Prescription drug prices in the U.S. are set to climb again, intensifying pressure on all parties involved in the pharmaceutical supply chain. Pharmacy Benefit Managers (PBMs) – the entities negotiating drug prices and managing pharmacy benefits for insurers and employers – are now central targets for legislative action.
PBMs currently reduce costs by securing discounts and rebates from drug manufacturers. These savings translate into lower premiums and out-of-pocket expenses for consumers. This function is critical in a market where pharmaceutical companies leverage patent protections to maintain high prices.
However, critics argue that PBMs are unnecessary middlemen, diverting money that could otherwise reduce healthcare bills. The core question is whether removing PBMs would actually lower costs, or simply shift the burden elsewhere.
Proposed reforms, including mandatory pass-through of manufacturer rebates and bans on “spread pricing,” appear straightforward. The goal is transparency, but the economic consequences could be counterproductive. The question is not about intent, but about market dynamics.
Competition Exists Beyond the Big Three
While the PBM market is dominated by three major firms, it also includes a diverse range of independent and mid-sized PBMs. These firms serve self-insured employers and public purchasers by offering flexible benefit designs and pricing arrangements that larger PBMs often cannot match. This competition is vital.
The key is choice: the ability of purchasers to select among different business models. Regulation that enforces a single compensation structure doesn’t just change how PBMs get paid; it eliminates the primary way smaller firms differentiate themselves.
Pass-Through Mandates Favor Large Players
Advocates claim rebate pass-through is a neutral transparency measure. In reality, it’s deeply regressive.
Large PBMs can absorb revenue losses from capped rebates by shifting margins elsewhere due to their scale. Smaller, independent PBMs cannot. Many rely on specific pricing mechanisms to cover fixed costs (technology, clinical programs). A uniform ban acts as a “compliance tax” they can’t afford.
Furthermore, mandates restrict employer autonomy. Many employers deliberately choose PBM models where the PBM has “skin in the game” – meaning their compensation depends on securing deeper discounts. Blanket bans strip business owners of performance-based tools, replacing negotiation with a government-dictated model.
The Risk of Consolidation
The unintended consequence of blunt regulation is market consolidation. Boutique and mid-sized firms will exit or be absorbed by larger entities because they cannot survive on razor-thin administrative fees dictated by new rules. This narrows employer choice.
The implications extend beyond PBMs: mid-sized employers may lose access to tailored benefit design specialists, public purchasers may face less competition, and manufacturers may negotiate with an even smaller group of intermediaries.
A Better Approach: Empower Purchasers, Not Dictate Models
Meaningful PBM reform should focus on empowering purchasers with transparency, ensuring they understand what they’re paying for, rather than mandating specific business models.
Policies preserving contractual flexibility are more likely to sustain competition than blanket prohibitions. In markets with massive scale advantages, one-size-fits-all rules often have unintended consequences. Lawmakers must avoid dismantling the very competitive discipline that a diverse market provides.
In conclusion, while the goal of lowering prescription drug costs is critical, poorly designed regulation risks concentrating power in the hands of larger PBMs, reducing choice for employers, and ultimately undermining the market forces needed to drive down prices effectively.
