Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

The Hidden Cost of Cheaper Drug Prices

For all the uproar over U.S. drug pricing, you wouldn’t expect to hear that drug spending slowed for many last year. A big reason? An increasingly powerful group of medication middlemen called pharmacy benefit managers (PBMs), which negotiate drug prices on behalf of insurers, employers and the government.

But their services carry high costs of a different sort, including fewer drug options for patients. 

The biggest of these firms, Express Scripts and CVS Health, say they held drug spending growth for their clients last year to 5.2 and 5 percent, respectively, from 13.1 and 11.8 percent in 2014.

One of the ways PBMs do this is by cutting deals with drugmakers, sometimes getting price discounts in exchange for refusing to cover competing medicines.

In other words, behind major drug-price cuts there is often a reduction in drug choices available to patients. 

Big PBMs have gotten more aggressive about such dealmaking in recent years, which they say has saved clients billions. The gap between the prices drugmakers charge and the price after rebates and discounts, where PBMs live, is pretty big. An IMS Health report puts the number at about $115 billion in 2015.

Employers or insurers can choose less exclusive drug lists (or formularies). But Express Scripts' narrow drug list is the most widely used formulary in the country.

Middlemen have to make money somehow, and PBMs sometimes pocket a chunk of those rebates. The firms say they give much of the savings back to clients and only exclude drugs if there are appropriate alternatives available. But it's tough to know exactly how big the discounts are and what portion PBMs keep; some insist on keeping individual drug deals secret, saying that revealing them would harm their negotiating positions.

PBMs say they are transparent with clients. But that hasn't stopped at least one major disagreement about who benefits from savings. Anthem, one of the nation's largest health insurers, is suing Express Scripts for about $15 billion mostly related to alleged drug overcharging. Anthem has claimed Express Scripts owes it an extra $3 billion in prescription savings each year. The PBM says it does not, and has countersued.

PBMs have successfully brought down the prices of important drugs, such as new treatments for Hepatitis C. But as a sometimes-opaque cog in the middle of an arguably broken U.S. drug pricing system, they invite criticism.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Some of those rebates go to the government and other payers instead of PBMs and their clients.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net