Large companies that spend billions of dollars a year on prescription drugs for their employees are hoping that the Federal Trade Commission’s inquiry into pharmaceutical benefit manager business practices will yield information that spurs major policy changes to reduce drug prices wrote Bloomberg Law. Prescription drug pricing isn’t the problem. Bloomberg Law has it wrong.

The FTC unanimously voted June 7 to conduct an inquiry into the PBM industry, sending compulsory orders to the six largest PBMs—CVS Caremark, Express Scripts Inc., OptumRx Inc., Humana Inc., Prime Therapeutics LLC, and MedImpact Healthcare Systems Inc.— to provide a wide range of information concerning the competitive impact of their contracting and business practices within 90 days. No date was set for issuing a special report from the information gathered.

Tyrone’s Commentary:

PBMs have always been tough negotiating with manufacturers and pharmacy networks for discounts. These negotiations have led to significant price concessions more than any other organization, government aside, could have negotiated for themselves. When those negotiations are completed, the pricing is set and accounts for inflation. We are hired to negotiate discounts. The problem isn’t the pricing it is the PBM’s management fee or Earnings After Cash Disbursements (EACD = AF + DF + IC + MR – CD).

The share of discounted pricing a PBM keeps for itself is its management fee or EACD. It would be like you calling up Amazon’s customer service on Prime Day and saying, “you know that 50% off deal for the Sony 75-inch television you are offering? Well, I don’t need that big of a discount, just make it 25%.” Because PBMs have superior information and knowledge, plan sponsors are giving discounts back to PBMs at the negotiating table. The focus should be on the PBMs’ management fee not pricing. This doesn’t mean that pricing isn’t important.

Until the industry standard becomes radical transparency, pricing is less important than the EACD. For example, a report by Nephron research says, “contracting entities are shifting discounts from the rebate profit pool 99% of which flows to clients to fee pools that may be retained by the PBM[i]. In other words, non-fiduciary PBMs have shifted their management fee to GMFs or group purchasing organization management fees. They’ve also shielded themselves from spread pricing revenue loss by powering discount cards.

Conclusion – Prescription Drug Pricing Isn’t The Problem. Bloomberg Law Has It Wrong

Bloomberg law writes, “among employers concerns a lack of transparency into whether PBMs are fully refunding rebates and discounts negotiated with drug manufacturers.” Non-fiduciary PBMs intentionally make it difficult to ascertain their management fee. It is easier to get away with an unfair management fee or overcharging when the purchaser has no clue what it amounts to. When a problem is misdiagnosed, the solution is inevitably wrong or inefficient.

[i] Fein, Adam PhD, Drug Channels News Roundup, June 2020: CVS’s New GPO, CMS on Copay Accumulators, GoodRx Fees, Supermarket Pharmacies, and Merck’s Ken Frazier, June 24, 2020, https://www.drugchannels.net/2020/06/drug-channels-news-roundup-june-2020.html