pharma critic Robert F. Kennedy Jr. -- policy discussions have shifted toward PBMs, especially after the Inflation Reduction Act (IRA) began to squeeze pharmaceutical companies' margins on key drugs. Notably, Trump singled out PBMs following a high-profile dinner with Eli Lilly Chief Executive David Ricks, Pfizer CEO Albert Bourla and RFK Jr.
Before the spending bill was scrapped, Lance Wilkes, an analyst at Bernstein, predicted that the PBM provisions would either pass by year's end or be revisited in a reconciliation package in 2025.
The proposed reforms would have had only a modest impact on PBM earnings. Over the past decade, PBMs have shifted away from rebates as a primary revenue source. While rebates accounted for 46% of their gross profits just over a decade ago, that figure has now dropped to just 13%, according to Nephron Research. Instead, PBMs generate more revenue through administrative fees, many of which are funneled through group purchasing organizations, or GPOs, based in countries such as Switzerland, making regulatory oversight more challenging. Charles Rhyee, an analyst at TD Cowen, estimated that the year-end bill would have reduced profits for the "big three" PBMs by only 3.5%.
Even incremental reforms, however, could pave the way for more transformative changes down the line. For instance, Trump might revive efforts to eliminate the rebate system entirely. During his first term he sought to get rid of the rebate through a rule that would have scrapped Medicare prescription drug rebates. The Biden administration wound up not implementing it. Additionally, increased transparency in PBM operations could reduce the system's opacity, potentially fostering competition from smaller PBMs.
The U.S. remains the only wealthy nation without strict drug price regulation, which explains the unique role PBMs play in its healthcare ecosystem. In the absence of a centralized authority to control pharmaceutical prices, the economics underpinning the PBM model are unlikely to disappear. And despite their flaws, PBMs' profit margins are relatively slim compared with those of pharmaceutical companies, which continue to capture the lion's share of drug profits.
Still, it is clear that Washington has set its sights on PBMs, and 2025 could very well be the year they begin to face a reckoning.
Write to David Wainer at david.wainer@wsj.com
(END) Dow Jones Newswires
December 30, 2024 05:30 ET (10:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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