Are pharmacy benefit managers driving up drug prices? (Update)

0:01NPR.

0:11The CEO of Novo Nordisk, a Danish company that makes the weight loss drugs Ozempic and Wegovy, was on Capitol Hill yesterday. A Senate committee questioned Lars Frogaard Jorgensen on why those drugs cost close to$1 ,000 for a month's supply in the U.S. That's more than five times higher than the next highest international list price in Japan. Jorgensen blamed the complicated health insurance system in the U.S., which includes pharmacy benefit managers, a.k.a. PBMs. We have to negotiate against PBMs and their insurance companies not taking much risk. and yet benefiting from it for the list price.

0:50I think that's absurd. This follows the US Federal Trade Commission filing a lawsuit against three of the country's biggest PBMs just last week, CVS Caremark, Express Scripts and OptumRx. The FTC claims these companies engaged in unfair practices that artificially inflated insulin prices. So what the heck are PBMs and why do they have so much power in the medicinal marketplace? This is The Indicator from Planet Money. I'm Darian Woods. And I'm Adrian Ma. To answer that question, we're going to share with you an episode we originally ran two years ago. And as you'll hear, the power of PBMs involves secret deals and double agents.

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2:14This means you could be earning daily cash on just about anything, like a slice of pizza or a latte from the corner coffee shop. Apply for Apple Card in the Wallet app to see your credit limit offer in minutes. Subject to credit approval, Apple Card issued by Goldman Sachs Bank USA, Salt Lake City branch. Terms and more at applecard.com. So pharmacy benefit managers, what do they do? Well, in the prescription drug pipeline, you already know about the pharmaceutical companies, which make the drugs, and you know about health insurance companies, which help people pay for the drugs. Now, sitting in between those two are the pharmacy benefit managers, and their whole part of this pharmaceutical circle of life is they negotiate with the drug companies on behalf of the health insurance companies.

3:00In other words, there is a middleman or a middle player, which that's generally not a compliment, right? But Alex Chan says there's nothing inherently evil about middle players. I think it's incorrect to think about them as just like supply chain toll collectors, right, that are performing no legitimate economic function. Alex is a health economist, and he also used to work for a company called Optum, which runs one of the biggest PBM companies. He says the existence of intermediaries or middlemen, you know, whatever you want to call them, they're often a good thing for consumers. For example, how do you think Costco manages to sell all this stuff to its members at a lower price than they could get elsewhere?

3:41Costco, you know, provide negotiation leverage as they amass scale by aggregating many small buyers, all the Costco members, and getting better prices. And the PBM, in a sense, do the same thing. PBMs, by working with health insurers, they pool demand for prescription drugs. That way they can tell the drug makers, you want access to these customers, you got to negotiate with us. Yeah, and on top of that, PBMs also decide which drugs health plans will buy. And that gives them even more leverage because they can say to the drug makers, if you want your drugs to be covered by our plans, you better give our customers a juicy rebate.

4:19If you've ever bought something that comes with a rebate coupon, it's like that. So first you buy the product at the listed price, and then you claim the rebate and get some money back. So in this case, the health insurers will buy the drugs at the list price, and then it gets a rebate, which the PBM has negotiated. The insurer shares that rebate with the PBM, and this is a key part of how PBMs make money. And so in theory, these rebate savings should also trickle down to you, the patient slash consumer. But here's where the comparison to Costco starts to break down. While Costco brings down prices, Alex says PBMs may actually be contributing to rising drug prices because of a couple of key flaws in this market's design.

5:05And the first flaw he says with this whole PBM setup is it's rife with what economists call agency problems. Think about someone who is buying a house. So you would use a real estate agent. And that agent, they are supposed to be serving the buyer. But how much that agent is paid is based on how high the price of the house would be. The buyer wants the price to be lower, but the agent actually could benefit from the price of the house being higher. In the context of pharmacy benefit managers, they're supposed to be our agents, or at least our health insurers agents, negotiating with the drug makers for lower prices.

5:43But here's the problem. They're getting payments both from the health plans and they're also getting paid by the manufacturers of pharmaceuticals. So, you know, you think about this as sort of a double agent scenario. A double agent scenario, as in pharmacy benefit managers are playing both sides of the deal. Because remember, PBMs get a percentage of the rebates they negotiate with drug companies. So it's actually in their interest for the drugs to be priced higher so they can get a fatter rebate. All this really bothers Robin Feldman. She specializes in health law at the University of California, Hastings Law School.

6:19And to illustrate her concern, she came up with a hypothetical. Imagine you have a drug called Life Elixir. What does Life Elixir do, by the way? This is my mythical drug. It will solve all of your health care problems in one nifty pill. So imagine that Life Elixir is right now selling for$100 a month. Okay. Okay. Now, the PBM says to the health plan, I'll negotiate a good price for you for all of the patients in this health plan with the drug company. If the drug company raises the price of Life Elixir up to$500 a month, and then the PBM negotiates a discount back down to$100 a month, the PBM goes to the health plan and says, oh, look, I saved you$400 a month.

7:15So the insurer pays the inflated price to the drugmaker, and it gets back that hefty rebate, which is shared with the PBM. And so in this scenario, the drug price was always going to be$100 anyway. And for Robin, this is the nightmare scenario. The PBMs benefit from the inflated price because they can pad their rebate and make more money. And the drug company benefits because offering a bigger rebate makes the PBMs want to do business with them. And Robin says this dynamic is part of why between the mid-2000s and the mid-2010s, the list price for brand-name drugs has shot up. Now this might be fine if consumers benefited too, but it's not clear just how much they are, because PBMs keep the details of their deals with the drug companies hidden.

8:03They argue that they're trade secrets. But if we can't see what's going on behind the curtain, then there's no way to really know whether these negotiations work more for consumers or for the PBMs. Information helps competition flourish. It helps regulators see where the problems are and target those problems. And it helps pesky academics like me point out where the problems are. Now, the Industry Association for Pharmacy Benefit Managers, they say they can't disclose numbers because that would enable collusion between PBMs and that would be bad for customers. They also say they have helped to lower drug costs in a variety of ways.

8:42For instance, by nudging insurance plans towards more affordable generic drugs and promoting mail-order pharmacies. They also cite their own study which says that they save health plans and patients an average of$962 a year. Now, Alex Chan, the health economist, says a couple of studies suggest PBMs do create value. The question, of course, is that the profits that a PBM earns by providing all these valuable services in the middle, Is it justified? Is it justified? So that's a tough question. I think that there are some characteristics of this market that suggest to me that some of it might be too high.

9:21But with the lack of transparency around PBM deals, it is hard to know for sure. A couple of updates for you. Since this episode originally aired, Congress passed and President Biden signed the Inflation Reduction Act, which capped insulin prices for many Medicare patients at$35. The following year, in part because of public pressure, insulin makers like Eli Lilly have lowered some of their prices. And as for the pharmacy benefit managers targeted by the FTC's lawsuit, they deny the agency's claims. An OptumRx spokesperson said the suit, quote, demonstrates a profound misunderstanding of how drug pricing works.

10:02Meanwhile, at yesterday's Senate hearing, Senator Bernie Sanders wrested a commitment from the Novo Nordisk CEO to meet with pharmacy benefit managers on lowering the cost of WeGoV and Ozempic here in the U.S. This episode was produced by Julia Ritchie with engineering by Neil Rauch. It was originally produced by VLA with engineering by Robert Rodriguez. It was fact-checked by Sierra Juarez. Cake and Cannon is the show's editor and the indicators are production of NPR. This message comes from Vanguard. Capturing value in the bond market is not easy. That's why Vanguard offers a suite of over 80 institutional quality bond funds, actively managed by a 200-person global team of sector specialists, analysts, and traders.

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