Inflation has hit all Hoosiers hard, and consumers are bracing themselves for rising costs across all industries. Unfortunately, the healthcare industry is no different. Nationwide, employers expect significantly higher healthcare costs and outsized premium increases in 2023.
Indiana may be especially hard hit.
The Kaiser Family Foundation studied 13 states, including Indiana, to estimate the expected healthcare cost increases in 2023. Its analysis estimated that the average increase in costs would be a notch above 10% nationwide. Given these accelerating costs, the Federal Trade Commission was directed to investigate, and potentially limit, the market power of pharmacy benefit managers (PBMs). This action is puzzling since PBMs actually help reduce the rising costs of prescription medicine.
Pharmacy benefit managers are intermediaries who negotiate with pharmaceutical companies on behalf of insurers, unions, state Medicaid agencies, and large employers. PMBs negotiate on behalf of consumers to obtain rebates and fees that reduce the net cost of prescription drugs to consumers and insurers. The FTC’s core concern is that PBMs have become too large and have accumulated too much market power. This perspective overlooks that negotiations result in more equitable outcomes through balancing market power.
Think of these negotiations as a wrestling match. To make a match fair, both wrestlers need to be in the same weight class. Pharmaceutical firms are huge, and consumers are comparatively microscopic. Without PBMs, pharmaceutical companies are heavyweights beating up on the little guy. PBMs serve to reduce the market power of pharmaceutical companies and level the playing field. Since consumers and the retail pharmacies cannot organize to use their collective market power, PBMs exist to leverage that market power into lower drug prices.
Those who consider PBMs as superfluous “middlemen” ignore this imbalance of power. Pharma owns government-granted monopolies on their latest, cutting-edge drugs, and seek a healthy return on their investment. For Pharma, patent protection incentivizes research, advances medicine and improves health outcomes, but removing PBMs from the negotiations will not reduce drug costs in the slightest. It will just give Big Pharma more market power while harming consumers who will no longer have a seat at the negotiating table.
PBMs also help their clients by encouraging home delivery for prescriptions. Depending on the medication, home delivery helps ensure consistent uptake by consumers. Research shows that patients with chronic maladies, such as cholesterol management, achieve better health outcomes and lower health care system costs when they receive their prescriptions by mail, especially those with mobility concerns or living in rural areas. One study showed that Medicare beneficiaries afflicted with hypertension could save the government $13.7 billion annually by using prescriptions delivered by mail.
PBMs serve a valuable, competition-enhancing market function, but regulators and policymakers have turned them into a boogeyman to distract from real problems. The bottom line is that PBMs balance the market power between Pharma and retail pharmacy chains to lower drug costs for consumers and healthcare providers. If those advocating against PBMs are successful, the likely outcome will be higher healthcare costs to all Hoosiers, the state of Indiana, and the federal government, along with compromised health outcomes across all constituencies.
Timothy F. Slaper, Ph.D, is Research Director at the Indiana Business Research Center at Indiana University.