Episode 043: How PBMs Jack up Drug Prices with Dr. Madelaine Feldman

How do PBMs (pharmacy benefit managers) pass on savings to themselves and leave patients and insurance companies holding the bill? It's hard to answer that question without first understanding what a PBM is, how they work, and what their role is in the pharmaceutical market. Unfortunately, the PBMs intentionally cloud what they really do in order to continue ripping off patients and insurance companies with unnecessarily high drug prices.

How the PBMs do that is the explained by the guest of this episode, Dr. Madelaine Feldman, who is a rheumatologist in private practice in New Orleans, LA. Dr. Feldman explained in a very good article the exact mechanism that PBMs use to garner their very high profits. It begins with only three companies commanding a tremendous market share aided in part with regulatory advantages and the use of laws within states and the federal government.

In theory, the PBMs are supposed to operate to control pharmaceutical prices to their clients (Medicare, private insurers, pharmacies) by contracting directly with pharmaceutical manufacturers and acquiring economies of scale through bulk purchasing and the creation of efficient formularies. Through the contracting process PBMs would acquire rebates because of their large purchasing patterns and then pass those savings along back to their clients.

In practice, the PBMs do no such thing. Instead, they capture tremendous rebates and pocket them without passing along any of the savings. Also, because they structure their profits with the rebates they can capture, they then perversely encourage the manufacturers of those pharmaceuticals to have higher initial prices. The reason is best illustrated with the following equation:

Rebate Total ($ made by PBM) = (List Price) x (% Discount) x (# of Rx filled)

As you can see, the money or profits by the PBMs is dependent on high list prices and the volume of drug they can move. As they command a large share of the market they don't worry about their expense and only to keep the list price high in order to capture the rebates which is where the bulk of their money is made. We did discuss the problem with this equation is that if someone came in and just adjudicated claims and passed all the rebate savings back to the insurers they could significantly undercut the current model. That is beginning to happen but not quickly as insurance brokers who sell to businesses get sizable rewards for selling certain insurance plans that have the necessary capital to keep this machine running.

Madelaine Feldman, MD — Dr. Madelaine Feldman is a rheumatologist in private practice in New Orleans, LA and an expert on pharmacy benefit managers (PBMs). She testifies before the federal government and state legislatures about controlling the costs of pharmaceuticals.

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show notes

Prescription Drugs and the Effect on Access to Biosimilars in the US : Dr. Feldman's piece explaining how pharmacy benefit managers make their money through a combination of volume and maximizing the rebates they can attain from manufacturers (after the list prices have been increased).

@MattieRheumMD: Twittering for Dr. Feldman

Linked In: Dr. Feldman's Linked In Page

Episode 012: My discussion with Dr. Keith Smith about his surgical center and why health insurance is so expensive.

Episode 040: The problem with prior authorization and also drug tiering by insurance with Dr. Mark Lopatin

Episode 005: My discussion with Dr. Marion Mass regarding group purchasing organizations and pharmacy benefit managers.

Episode

Memorial for Andy Larson: This is the donation link to honor Andy's death with the Grand Rapids Choir of Men and Boys where he blossomed and served as a head chorister.

YouTube for Paradocs: Here you can watch the video of my late son singing his solo on the Paradocs YouTube page.

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Episode 043: How PBMs Jack Up Drug Prices with Dr. Madelaine Feldman

Episode 043