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by CASE President Matthew Kandrach

Pharmacy Benefit Managers (PBMs), the goliath health insurance middle-men wedged between plan managers, drug manufacturers, patients and pharmacies, make huge profits by forcing pharmacies to pay back a portion of drug sales after the sale has been completed. It is a profitable business model in today’s healthcare industry.

The practice is called a “clawback,” and PBMs are able to pull this off because of the enormous leverage they have to set both the wholesale and retail costs of drugs, as well as control what drugs pharmacies may carry. After a period of mergers and consolidations in the industry, today just three PBMs control 78 of the prescription benefit market, a healthcare oligarchy if there ever was one.

Control of the market allows them to keep drug manufacturers, pharmacies, plan sponsors and patients completely in the dark on the actual cost of prescription medications paid by consumers.

In fact, PBMs require that drug manufacturers who supply the product and the pharmacies who sell to patients sign non-disclosure agreements. Only the PBMs know the true costs at each stage, and this knowledge allows them to ratchet up profits far from prying eyes.

An investigation in New Orleans exposed one example of this swindle — a pharmacy patient was charged her full $50 co-pay for a drug that had a retail cost of $11.65, meaning it would have been much cheaper to purchase outside the patient’s prescription drug plan.

The patient didn’t know the true cost, and the pharmacy was under obligation not to tell her of the cheaper out-of-plan cost, so the consumer overpaid by $38.35. The pharmacy was forced to send that amount back to the PBM as pure profit. This transaction is far from isolated, and comes courtesy of the rules created and enforced by the PBMs. This is unacceptable.

The PBM highlighted in this particular transaction, Optum Rx, actually released a letter defending the practice, saying that by collecting the overage they were helping keep insurance costs down for consumers. This is like a car dealer saying he overcharged you on an auto sale in order to keep repair costs down, a contention that would be laughable if it weren’t so outright dishonest and costly.

It is amazing that in the heavily-regulated healthcare industry, PBMs are not only able to skirt the rules, they pretty much get to write their own. There are no effective limits on how they negotiate volume, price and drug availability with pharmaceutical manufacturers, and there are no limits to how much they dictate pharmacies must charge patients. The amount of money the PBMs keep for themselves is as mysterious as string theory.

Their incentive isn’t to keep costs low for the sponsors who hire them to administer a plan for their employees, but to maximize profits, by squeezing drug makers and pharmacies to be included in their 78 percent market share. And their model is succeeding. One of the big three PBMs, Express Scripts, saw profits jump from $2 billion in 2014 to $3.4 billion in 2016, a 70 percent increase in just two years.

That’s money they’re taking straight from consumers by pocketing the rebates they squeeze from manufacturers and the rapacious clawbacks they demand from pharmacies. In this absence of true market competition, PBMs can practically choose how much to profit on the backs of consumers.

Thankfully, there is a proposal on the table that will help rein in their practices, legislation titled  Improving Transparency and Accuracy in Medicare Part D Drug Spending Act. These bills start the much needed effort to put limits on PBM clawbacks in the Medicare Part D program, which provides prescription drug services to seniors.

Specifically, the Medicare Part D Drug Spending Act would complete the transaction of consumer drug purchases at the point of sale for Part D plans, with no requirement that pharmacies then send money back to the PBMs.

As noted in a study conducted by Wakely Consulting Group last month, these companion bills would save taxpayers $3.4 billion over 10 years, with zero decrease in benefit to seniors.

Legislation that brings even some transparency to PBM’s role in the managed prescription drug market will benefit consumers. It does this by forcing them to set a true retail price for pharmacy prescriptions and eliminate back door clawbacks. It’s an important start, and one that can hopefully lead to more sunlight in the cost of prescription medications, more competition in the market, and lower prices for consumers.

Matthew Kandrach is president of Consumer Action for a Strong Economy(CASE), a free-market oriented consumer advocacy group.