Rethinking Drug Pricing: Fixing the Misalignment in Healthcare Markets
The functioning of the current drug pricing market is clearly broken, evident to anyone observing closely. But what's causing this dysfunction?
In the realm of healthcare, the existing government-driven, third-party payer system misaligns the interests of patients with those managing drug benefits, known as pharmacy benefit managers (PBMs). This misalignment often results in inflated out-of-pocket costs for patients and encourages the use of expensive drugs over more affordable alternatives.
Addressing these issues is crucial for establishing a patient-centered healthcare system. Several Congressional proposals, such as the Delinking Revenue from Unfair Gouging Act and the Modernizing and Ensuring PBM Accountability Act, aim to tackle these adverse consequences. While these reforms aren't a cure-all, they target key deficiencies in the current system.
Contrary to some claims, reforming PBM practices doesn't move the healthcare system closer to socialism; rather, it promotes market efficiency. The dominance of three PBMs controlling 80% of the pharmacy benefit market, all subsidiaries of major health insurers, exacerbates the problem.
PBMs control the list of approved medicines, dictating which treatments patients can access. This control distorts the pricing system, as the net price—manufacturer's list price minus undisclosed discounts negotiated by PBMs—becomes the true transaction price.
Manufacturers strive for favorable placement on PBM formularies to ensure patient access to their drugs. Consequently, PBMs benefit from high list prices, as they negotiate larger discounts, thus earning more revenue.
Additionally, PBMs' fees are linked to drugs' list prices, further incentivizing higher prices. This setup discourages the use of lower-cost alternatives, even if equally effective.
Patients bear the brunt of inflated gross prices through out-of-pocket costs, while PBMs and insurers profit. This undermines an efficient pharmaceutical market and underscores the need for reform.
Congress is considering reforms to mandate full disclosure of prescription drug costs, prices, and discounts, as well as breaking the link between PBM compensation and list prices. Addressing anticompetitive practices like "spread pricing" is also on the agenda.
These reforms won't solve every problem but will enhance market efficiency, improve drug affordability, and lower healthcare costs. Ultimately, they signal a shift toward a patient-centric healthcare system, empowering patients and doctors in healthcare decisions.