Drug middlemen in the hot seat: Q&A with USC Schaeffer Center’s Erin Trish

The Federal Trade Commission last week issued a long-awaited report alleging that the firms managing prescription drug benefits for insurers and employers are inflating costs, including what patients may pay at the pharmacy counter.

The report comes in an election year when many polls, including a tracking poll by KFF, show that health care costs are a top concern for most Americans, regardless of party affiliation. Executives of the companies have been called before Congress about the pricing issues.

Research by USC Schaeffer Center for Health Policy & Economics over the past seven years has revealed the significant role pharmacy benefit managers play in drug prices. The researchers’ findings have prompted recent in-depth media coverage and government scrutiny.

USC News spoke with Erin Trish, co-director of the USC Schaeffer Center and an associate professor of pharmaceutical and health economics at the USC Alfred E. Mann School of Pharmacy and Pharmaceutical Sciences, about the story of how these middlemen affect drug prices and what Congress and regulators may do about it.

Many people may not have heard of pharmacy benefit managers or may not understand them. How do these “PBMs” affect what patients pay?

Trish: PBMs basically sit in the middle of three prongs of a negotiation. They’re negotiating with branded drug manufacturers the rebate — or the after-the-fact discount off the list price — as well as patients’ access to drugs.

Separately, PBMs are negotiating with pharmacies about how much they’ll get paid for dispensing a drug. And they negotiate with insurers and employers about how much the PBM will charge them when an enrollee gets a drug. So, PBMs are very influential in determining what costs patients will actually face when they fill their prescription.

There’s nothing that dictates that these different prongs are equal. That means PBMs can reimburse a pharmacy one price for a drug, and then they can turn around and charge a health plan something else.

I think it was a surprise to many of us who study this just how big of a gap that can be and how frequently this happens, especially on generic drugs. That ultimately affects insurance premiums, too.

Drug costs have been a big concern for a long time. Why are PBMs now getting so much attention from policymakers and the media?

Trish: Policymakers, researchers and others have really gotten a better understanding of just how important PBMs are in determining prices and affecting access to drugs. The big three PBMs capture the vast majority of prescription drug claims, and they’ve become vertically integrated with pharmacies and/or insurers and other entities.

Going back several years ago, the attention on drug prices was largely focused on manufacturers. I don’t think the typical consumer, policymakers or even researchers necessarily understood the complicated market dynamics at play. There’s a growing gap between the drugs’ list prices and the net prices that manufacturers receive after the discounts they provide.

A USC Schaeffer Center white paper from 2017 was one of the first major reports to shed light on how big of a role these middlemen have. We found that 41 cents of every dollar we spend on drugs doesn’t actually go to the manufacturer but to other entities in the distribution system — like PBMs. If we’re going to have a meaningful policy discussion about drug prices, we have to consider these other factors.

It’s been widely reported that the FTC is planning to sue major PBMs over insulin prices. Why are PBMs under scrutiny over insulin?

Trish: We’re still waiting to see what the FTC will say in this lawsuit, but I think the insulin market is a prime example of how problematic incentives and market dynamics really blew up. And it created pretty significant issues for patients.

List prices for insulin were increasing in the last decade, while the net prices that manufacturers received were decreasing. The USC Schaeffer Center research led by Karen Van Nuys and others showed that an increasing share of insulin spending was going to parts of the pharmaceutical distribution system that weren’t manufacturers.

By 2018, more than half of every dollar spent on insulin was going to these entities, including PBMs. Just a few years ago, it grew to something like 70%. That’s a huge gap and a problem for patients who had out-of-pocket costs tied to the drug’s list price.

Insulin pricing has largely been reset in the last few years, including by Medicare policy changes and manufacturers dropping their list prices and capping patients’ costs. But it was an example of these poor market dynamics playing out — you basically had PBMs telling manufacturers they had to give bigger and bigger discounts if they wanted coverage of their insulin.

In Congress, there’s bipartisan interest in cracking down on PBM practices this year. What solutions are lawmakers considering?

Trish: We’ve been fortunate to be a part of these conversations. We’ve had multiple people from the USC Schaeffer Center testifying at congressional hearings with different committees and have shared our work with them.

There’s interest at least in expanding transparency in the market. There’s some interest in changing some of the rules, like not allowing PBM compensation to be tied to a drug’s list price — a practice that essentially encourages higher and higher list prices. There’s also a discussion about policies that would ensure patients benefit from discounts by linking what they pay out of pocket to the negotiated price for at least certain drugs.

There’s clearly momentum and a multitude of policy packages out there. It’s hard to predict what might get across the finish line, but I think there’s a clear understanding that solving issues in the PBM market is an important component of making meaningful differences in what patients pay for drugs.