Targeting PBMs could raise drug prices

As prescription drug costs in the United States skyrocket, the search for a culprit often lands on Pharmacy Benefit Managers (PBMs). These intermediaries tasked with negotiating drug prices on behalf of consumers, pharmacies, and insurers, increasingly face accusations for driving up high costs, which even led to an FTC lawsuit against them.

The reality, however, is far more nuanced. PBMs exist to lower drug prices. Measures to restrict them risk making medications less affordable for Americans. Weakening PBMs' role does not solve the problem. It shifts the balance of power back to the very companies responsible for the skyrocketing costs.

You might have never heard of PBMs, but their role has likely affected you if you live in the United States and filled out a prescription. They are sometimes called 'middlemen' in the complex prescription drug supply chain, negotiating prices with pharmaceutical manufacturers behind the scenes and deciding which medicines are covered by insurance plans, managing prescription drug benefits.

As such, PBMs act as the intermediaries between health insurance plans, employers, and drug manufacturers. PBMs use their size to negotiate lower prices and keep a check on the power of drug companies to raise prices. This task can make the difference between an affordable treatment and one out of reach, helping control costs for patients.

Critics argue that PBMs have become too powerful, accusing them of adding hidden markups, distorting prices, or placing their own profits above patient needs. They claim that PBMs operate in ways which lack transparency and sometimes leave pharmacies or consumers disadvantaged.

These concerns have fueled political pressure and helped create the narrative that PBMs are to blame for rising drug costs. Critics of PBMs also point to administrative fees, opaque rebate practices, or perceived conflicts of interest. While transparency and oversight are certainly important, these critiques should not obscure the larger economic reality.

The recent lawsuit targeting PBMs could unintentionally lead to higher drug prices, as it threatens the very mechanisms which negotiate lower costs on behalf of consumers. Anti-PBM claims rest on limited evidence and ignore the far greater pricing power of pharmaceutical manufacturers, who ultimately set list prices.

Several states like Arkansas, Tennessee, Wiscounsin, and Arizona, have seen proposals aiming to restrict PBM practices to make drug pricing more transparent. But closer analysis suggests these measures may backfire. By limiting PBMs' negotiating power, lawmakers inadvertently shift leverage back to manufacturers, the entities which actually set and raise prices.

Consequently, and contrary to what you might hear from their critics, PBMs do not set drug prices, let alone raise them. They negotiate them down, earning slim margins of about 2%, far below the 12% typical of pharmaceutical or large S&P 500 companies.

While the intent of protecting consumers is laudable, the outcome is likely to be the opposite. PBMs, not drugmakers, are tasked with applying downward pressure on prices. Removing or penalizing them simply strengthens the manufacturers' position, which can lead to higher, not lower, costs for patients.

A more productive approach would involve sensible, moderate regulation aimed at increasing transparency in drug pricing, incentivizing competition among manufacturers, and supporting PBMs in their negotiating role rather than limiting it. Policymakers should ensure PBMs can continue to leverage their bargaining power effectively, while also requiring clear reporting to maintain accountability and public trust.

While attacking PBMs might seem well-intentioned, it turns out to be the wrong target and a misguided strategy. These middlemen are not the cause of soaring drug prices. They protect the Americans from them.

Laws and regulations targeting PBMs are, at best, a misdiagnosis of the problem. They risk punishing the intermediaries working to keep medications affordable while leaving the entities which actually drive up costs untouched.

In other words, efforts to penalize PBMs risk worsening the very problem they are trying to solve, because in a market dominated by manufacturers with significant pricing power, PBMs wield the bargaining leverage which individual consumers, small pharmacies, or even insurers would struggle to achieve on their own. Without them, prices would almost certainly rise further and faster.

Bojan Lazarevski is a political scientist in international and intercultural studies based in North Macedonia. Bojan is also a writing fellow with Young Voices Europe and an activist and researcher.

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