Healthcare lawsuit could push drug prices higher
It has been several weeks since President Trump issued a bombshell executive order declaring war on Big Pharma over drug prices, and not much has changed. The order directed his health secretary, Robert F. Kennedy Jr., to lower prices. Trump is right to hone in on drug pricing as a significant issue, but it will require a more complex solution.
A lot going is on with drug prices, even without Trump’s intervention. The Federal Trade Commission, without Trump noticing, is pursuing a lawsuit that risks letting Big Pharma off the hook and sending drug prices skyrocketing. Before any executive policy can take effect, Trump should rein in the Federal Trade Commission and call off this disastrous lawsuit.
The lawsuit’s targets are pharmacy benefit managers (PBMs). PBMs are the little-known heroes of the American healthcare system. They act as intermediaries to negotiate drug prices with Big Pharma on behalf of consumers. Insurers and employers hire them to obtain the lowest prices available. In other words, they act as a check on Big Pharma’s power to raise prices.
Now, though, they are under threat. A misguided lawsuit from the FTC uses faulty data to place the blame for rising drug prices at the doorstep of PBMs rather than Big Pharma. The FTC should urgently revisit its research and correct its erroneous view of who the key players of the medical market are.
It is not an exaggeration to call PBMs a marvel of the modern world. The free market makes life-improving services available at remarkably low prices. Thanks to modern technology and scalability, companies can offer services of immense value for a minimal cost or sometimes free.
Amazon Prime offers nationwide same-day or next-day delivery on millions of products for a nominal monthly fee. Managers of stock market funds achieve double-digit returns for Joe Public in exchange for tiny percentage fees that often amount to a few pennies. The internet is available at our fingertips, free.
PBMs are another impossibly cheap feature of the modern world. The “consumer surplus” they deliver is enormous. They negotiate drug prices on behalf of consumers, keeping Big Pharma in check and maximizing healthcare accessibility in exchange for meager profit margins as low as 2 percent (well below the S&P 500 average of 12 percent). On paper, it sounds too good to be true. And yet, thanks to free-market capitalism, it is.
Sadly, Republicans are indifferent or confused about the PBMs’ role. Arkansas Gov. Sarah Huckabee Sanders has unwisely decided PBMs are acceptable collateral damage in her political battles. CVS, which owns a PBM called Caremark, has threatened to leave Arkansas over Sanders’ new anti-PBM law. A PBM group has filed a lawsuit.
“We have a number of other pharmacies that I know will be happy to step up and take CVS’s place if they decide to take their ball and go home,” Sanders says. This is incorrect. The pharmacy business is already struggling. If CVS were to vanish, customers would be left with nowhere to go. Since Rite Aid went bust, Pennsylvania pharmacists say they are being crushed by the weight of trying to take on former Rite Aid customers.
Even if Sanders were right about pharmaceutical capacity, the loss of PBMs would be crushing for Arkansas consumers. PBMs are consumers’ (and regulators’) strongest weapon against Big Pharma. If they fall by the wayside, the fight to get drug prices down will get much harder.
It is alarming that the primary threat to PBMs’ bargain services is entirely avoidable. There is no need for Sanders or the FTC to go after PBMs. The FTC’s legal allegations crumble under scrutiny. Anti-PBM action benefits only Big Pharma, which would relish the opportunity to rid consumers of their drug-buying agents, freeing themselves of the pesky checks and balances PBMs provide on their pricing.
The primary allegation leveled against PBMs is that they mark up prices, rather than lower them, to squeeze more profits out of drug transactions. The FTC has published two interim reports, the latter outlining the data it thinks supports this allegation. Unfortunately, that paper examines a handful of specialty generic drugs that account for less than 2 percent of the market.
Dennis Carlton, an economist and former deputy assistant attorney general in the Justice Department, reaches a different conclusion. The Carlton report applies the FTC methodology to the 98 percent of drug expenditures the FTC research ignored. Carlton finds the opposite of what the FTC claims: PBM-affiliated pharmacies are reimbursed at lower rates than their non-affiliated counterparts, suggesting PBMs are delivering value by securing lower costs for plan sponsors. That doesn’t stack up with the FTC’s claim that PBMs inflate drug prices.
The data indicate that PBMs are doing their jobs properly by achieving lower drug prices. Indeed, if they weren’t, no one would work with them. There is no law saying insurers must hire PBMs. They do so because they want to. The existence and success of PBMs demonstrate that they are providing value, as insurers voluntarily continue to employ them, and Carlton’s data support those choices.
The FTC put its anti-PBM case on ice last month while it considers its next steps. Its best option would be to drop the case, ensuring that consumers continue to benefit from PBMs negotiating drug prices on their behalf, not to mention the FTC avoiding embarrassment in court when its antitrust arguments fail to withstand legal scrutiny.
The FTC has a vital role to play in regulating the drug market, but there is no evidence of PBM wrongdoing. Its anti-PBM push has its roots in the playbook of its former leader, Lina Khan, whose “big is bad” mantra led to interventions in the technology industry, such as trying to break up Amazon or force Google to sell the Chrome browser.
Ironically, applying the “big is bad” approach to healthcare means empowering Big Pharma by clipping PBMs’ wings. Khan decried the recent decision to pause the PBM case as “a gift to the PBMs.” If true, is that so bad? The alternative is “a gift to Big Pharma,” which would be much worse for stretched consumers. The FTC should move its focus away from PBMs and toward those who are responsible for drug prices going up. Without PBMs, any political attempts to reduce drug prices are doomed to fail.
Jason Reed is the PR manager and UK Lead at Young Voices. He wrote this for InsideSources.com.