When it comes to PBMs, legislators should be cautious about regulating things they don’t understand

• The unintended consequences could be immense, disrupting contractual agreements at a cost of tens of millions of dollars and increasing the price of drugs to Mississippians.

When I first started engaging on policy at the Capitol, a friend of mine who was longer in the tooth told me, “Russ, you see everything as free market versus big government, but what happens up here is a fight between cartels.”

As much as I wish it weren’t true, that insight has served me well in understanding legislative battles. A kind of cartel fight is taking place between pharmacy benefits managers (PBMs) and independent pharmacies in the Legislature this year. Caught in the crossfire are Mississippi employers and consumers.

Locally owned businesses make for sympathetic combatants, but legislators should proceed with caution in putting their thumbs on the scale. The unintended consequences could be immense, disrupting valid contractual agreements at a cost of tens of millions of dollars for the state’s employers and increasing the price of drugs to Mississippians.

As focus rested almost exclusively on tax reform last week, a group of the largest employers in Mississippi raised alarm bells about a Senate proposal added into a bill aimed to provide PBM transparency, HB 1123. According to a letter sent to House Speaker Jason White, the Senate’s additions would result in higher prescription drug costs, violate federal law, and potentially result in lawsuits.

What Is a PBM?

Pharmacy benefits managers date back to the 1960s when health insurance companies began offering prescription drug coverage. PBMs helped determine what drugs to cover for certain conditions, to set reimbursement rates, process claims, and ultimately pay pharmacies.

Today, PBMs do not work solely with big health insurance companies, but also the self-funded ERISA plans of businesses. These companies contract with PBMs to manage their prescription drug benefits.

How it Works?

PBMs serve two important functions for health insurers and consumers aimed at reducing the cost of prescriptions. First, PBMs create formularies — essentially lists of recommended drugs for specific conditions. These lists putatively exist to provide for lower cost alternatives.

Second, PBMs negotiate rebates from large drug manufacturers. Because they are gatekeepers to the entire market, PBMs have enormous negotiating power. 91 percent of these rebates get passed on to insurers and health plans, which help to reduce their costs.

The remainder of the rebates are one of two ways PBMs earn profits. The other way PBMs earn profit is through something called “spread pricing.” Essentially, insurers and plans agree to pay a set amount for a drug and the PBM negotiates a lower reimbursement to pharmacies. The delta between the two becomes what is essentially a negotiator’s fee for the PBM.

The Benefits & The Detractors

The Pharmaceutical Care Management Association, the trade association for PBMs, says they save payers $1,154 annually per patient, or 40-50 percent on drug costs. For every dollar in fees paid to PBMs, PCMA says they generate $10 in savings.

Still critics have argued that the PBM model sometimes results in drug choices being made that aren’t in the best interests of patients, but rather, a result of which manufacturers are offering the biggest rebates. Independent pharmacies also argue that PBMs often pay too little to cover the cost of the drugs they sell and that they favor larger chain pharmacies that purchase greater volumes of pharmaceuticals.

Similar arguments could be made about Wal-Mart or other large retailers getting preferential treatment from vendors as a byproduct of volume purchasing.

The Free Market Warrior

The free market warrior still living in me would say it’s none of government’s business what private companies contract to do and that even HB 1123 in its original form went too far. How would you like for government to monitor whether you’re charging too much or too little for your services? Where does it end?

But the Senate version goes even further, from monitoring to actual interference in private contracts, in a way that will damage Mississippi consumers and businesses. Legislators should talk to actual employers about the impact before they go down this road.