New Drug Plan Regulations Protect Pharmacies, Harm Consumers

Policy Reports | Health

No. 365
Monday, April 20, 2015
by Devon M. Herrick

Drug plans and drug benefits have become widespread. An estimated 220 million Americans obtain their drugs through a managed plan. Some drug plans are integrated with health coverage, while others — such as the Medicare Part D plans — are stand-alone plans.  Drug plans use a variety of techniques to control costs. Large national pharmacy benefit managers (PBMs) are able to negotiate lower prices from manufacturers because they have multiple clients, and therefore possess far more bargaining power than individual firms. PBMs also negotiate with pharmacies, and assemble networks of preferred pharmacies willing to provide the most value for consumers’ dollars. The process is highly competitive: PBMs compete for the rights to manage health plan members’ drug benefits; drugstores compete to attract drug plan members needing a prescription filled; drug makers compete to ensure their drugs go into members’ prescription pill bottles. The process is also often antagonistic — involving intense negotiation, competitive bidding and fierce price competition.

The degree to which drug benefits are managed efficiently has significant effects on consumers’ cost-sharing and premiums. For most Americans, a trip to the pharmacy incurs little out-of-pocket cost:

  • One-fourth (23 percent) of retail prescriptions are fully covered by insurers and require no copayment by the patient.
  • An additional one-third (34 percent) cost the patient $5 or less.
  • The cost-sharing for more than three-fourths of prescriptions (78.6 percent) is $10 or less.

Considering the benefits of safe and affordable prescription drugs, lawmakers are unwise to impose stifling regulations on drug plans, boosting costs to consumers and employers. These regulatory initiatives purportedly “protect consumers,” but are actually designed to protect local pharmacies from competition. State regulations reducing competition often boost the profits of local stakeholders. These profits generally come at the expense of insurers, employers, pharmacy benefit managers and consumers.

Harmful Drug Plan Regulations. PBMs reduce premiums by contracting with qualified pharmacies offering competitive prices. Pharmacies and other suppliers excluded from the network (due to price or quality considerations) lobby sympathetic politicians to force PBMs, health plans, drug plans and insurers to do business with noncompetitive pharmacies, which increases costs to consumers. Recent legislative proposals — some that passed and some that didn’t — would weaken or prohibit these agreements health plans negotiate with pharmacy networks.

These regulations have tilted the playing field further away from free market competition and are likely to continue. Failed legislative agendas designed to benefit special interests have a way of coming back year after year. Some examples of bad regulations include:

Banning Preferred Pharmacy Networks. Increasingly, drug plans have experimented with exclusive or “preferred” pharmacy networks as leverage to negotiate lower drug prices from pharmacies competing to become exclusive network drug providers. The Federal Trade Commission (FTC) has argued time and time again — in numerous reports and opinions issued on specific state proposals — that any willing pharmacy laws banning such networks lead to higher drug prices and higher premiums.

Limiting Mail-Order Pharmacies. One self-serving regulation that harms consumers is designed to protect local pharmacies from having to compete with highly efficient mail-order pharmacies. These restrictions often prohibit drug plans from offering members a financial incentive (a discount) for using a health plan’s preferred pharmacy or its mail-order option.

Inhibiting Specialty Networks. Highly advanced specialty drugs and biological agents are supplanting the pills, capsules and elixirs Americans relyied on during the past century. Specialty drugs are very expensive, costing thousands to tens of thousands of dollars per month — creating a gold rush among firms vying to provide these lucrative services.

Well-managed, exclusive specialty pharmacy networks allow manufacturers to track drugs that require specific or complex dosing and laboratory monitoring. FDA monitoring requirements favor tightly controlled networks for safety reasons. Moreover, the Federal Trade Commission (FTC) agrees exclusive networks are an effective means of cost control. Regulations that inhibit drug plans from establishing highly efficient, preferred specialty networks also make it more difficult to ensure the integrity of these drugs.

Obstructing Competitive Bidding. With the cost of advanced therapies growing to previously unimaginable levels, health plans and PBMs have increasingly turned to competitive bidding in order to negotiate better deals with drug makers and retail pharmacy chains. This often means the lowest bidder of a competitive auction wins the near-exclusive right to dispense a particular medication. And in a healthy marketplace, competition for a coveted place on a formulary encourages bidders to offer their best deals — to avoid the loss of potentially lucrative business.

Drug benefits managed efficiently help make most medications affordable to most patients. Blatant protectionism through restrictive drug plan regulations may be touted as consumer protections, but more often than not they benefit local pharmacy service providers at the expense of consumers.

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