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Competitive Concerns and Price Transparency in the PBM Market
Excerpted from the September/October 2003 issue of ‘Update,’ a journal of the Food and Drug Law Institute. |
| Tuesday, July 27, 2004 By David A. Balto |
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Although pharmaceutical benefit managers (PBMs) can provide a valuable service, consumers and plan sponsors often do not receive their full benefits due to certain market characteristics and a lack of transparency in the process.
A lack of transparency about the compensation PBMs receive from pharmaceutical manufacturers prevents plan sponsors from efficiently securing the lowest pharmaceutical prices. In theory, a PBM serves as a middleman attempting to secure favorable pharmaceutical prices. But unlike a true group purchasing operation that may be efficient, PBMs do not actually purchase the drugs. Rather, they receive rebates from manufacturers for placement of drugs on a formulary, a list of approved drugs. Generally these rebates can benefit consumers where they are transparent. Secret rebates, however, can lead to discrimination that ultimately may harm buyers and the ultimate consumer. Secret rebates may encourage a PBM to choose a higher-priced drug, resulting in higher costs to consumers. Consumers do not necessarily receive the benefit of these middleman rebates. Competitive concerns have arisen in the PBM market – a highly concentrated industry in which the four largest firms hold about a combined 80-percent market share. Substantial costs have prevented any successful entry into the PBM market for quite some time, and substantial switching costs create obstacles for plan sponsors to change PBMs. This situation is one in which PBMs can act opportunistically – easily increasing prices or decreasing service. Indeed, the Federal Trade Commission (FTC) placed the two largest PBMs -- Merck and PCS – under regulatory consent orders to prevent opportunistic conduct that would harm consumers. Government inquiries The competitive practices of PBMs are the subject of several investigations and regulatory enforcement actions. The Department of Health and Human Services’ Office of Inspector General has warned that rebates collected by PBMs under state Medicaid programs violate federal anti-kickback laws. The Department of Justice in 2003 joined a lawsuit filed by a former employee against Merck/Medco. The complaint alleges that as a result of long-standing fraudulent business practices, Merck/Medco’s services to plan sponsors resulted in price increases and a threat to the prescription users’ health. Much of the concern over PBMs focuses on whether the rebates and other payments received from pharmaceutical manufacturers are passed on to plan sponsors in lower prices; PBMs consistently decline to provide systematic and complete payment information to their plan sponsors. The American Federation of State, County and Municipal Employees sued the nation’s four largest PBMs (PCS, Express Scripts, Medco and Caremark), alleging that they violated California’ Unfair Competition Law. The complaint charges that the four PBMs have negotiated rebates from drug manufacturers and discounts from retail pharmacies, yet have not passed those savings on to healthcare plans and consumers. In addition, the complaint also alleges that the PBMs developed a pricing system based on the average wholesale price, which is widely considered an inflated “sticker” price set by drug manufacturers. Transparency Is Essential “Secret” rebates may encourage a PBM to choose a higher-priced drug with a higher rebate instead of a lower-priced drug, resulting in higher costs to consumers and higher rebates to the PBMs. By requiring that rebates be disclosed, buyers can monitor and prevent this potential discrimination. Congress enacted legislation to prevent such conflicts of interest and possible discrimination – the Medicare/Medicaid anti-kickback law. A U.S. attorney’s office in Pennsylvania currently is investigating whether the rebates that PBMs receive from manufacturers constitute illegal kickbacks. Price and service transparency is a cornerstone to competition because when it exists, purchasers can make fully informed choices. Transparency in the process forces firms to compete more aggressively because they know that purchasers can and will make such choices. Price transparency invariably leads to lower prices, not higher prices. Regulation Can Be Necessary Markets often work well to provide the type of transparency consumers need. In some cases, however, it is necessary for the government to intervene. This is especially true in complex markets like pharmaceutical distribution and in concentrated markets with high entry barriers. Federal antitrust enforcement agencies have brought several enforcement actions and adopted regulations to protect the vital role of price transparency in many markets. In several cases, the FTC has required disclosure of the underlying terms of transactions to help consumers make fully informed choices. That a “middleman” such as a PBM may face a conflict of interest and that disclosure may alleviate the potential for such conflicts has been recognized in other contexts. Let consumers know For example, Internet search engines often receive payments from companies that place advertising on websites. By letter. The FTC informed Internet search engine companies in 2002 that they must disclose the existence of these payments on the website. It noted that disclosure of payments made by companies to them in exchange for preferential placement in search results “would put consumers in a better position to determine the importance of these practices in their choice of search engines to use.” Like all markets, PBM markets work most effectively where there is real transparency so consumers can make fully informed choices. Transparency is an essential element in providing comprehensive pharmaceutical benefits. - David Balto is a partner in the White & Case law firm of Washington, D.C., and a former director of policy in the Federal Trade Commission Bureau of Competition. |
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