Former Sen. Pat Toomey: Regulating PBMs Could Raise Pharmaceutical Costs Instead Of Lowering Them

Thought Leader: Pat Toomey

December 18, 2023

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FORMER SEN. PAT TOOMEY: PBMs (pharmacy benefit managers) are businesses, companies, that are hired by health insurance companies or businesses that sponsor health insurance plans for one purpose: to negotiate lower drug prices than the insurance company or employer could negotiate for themselves. They are an intermediary that gets the best possible price.

What that means is if you are a consumer, if you have a health insurance plan or prescription drug coverage with your plan, chances are good you’re paying less for prescription drugs than you would because there is a PBM involved that i negotiating those lower prices.

It’s an interesting response to the healthcare marketplace that includes a kind of bargaining imbalance, if you will. America has some of the biggest and greatest pharmaceutical companies on the planet. We really dominate this important space, and our companies do fantastic work with new medicines that keep us healthy and alive.

But, they’re big and national, whereas the health insurance industry is much more fragmented. It tends to be that health insurance plans cover a geographical region. It might be a good-sized region. I can think of a great company that covers most of southeastern Pennsylvania. America is a lot bigger than southeastern Pennsylvania.

So there’s an asymmetry in bargaining power and PBMs kind of level that playing field to a significant degree. They tend to work for many insurance companies, and by being able to aggregate the purchasing of many insurance companies, they’re a much stronger counterweight. So you tend to have more balanced negotiations that you might otherwise have. The net effect is prescription drug prices are lower as a result of PBMs than they would otherwise be.

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You hear a lot about prescription drug costs. If you look closely at it, you see that the prescription drug cost as a component of overall healthcare spending has been much better anchored than other sectors of healthcare — including hospitalizations, for instance. There are a variety of reasons for that, actually, PBMs are one of them, but the combination of the ability to substitute generic for branded drugs, competition in the industry, the constant evolution of new medicines — the net effect of all that is the rate of increases in prescription drugs, notwithstanding individual exceptions, generally has been quite low.

It is one of the reasons why I think Congress is looking at the wrong place here. By going into this fairly complex delivery system that involves pharmaceutical companies, health insurers, PBMs, employer sponsors, customers, pharmacies — a lot of moving parts — for Congress to come in and say, “We’re going to disrupt this by making it much more difficult for one of the players in this supply chain to operate,” is a big mistake.

The legislation that is getting a lot of attention would severely curtail PBMs. One thing several would like to do is disrupt the mechanism by which PBMs generate revenue. They’re a business. They have to generate revenue. And one of the ways they do that is by sharing in the savings. They sometimes get a percentage of the reduction they’re able to negotiate in prescription drug costs. That does have the virtue of aligning the interest. The PBM has the same interest as the consumer who is buying the pharmaceutical product or the insurance that is covering the cost of that.

I think this is a mistake at the macro level of where the problems actually are, it’s a mistake at the more tactical level of going after one player in a complex delivery system.

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They’re disparaged as “middlemen” as though there is something intrinsically wrong with a middleman in a series of transactions in the economy. I would suggest we step back in the first place and remember how our entire economy works. A grocery store is a middleman between the farmer and the consumer. The car dealer is a middleman between the manufacturer and the consumer. They don’t really get to exist unless they’re adding some value to the consumer, and it is no different for PBMs. The insurance company, or the sponsor of a health insurance plan, have no mandate to use a PBM, so why do they do it? They do it to get lower-cost prescription drugs for the people they are covering. That’s what translates to lower premiums and lower costs.

So, you could say they’re a middleman, but that shouldn’t be a term of disparagement. They’re playing a very useful role in that capacity.

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Transparency is good, depending on where you are in the system. The consumer should have transparency about what they’re paying and what their cost is. But what a lot of these legislative proposals impacting PBMs say about transparency is to require the disclosure of sensitive business-to-business negotiations. If all that is disclosed, it would dramatically weaken the PBMs’ bargaining power with the pharmaceutical companies. And it would serve no useful purpose that I can think of for the end consumer. It depends on what kind of transparency we’re talking about.

TOM BEVAN: What about perhaps unintended consequences of legislation?? You were a senator for a long time, you’ve probably seen this up close. Legislation that gets passed often has unintended consequences. What might some of those be in this case?

PAT TOOMEY: You’re absolutely right. When the government goes in and disrupts a private sector arrangement, it almost always has unintended consequences, and they’re usually adverse because the business folks who worked out these arrangements are rational. The businesses that are providing health insurance for its workforce, or the insurance companies that are providing it, want the lowest cost. So that’s why the business arrangements evolve the way that they do.

When the government in Obamacare passed a cap on insurance companies’ profits, it probably contributed to the need to consolidate. So now we’re going to have less competition than we otherwise would. I don’t think that was the intention when people were writing Obamacare, but it is exactly the kind of thing that happens.

So in the case of PBMs, there is a logical construct here: The only reason they could continue to exist, and they do exist, is if they achieve savings for the people who hire them. If they go away, so do those savings. That isn’t just my theoretical opinion. The Congressional Budget Office (CBO) has done a lot of research on this.

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The CBO did an analysis and said if you do impose this prohibition against rebates, drug prices will be higher. The CBO looked and evaluated the costs for various federal agencies and the money they were spending on prescription drugs and came to the conclusion that those who do not use PBMs paid more for pharmaceuticals than they otherwise would. So I think it is pretty straightforward, if you curtail the ability of PBMs to function, you’re going to probably have higher prescription drug costs. That’s the opposite of the intention for some of the authors, but that’s how it works out sometimes!

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