House Oversight & Accountability Committee Issues Testimony From Questrom School of Business Associate Professor
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I am
Here I review (1) the high costs of prescription drugs and associated spending levels and trends, and the likely transformative impact of IRA implementation on these levels and trends for Medicare Part D, (2) the function of PBMs, and (3) PBM contract features and evidence supporting PBMs intended and unintended impacts on patients, payers, and pharmaceutical industry. I conclude that while PBMs do provide efficiencies in the
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1 My research work is in part supported by grants, including in the past three years from the
2 See for example, Royce TJ, Kircher S, Conti RM. "Pharmacy Benefit Manager Reform: Lessons from
6 https://www.finance.senate.gov/imo/media/doc/A%20Tangled%20Web.pdf
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My conclusions are based on my own research, teaching, and first-hand experience with the healthcare ecosystem. They do not necessarily represent the views of
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7 I thank
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Prices and Spending on Retail Prescription Drugs and the Likely Transformative Impact of the IRA
The
According to an analysis by the
See Figure 1 for details. [Link to figure at bottom]
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Figure 1. Price Trends Paid by Medicare Beneficiaries Outpace Inflation
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8
9 Hales CM, Servais J, Martin CB, Kohen D. "Prescription drug use among adults aged 40-79 in
10 Ledley FD, McCoy SS, Vaughan G, Cleary EG. "Profitability of Large Pharmaceutical Companies Compared with Other Large Public Companies." JAMA. 323(9): 834-843.
11 Lu J, Comanor WS. "Strategic pricing of new pharmaceuticals."
12 See for example,
13 Annual price increases are also inconsistent with the notion that prices are optimized for profit maximization at launch and appear unrelated to approval of supplemental indications, additional information about the benefits associated with treatment, and potential increases in manufacturing costs. See
14
15
16 Cubanski J, Neumann T. "Prices Increased Faster Than Inflation for Half of all Drugs Covered by Medicare in 2020." KFF Issue Brief.
17 Ibid.
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In many cases, price inflation is the direct result of drug makers ensuring their profitability by delaying competition in specific drug markets.18
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Figure 2. Spending per capita on retail prescription drugs, 1960-2021
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18 For an explanation and summary of activities, see Statement by
19 Conti RM, Turner A,
20
21 https://www.healthsystemtracker.org/chart-collection/recent-forecasted-trends-prescription-drug-spending/#Annual%20change%20in%20per%20capita%20retail%20prescription%20drug%20spending,%201970%20-%202021;%20projected%202022%20-%202031%C2%A0
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Two types of on patent 'branded' prescription drugs contribute substantively to spending growth: new drugs and the expanded use of existing drugs. Also notable is that specialty drugs, including those in the protected Medicare Part D categories of oncology and immunology,22 have been increasing as a share of spending.23 In 2020, specialty drugs comprised 47% of spending, up from 24% 10 years earlier. Specialty drug spending is expected to increase to 60% of total pharmaceutical spending in the
Although relatively speaking prescription drug prices account for a small share of overall healthcare spending, Americans pay more out-of-pocket for prescription drugs than for less commonly used hospital care or health insurance.24 These spending levels and trends have imposed costs of payers.
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Retail Prescription Drugs are the Most Commonly Consumed Medical Care in the
In addition to high prices, widespread use contributed to these levels and trends. Prescription drug use is the most consumed medical care in the U.S.25 More than 131 million people -- 66 percent of all adults in
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Figure 3: Average annual out of pocket prescription drug expenditures, by age group.
Recent results from national polling (
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22
23
24 Yusra M. "As Drug Prices Soar, Policymakers Eye Dose of Government Intervention". MORNING CONSULT (
25 Retail prescription drug spending was estimated to account for nearly 12% of total personal health care services spending in the
26 https://hpi.georgetown.edu/rxdrugs/#:~:text=More%20than%20131%20million%20people,Prescription%20drugs%20are%20costly.
27 https://www.kff.org/health-costs/poll-finding/public-opinion-on-prescription-drugs-and-their-prices/
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Figure 3. Retail prescription drug use by US population socioeconomic and health characteristics.
Figure 4. Average annual and out of pocket retail prescription drug expenditures, by chronic condition.
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Patient Financial Toxicity Associated with Retail Prescription Drug Use
The
Figure 5. Proportion of people who take less medication than prescribed due to cost, by age group and condition.
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28 Conti R, Dusetzina SB, Sachs R. "How The ACA Reframed the Prescription Drug Market and Set the Stage for Current Reform Efforts." Health Aff (Millwood). 2020 Mar;39(3):445-452.
29 Witters D. "In
30
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Reports of financial burden are associated with worrisome deficits in care - medication non-adherence including skipping medication, taking less medication, or not filling recommended prescriptions at all. The practice of taking less medication than prescribed may increase overall health care costs if the result is more emergency room visits, hospital admissions, or physician visits. In addition, reports of financial burden commonly include an inability to pay for necessities such as food and utility bills, the presence of medical debt and high out of pocket burdens relative to income.
High spending on retail prescription drugs also imposes costs on taxpayers and harms workers in the form of higher health insurance premiums and lower wages.
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The Likely Transformative Impact of the IRA on Medicare Part D Retail Prescription Drug Levels and Trends
The Inflation Reduction Act of 2022 (IRA), passed by
The IRA includes several provisions to lower retail prescription drug costs for people with Medicare Part D and reduce drug spending by the federal government. The IRA took shape amidst strong bipartisan, public support for the government to address high and rising drug prices.32 CBO33 estimates that the drug pricing provisions in the law will reduce the federal deficit by
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31 https://www.congress.gov/bill/117th-congress/house-bill/5376
32 https://www.kff.org/health-costs/poll-finding/kff-health-tracking-poll-march-2022/
33 https://www.cbo.gov/system/files/2022-09/PL117-169_9-7-22.pdf
34 IRA includes numerous provisions aimed at reducing retail prescription drug spending levels and trends for those insured by Medicare Part D. These provisions include capping Medicare Part D out of pocket spending to $2000 annual effective starting in 2025, requiring drug makers to pay rebates to Medicare if their prices rise faster than inflation starting in 2023, and requiring drug makers to negotiate with Medicare for certain high spending drugs covered by Medicare (negotiation starts in 2024, and negotiated prices take effect in 2026).
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Figure 6: Distribution of total national health expenditures on retail prescription drugs, by payer.
Passage of the IRA has led to a shift in projected out of pocket spending on retail prescription drugs among those covered by Medicare Part D (see Figure 7).36 IRA provisions are also not expected to harm future drug innovation.37 Figure 7. Total out of pocket spending on prescription drugs, projections before and after the passage of the IRA.
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35 Medicare covered 32% of national drug spending in 2021. See https://www.cbo.gov/system/files/2022-09/PL117-169_9-7-22.pdf.
36 CMS expects retail prescription drug spending by Medicare to increase initially due to Medicare Part D redesign. CMS actuaries expect a 20 percent reduction in aggregate drug costs from negotiation and inflation rebates (See National Health Expenditure Projections, 2022-31: Growth To Stabilize Once The COVID-19 Public Health Emergency Ends | Health Affairs). CBO estimates the drug pricing provisions in the IRA will reduce the federal deficit by
37 https://www.cbo.gov/system/files/2022-09/PL117-169_9-7-22.pdf
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The Role of PBMs in the US Retail Prescription Drug Market
PBMs are third-party administrators of pharmacy benefits, and they arose in the 1980s to manage patient access to retail prescription drugs on behalf of payors. The influence of PBMs on patients' access to prescription drugs dispensed in the retail setting (at pharmacies and through mail order) and the affordability of medications has increased substantially since then.
PBMs act as intermediaries that bargain on behalf of payers (health plans and patients) for lower prescription drug prices, while receiving payments from drug makers (see Figure 8). [Link to figure at bottom]
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Figure 8. Schematic of PBM as Intermediary between drug maker, health plan (payer) and
PBMs create an arena for retail prescription drug maker competition. The arena is predicated on PBMs use of tiered formularies on behalf of health plans to steer patients to use certain retail prescription drugs over others. Consumer steering is largely (but not solely) predicated on differential out of pocket costs (see Figure 9). [Link to figure at bottom]
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Figure 9. Schematic of tiered formulary and consumer costs employed by PBMs to steer retail prescription drug sales.
Drug makers offer PBMs rebates to compete in the arena. Rebates offered grow by the extent of competition in drug's therapeutic class (see Figure 10).38 PBMs deploy other tools to create competition between drug makers and to promote patient access and payer affordability to needed drugs.39 Figure 10. Schematic of rebate offerings by drug makers based on preferred formulary tier and competition withing therapeutic class.
A recent report by GAO suggests the amount of drug maker rebates paid to Medicare Part D plans has been growing over time (see Figure 11). Rebates paid to PBMs acting on behalf of Part D plans may have the effect of moderating net retail prescription drug expenditures.
Figure 11. Medicare Part D Expenditures 2014-2016.
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38 Sarpatwari A, DiBello J, Zakarian M, Najafzadeh M, Kesselheim AS. "Competition and price among brand-name drugs in the same class: A systematic review of the evidence." PLoS Med. 2019 Jul 30;16(7): e1002872.
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Indeed, PBMs can enhance the efficiency of retail prescription drug markets relative to the alternative of selling branded prescription drugs at profit-maximizing prices. This can benefit consumers and payers through promoting access to needed drugs at more affordable prices.
In addition, PBMs, through their use of formularies, create incentives that steer patients to use generic drugs when available.40,41 The use of generic drugs when available contributes to significant cost savings for payers (see Figure 12),42 and patients, especially among those using drugs to manage chronic illnesses and acute conditions (see Figure 13), and using selected drugs (see Figure 14).
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Figure 12. Savings from generics and biosimilars totaled
Figure 13. Savings from generics and biosimilars for patients managing chronic illness.
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41 Ho K, Lee RS. "
42 Together, generics and biosimilars represent 90 percent of all
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Figure 14. Top generic prescription drugs with the greatest savings in 2022.
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PBMs in their role as a contractor for health plans also create opportunities for consumers to access pharmacy services that are lower priced compared to the alternative and may be more convenient. For example, PBMs commonly construct 'preferred' pharmacy networks on behalf of health plans. Researchers have found that Medicare Part D plans with preferred pharmacy networks pay lower out of pocket prices for retail prescription drugs.43 PBMs also may produce benefits to patients and health plans through the operation of their own mail order pharmacies.44,45 The availability of mail order creates value to consumers by promoting easy accessibility to drugs that treat or maintain chronic disease. This may in turn create health benefits and generate potential savings from forestalling additional medical care costs. PBM owned pharmacies also create competition with pharmacies, including those owned by massive corporate chains, such as Walgreens (see Figure 15). Competition between pharmacies may act to reduce prices and enhance quality.46
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43 Starc A, Swanson A. "Preferred Pharmacy Networks and Drug Costs."
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Figure 15. Largest 15 U.S. Pharmacies, by Total Prescription Revenues in 2022.
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44 Central-fill, mail pharmacies operated by large PBMs, and health insurers have displaced retail chains as the largest prescription drug dispensers by revenues. Five of the largest
45 According to the House oversight report, another key function of PBMs is to establish a network of pharmacies from which plan beneficiaries can get their prescriptions filled. However, the three largest PBMs--CVS Caremark, Express Scripts, and Optum Rx-- own their own pharmacies. They also control 80 percent of the market. But they are not the only ones - smaller PBMs own their own pharmacies too. PBMs "steer" patients to the pharmacies they control, making it difficult for independent pharmacies to survive. PBMs also reimburse unaffiliated pharmacies at low rates and charge several fees to independent pharmacies. These retroactive fees can be for just participating in the network, or they can be tied to performance metrics, such as pharmacy refill rates, error rates, or audit rates, which the PBM establishes. These retroactive fees add up - sometimes it costs a pharmacy more to fill a prescription than it is reimbursed. For specialty pharmacies, they accrue fees based on irrelevant metrics.
46 Tirole J. The theory of industrial organization.
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PBMs provide these benefits to the US health system without significantly altering incentives for innovation by drug makers.47 In addition, PBMs only interact with the market for drugs covered under the pharmacy benefits of health plans and therefore have no impact on the net prices paid nor revenue gained from specialty drugs covered under the medical benefit, many orphan drugs and branded drugs without competition.48 Among Medicare Part D plans evidence generated recently by the GAO suggests drug makers that sell the majority of branded drugs in the protected classes do not offer rebates to PBMs in exchange for formulary coverage.49 Indeed, rebates offered to Medicare Part D plans concentrated in a small number of products (see Figure 16). [Link to figure at bottom]
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Figure 16. Percent of rebates, gross expenditures, and utilization for 100 highest-rebated Part D drugs compared to all other drugs 2021.
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47 Conti RM, Frandsen B, Powell ML, Rebitzer JB. "Common Agent or Double Agent? Pharmacy Benefit Managers in the Prescription Drug Market."
48 Non-oral drugs, orphan drugs and other specialty drugs are where drug companies make money and where the industry has largely been innovating.
49 GAO-23-105270, MEDICARE PART D: CMS Should Monitor Effects of Rebates on Plan Formularies and Beneficiary Spending
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Emerging concerns regarding the PBM market
I am worried that PBMs activities may also contribute to behaviors that have the potential to harm patients and payers.
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PBMs and misallocated formulary incentives
Concerns have been raised that PBMs design formularies based on what maximizes revenues and profit rather than what lowers costs for patients.50 If rebates are based off a drug's list price, PBMs have an incentive to select a higher-priced drug over a lower-priced product to collect the higher rebate amount. Accordingly, PBMs may include more expensive products on formularies rather than therapeutically equivalent cheaper alternatives to garner the largest rebate. A recent report by the GAO,51 do not support the widespread use of these actions in Medicare Part D plans (see Figure 17) [Link to figure at the bottom]. However, such behaviors, if they do exist in the public and commercial insurance markets, will act to erode the substantial benefits gained from generic and biosimilar competition for
Figure 17. Percentage of formulary placements among 40 highly rebated brand-name drugs with generic counterparts in Medicare Part D Formularies
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50 See for example Socal M, Bai G, Anderson G. "Favorable Formulary Placement of Branded Drugs in Medicare Prescription Drug Plans When Generics Are Available." JAMA Internal Medicine 179(6) (2019): 832-833; Dusetzina S, Cubanski J, Nshuti L, et al. "Medicare Part D Plans Rarely Cover Brand-Name Drugs When Generics Are Available." Health Affairs 39(8) (2020): 1326-1333; and Buttorff C, Xu Y, Joyce G. "Variation in Generic Dispensing Rates in Medicare Part D."
51 GAO-23-105270, MEDICARE PART D: CMS Should Monitor Effects of Rebates on Plan Formularies and Beneficiary Spending
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PBMs also have been accused of switching patients to therapeutically similar drugs for which they have negotiated more favorable rebate terms.52 In a practice called "therapeutic substitution," patients are switched from one brand name drug to a generic form of a different drug in the same class or to a lower-cost brand name drug in the same class. While therapeutic substitution offers the potential for significant cost savings, at least one PBM agreed to pay
In response, PBMs highlight that their formularies are developed by a
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PBMs and pharmacies
On pharmacies, the construction of narrow networks and competition from PBM owned pharmacies may place significant competitive pressure on sole proprietorship and community pharmacies.54 This may reduce these pharmacies revenue base or impose additional costs on these medical providers and create challenges for consumer access, especially for some vulnerable populations and rural communities.
Moreover, PBMs may engage in spread pricing policies, in which a PBM pays a pharmacy a lower amount than they report to a health plan for a dispensed prescription. This behavior imposes costs on health plans, include state Medicaid programs.55 The difference between what the PBM pays the pharmacy and what the plan pays the PBM for the same prescription is pocketed by the PBM and can result in substantial earnings. In addition, because contracts between PBMs and pharmacies are proprietary, State Medicaid agencies and other payers often cannot verify the amount of spread pricing. If spread pricing is not appropriately monitored and accounted for, plans may not be aware of the spread amount included in pharmacy costs and may negotiate separate administrative payments to PBMs without knowing how much PBM profit is already built into the pharmacy costs as spread pricing. State Medicaid agencies and health plans may use these inflated pharmacy costs in setting premium rates and payments to managed care organizations if they delegate coverage responsibility. If a payer increases its capitated payments to managed care organizations (such as state Medicaid MCOs or Medicare Part C) based on a rate setting influenced by inflated pharmacy costs, it increases the cost of the benefit.56
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52 https://www.finance.senate.gov/imo/media/doc/A%20Tangled%20Web.pdf
53
54 Most prescription drugs are dispensed through large pharmacy chains. According to Drug Channels, the top seven companies operating pharmacies--
55 Royce TJ, Kircher S, Conti RM. "Pharmacy Benefit Manager Reform: Lessons from
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PBMs have been found to overcharge state Medicaid programs in
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PBMs and drug makers
The reaction of drug makers to the business model of PBMs also presents tradeoffs.
The rebates offered by drug makers competing in the arena set by PBMs may offset increases in list prices. Such behavior creates disconnections between the list prices set by drug makers and the actual transacted prices for branded prescription drugs, such as documented by many reports (see Figure 18).
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Figure 18. Trends in branded drugs' list prices, net prices, and patient out of pocket costs 2013 through 2022.
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Moreover, evidence suggests that these offsets off sets are not complete. In Medicare Part D, the differential between list prices set by branded drug makers and the costs borne by beneficiaries and taxpayers exists and has been growing over time (see Figure 18). [Link to figure at bottom]
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56 CMS Press Release, "CMS Issues New Guidance Addressing Spread Pricing in Medicaid, Ensures Pharmacy Benefit Managers are not Up-Charging Taxpayers." Available at https://www.cms.gov/newsroom/press-releases/cmsissues-new-guidance-addressing-spread-pricing-medicaid-ensures-pharmacy-benefit-managers-are-not. Accessed on
57 Catherine C. "State report: Pharmacy middlemen reap millions from tax-funded Medicaid."
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Indeed, a recent OIG report58 found that after accounting for rebates, Part D reimbursement still increased 62 percent from 2011 to 2015 (see Figure 19). Total rebate dollars for all brand-name drugs in Part D more than doubled (a 155 percent increase) across the 5 years, from
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Figure 19. The gap between total reimbursement and total rebates increased each year for brand-name retail prescription drugs covered under Medicare Part D.
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This activity also directly impacts the out-of-pocket payments consumers paid for such drugs. It may also have the most perverse effect on the millions of commercially insured patients in high deductible health plans and the uninsured (see Figure 20). [Link to figure at bottom]
Figure 20. Distribution of health plan enrollment for covered workers, by plan type, 1988-2022
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58 https://oig.hhs.gov/oei/reports/OEI-03-15-00080.asp
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This behavior also undermines transparency in our system, as the difference between list prices and transacted prices can grow under these incentives.59,60 the policy trends in our system to improve transparency and more closely align reimbursements with actual prices paid for medical care provision.
Economic theory suggests drug makers offer rebates off their list prices to compete in the arena PBMs create and maintain between drug makers and that PBMs will tend to place the higher list-price drug in the preferred formulary tier. This can be managed when list prices for drugs are set by external parties (such as based on value assessments in
The House Oversight Committee61
See as an example the pricing practices of Abbvie and
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59 https://www.gao.gov/prescription-drug-spending#:~:text=For%20example%2C%20retail%20prescription%20drug,other%20countries%20for%20prescription%20drugs.
60 https://www.iqvia.com/insights/the-iqvia-institute/reports/the-use-of-medicines-in-the-us-2023
62 The Oversight Committee report notes, "AbbVie and
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Figure 21. Evidence of Shadow Pricing Practices by Drug Makers Documented by the
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Faced with strong incentives to compete in the PBM arena on rebates, drug makers may also choose to undermine the formulary incentives by threatening PBMs through the offer of bundled rebates across drugs they sell.63 This behavior on the one hand may reduce prices paid for drugs, but on the other hand may reduce competition between drug makers, reducing access to drugs by patients and physicians. This may be particularly perverse when it impacts the entry and competition of generics and biosimilars.
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PBMs and horizontal consolidation
I am also worried about the market tendency to consolidate because of these practices.
In my research, I have noted the ubiquity of most favored nation (MFNs) clauses in contracts between PBMs and health plans.64 MFNs guarantee each health plans contracting with a PBM that they will share in lower prices PBMs are able to extract from drug makers.65 From a theoretical perspective, MFNs in the is context, create a contracting extension that lead to weaker formulary incentives where the copay in the preferred tier exceeds marginal cost. Under these circumstances, horizontal mergers between PBMs internalize this externality. The result is more efficient (stronger) formulary incentives where the copay in the preferred tier is set closer to marginal cost. PBMs are now huge entities that are much larger by various metrics than their negotiating counterparts up and down stream in the us medical care system, such as health plans or drug makers (see Figure 22). [Link to figure at bottom]
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63 See GAO-23-105270, MEDICARE PART D: CMS Should Monitor Effects of Rebates on Plan Formularies and Beneficiary Spending And
64 Conti RM, Frandsen B, Powell ML, Rebitzer JB. "Common Agent or Double Agent? Pharmacy Benefit Managers in the Prescription Drug Market."
65 Certain federal regulations also build MFN-style guarantees into the purchase of prescription drugs insured by Medicaid or acquired by hospitals. These MFN guarantees threaten formulary efficiency by introducing a contracting externality. If one PBM secures a lower net price for a branded prescription drug through aggressive formulary incentives, the drug maker must also lower the net price for the other PBMs who have MFN guarantees.
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Figure 22. PBM market share, by total equivalent prescription claims managed, 2022.
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The horizontal consolidation among PBMs has tradeoffs. While it may generate higher rebates extracted from drug makers, it also reduces competition between these important intermediaries in our system, reduces incentives for transparency, which in turn reduces the ability for health plans and their beneficiaries to shop for PBMs services. This market organization may also not facilitate the sharing of rebates with plans/employers or patients.66,67,68 Indeed, the distribution of efficiency gains is determined by competition in the market for PBM services.69 When PBMs are highly concentrated, efficiency gains resulting from formularies accrue to PBMs rather than consumers or drug makers.
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PBMs and vertical consolidation with health plans
66 Drug Channels. "Employers are Getting More Rebates Than Ever - But Sharing Little with Their Employees". (
67 Bai G, Sen A, Anderson G." Pharmacy Benefit Managers, Brand-Name Drug Prices, and Patient Cost-Sharing," Annals of Internal Medicine 168(6) (2018): 436-437.
68 Feldman W, Rome B, Raimond V, et al. 'Estimating Rebates and Other Discounts Received by Medicare Part D".
69 https://www.drugchannels.net/2023/05/the-top-pharmacy-benefit-managers-of.html
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In my research, I have noted that each PBM operating in the
Figure 23. Vertical relationships among insurers, PBMs, specialty pharmacies, and providers, 2023.
While there are potential efficiencies with vertical consolidation between PBMs and health plans, there may also be potential perverse impacts.72 We find that a large PBM acting as an agent for many payers can internalize the contracting externality created by MFNs and so enhance market efficiency. But to the extent that large, common-agent PBMs reduce market competition, the resulting efficiency gains will accrue to PBMs rather than consumers or producers and consequently, reduce how sensitive a drug maker's rebate offer will be to any one PBM's formulary design. This will indeed result in lower rebates, but the main consequence is PBM formularies will not be so generous, and patients may pay more out of pocket. In short, MFNs can increase patients' out-of-pocket costs for drugs.
Vertical consolidation between health plans and PBMs likely has other consequences. Burns notes that such integration also potentially signals that PBMs may focus increasingly more on the specialty pharmacy business for their profitability and, conversely, focus increasingly less on retained rebates.73
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70 https://www.drugchannels.net/2023/05/mapping-vertical-integration-of.html
71 As
72
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PBMs have passed along a much greater share of these rebates to health plan sponsors over the past decade, from 75% in 2013 to 90% in 2018. According to some PBM industry presentations, rebates apply to 70% of their branded pharmacy scripts, which in turn account for only 10% of total scripts. Rebates have also diminished in importance due to Medicare's growing share of retail prescription drug spending (from 18% in 2006 to 30% in 2017) and the low amount of rebates retained by PBMs in their relationships with Medicare Part D plans.
Gray et al examines the extent and impact of PBM-health plan vertical consolidation in Medicare Part D plans.74 They find evidence that vertical integration between PBMs and insurers increased dramatically in the Medicare Part D market with the market share of vertically integrated plans increasing from about 30% to 80% between 2010 and 2018. Vertical integration between a health plan and the PBM did not result in lower premiums for beneficiaries of the integrated plan. Furthermore, they show that rising vertical integration may have led to the market exit of standalone PBM competitors, which could explain rising premiums for Medicare beneficiaries at non-vertically integrated plans.75 The existence of MFNs in PBM contracts with health plans does allow smaller plans and employers to get better deals from drug makers than they otherwise would without the pooling with the larger plans the PBM offers. However, with vertical consolidation between PBMs and larger plans, smaller plans and employers may have even less ability to understand the benefits and costs of PBMs, and shop accordingly. This is important to note because self-insured plans account for around two-thirds of enrollment in employer plans, and consequently it is still frequently the case that the PBM and the ultimate payer are different entities even where PBMs and insurers are integrated.76 Growing vertical integration between health plans and PBMs will likely reduce the transparency of freestanding PBMs' financial results.77 This may also create challenges with medical loss ratio reporting by health plans covering Medicare Part D beneficiaries and beneficiaries enrolled in Medicare Advantage (Part C) plans.78,79
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73
74 Gray C, Alpert AE, Sood N. "Disadvantaging Rivals: Vertical Integration in the Pharmaceutical Market." NBER Working Papers 31536, 2023.
75 Gray et al found studied the vertical acquisition of Catamaran (a PBM) with United (a health plan) in 2015.
76 https://www.kff.org/report-section/ehbs-2022-section-10-plan-funding/
77
78 CMS, "CMCS Informational Bulletin: Medical Loss Ratio (MLR) Requirements Related to Third-Party Vendors." Available at https://www.medicaid.gov/federal-policy-guidance/downloads/cib051519.pdf. Accessed on
79 https://www.brookings.edu/articles/a-brief-look-at-current-debates-about-pharmacy-benefit-managers/
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Original text plus figures here: https://oversight.house.gov/wp-content/uploads/2023/09/House-PBM-Testimony-Conti.pdf
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