Are Intermediaries Necessary for Better, More Cost-Effective Healthcare Delivery?

Pharmacy Benefit Managers (PBMs) manage the cost of drugs by establishing formularies and negotiating discounts from drug companies. They also tell a pharmacist to collect the right co-pay from the person getting the prescription according to their insurance plan.   They are one of many intermediaries that make money from moving drugs around in the U.S. With PBM consolidation and growing drug cost sharing, the role of the intermediary is in question. Policymakers have made efforts to reduce PBMs’ power and to increase the transparency of their drug management.

With the Inflation Reduction Act, the federal government decided to be the intermediary, setting the price directly. Presumably the government decided the biopharma companies and the intermediaries couldn’t get the job done anymore.  PBMS, insurers and biopharma companies are losing a significant part of their role in shaping competition and investment in future health.  Taking power away from one set of opaque private organizations and handing it over to an equally opaque government process doesn’t signal anything good to come for patients or scientific advance.  A better approach would be to align the financial incentives so the intermediaries are rewarded for more cost effective healthcare delivery.

Intermediaries are a necessary part of many businesses: a contractor doesn’t cut down trees to build a house and a research scientist doesn’t carry pills out of the lab and hand them out. However, not only are PBMs gatekeepers for drug coverage, they also inform investment in new drugs. When PBMs extend their exclusion of drugs in a particular category, new drug development investment within that sector decreases. Given that drugs have such a large public health benefit and cost, the right question for policymakers to ask is not just about transparency and market power, but rather does the intermediary result in better and more cost-effective healthcare delivery.

Drugs have evolved since the PBMs emerged. Many of the newer medicines are higher cost drugs that don’t have alternatives. For specialty drugs, like for cancer or a neurological condition, there is almost no price that makes the drug affordable without good insurance coverage. When insurance coverage for drugs expanded for millions of people in the U.S., the government allowed new plans and PBMs, including Medicare Part D and the Affordable Care Act, to charge deductibles and coinsurance. This approach rested on the ill-conceived, and now refuted idea, that the person needed financial “skin in the game” for their healthcare to make the “right” decision. Formulary drug exclusions also increased 961 percent from 2014 to 2020. When the choice is limited, or costs are high, a person tends to opt for not getting treatment at all. In this scheme, the drug costs are managed by care denial, not better care choices.

However, recent calls for eliminating PBMs fail to recognize that PBMs and other intermediaries provide an essential service. There does need to be a negotiating counterweight to biopharma pricing power, along with formulary management and claims adjudication and turning that over to the federal government will mean more supply shortages and fewer drugs. The focus of intermediary reform should be to give them a better role, restoring competition and providing a reimbursement environment with financial incentives for them to use their scale and expansive data sets to improve health and patient value.  PBMs should be able to make money by driving savings in total healthcare costs and promoting the use of high value medicines.

What could this look like? In a market where integrated care plans are growing, such as Medicare Advantage, PBMs could get financial incentives for designing formularies that change behavior that leads to better health. This could include adherence for diabetes management such as insulin, following up with a patient who doesn’t pick up their medicine, promoting vaccination, making prior authorization requests faster or fewer, promoting testing for genetic subtypes of cancers when a medicine exists that might be better than the one the person is taking. There are so many approaches that could be implemented; PBMs have the data, they just aren’t rewarded for care delivery, but rather for care denial and prescription cost “savings” that go along with that denial.