The Cantwell-Grassley PBM Bill Is Much Needed But More Can Be Done

Senators Maria Cantwell (D-Wash.) and Chuck Grassley (R-Iowa) recently introduced legislation that aims to shed light on the pharmacy benefit manager (PBM) market.  The new proposal would prohibit a PBM from engaging in commercial practices known as spread pricing and pharmacy clawbacks unless it passes all rebates and concessions received from drug manufacturers to health plans and discloses all cost, price, and reimbursement information and all fees, markups, and discounts charged to health plans and pharmacies. It would also mandate greater transparency by requiring PBMs to submit an annual report to the Federal Trade Commission (FTC) about the aggregate revenues they take in from spread pricing and clawbacks, their reasons for specific changes in formulary placements, and business practices related to treating pharmacies affiliated with PBMs differently than unaffiliated pharmacies.

What Problem Does The Bill Address?

The first question one might ask is whether the bill will solve a critical problem or whether it is an example of burdensome regulation with little public benefit. Research from the USC Schaeffer Center for Health Policy & Economics suggests that the bill is much needed.

Many PBM commercial tactics leverage the current system’s opacity and complexity in ways that increase their profits while avoiding scrutiny.  For example, PBMs may retain manufacturer rebates as profits rather than passing them through to their health plan clients.  When health plans lack full transparency and cannot see how much manufacturers paid in rebates, they do not know how much their PBM retained as profits.

“Spread pricing” is another practice that leverages opacity in the system to allow PBMs to secretly collect large margins.  When a beneficiary fills a prescription, the PBM reimburses the pharmacy one price while charging the health plan sponsor a higher price and pockets the difference or “spread.” Because neither the plan nor the pharmacy knows what the other side was paid or charged, the practice hides the PBM’s margins.  In 2018, Ohio’s auditor found that the average spread on generic prescriptions filled by Medicaid managed care beneficiaries was 31.4 percent, costing taxpayers of Ohio $208 million in one year. 
 
In a third controversial practice, PBMs withhold reimbursement or charge pharmacies “direct and indirect remuneration” (DIR) fees and “clawbacks” after a claim has been settled, with many pharmacists complaining that these practices are arbitrary and applied unfairly. Some claim that, by imposing smaller fees and clawbacks on pharmacies in their corporate family than those imposed on unaffiliated pharmacies, PBMs are driving unaffiliated pharmacies out of business, further consolidating pharmacy markets. But pharmacies have little recourse given the dominant position of major PBMs.

Many stakeholders question whether PBMs are using practices like these to benefit patients and payers, or to earn excess returns on their own account.  If the latter, then the current drug distribution system is inefficient, failing to get medicines to the patients who need them for the lowest possible total expenditure.

Our research shows that of every $100 in spending on drugs sold in retail pharmacies about $41 goes to intermediaries in the supply chain, such as PBMs. These intermediaries are earning excess returns compared to the average firm in the S&P 500, and these excess returns are rising over time. Our recent analysis of the market for insulin underscores these findings – we find the share of spending going to intermediaries is rising rapidly while overall insulin spending changed little.

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