Congress grilled little-known middlemen over the high cost of prescription drugs. Here's how they defended themselves.

A group of executives representing little-known middlemen in the pharmaceutical industry had their day in the hot seat.

On Tuesday, the Senate Finance Committee grilled these pharmacy benefit managers or PBMs, the entities responsible for negotiating lower drug prices.

“It’s our duty to understand how the system is working today and what we can do to improve it,” Senator Chuck Grassley, a Republican from Iowa, said in his opening statement. Grassley leads the Senate Finance Committee.

Those who testified Cigna chief clinical officer Steve Miller; CVS Caremark president Derica Rice; Humana’s healthcare services segment president William Fleming; Mike Kolar, the interim president for Prime Therapeutics; and John Prince, the CEO of UnitedHealth Group’s OptumRx unit.

List prices for prescription drugs have been increasing over the past decade. Drug companies set the list prices for their drugs directly. But they say the list prices don’t reflect the real cost of their drugs.

Instead, drug companies point to a measure called net price, which takes into account rebates and discounts negotiated by PBMs on behalf of employers and insurers. They say that’s increased far less, or even declined for some drugs. Pharma companies say consumers are paying high out-of-pocket costs for their drugs because of policies set by insurers and pharmacy benefit managers.

Drugmakers pay out more than $US100 billion in rebates annually. Rebates are a big business for PBMs, whose clients can opt to pay for the PBM’s services via those rebates or have them passed directly on. In their written testimony, the executives worked to downplay the role these rebates play in their business.

Read more:Everybody is talking about the high cost of prescription drugs. Here’s who’s actually responsible for the prices you pay.

What rebates?

The Trump administration is targeting the rebate system, saying it drives up out-of-pocket costs for consumers. The Department of Health and Human Services proposed a rule earlier in 2019 that would effectively ban some rebate payments unless they’re passed along to consumers. Big pharma companies applauded the rule, while PBMs and health insurance companies criticised it.

With rebates in the crosshairs, the executives tried to contextualize how big of an impact rebates have.

Humana’s Fleming noted that in 2019, only 255 of the drugs covered in Medicare had rebates, or about 7% of all the drugs Humana’s Medicare plans cover. In response to a question from Democratic Senator Sherrod Brown of Ohio, Prime’s Kolar said that about 8% of the drugs in its Medicare plan have rebates, OptumRx’s Prince said rebated drugs make up about 7% of its overall business. Cigna’s Miller arrived at a similar estimate.

Some provided estimates of what per cent of their rebates were passed along directly to their employers or insurers.

For instance, Miller said that nearly half of his clients have opted for 100% of their rebates to be passed through. CVS’s Rice said that more than 98% of discounts are passed along to their clients, noting they’re often used to bring down the cost of monthly premiums.

And Kolar said that the company’s model is built to send the entire rebate back to the client.

Read more:
A leaked letter exemplifies the fight between drugmakers and middlemen over who’s to blame for the high cost of prescription drugs

Where prices are still going up

The executives were quick to note in their testimonies examples of pharmaceutical drugs where they weren’t receiving rebates. Drugmakers have argued that they raise their list prices because they have had to pay out higher rebates. In turn, the PBMs argue that the cost of drugs is rising because pharma companies are raising their prices.

For instance, Humana pointed to Celgene’s cancer drug Revlimid, AbbVie’s cancer drug Imbruvica, and Merck’s HIV treatment Isentress as examples of treatments where it doesn’t receive rebates. Revlimid’s list price rose from $US6,195 a month to $US16,691 between 2007 and 2017.

“Data show that in many cases list prices are increasing faster for drugs with smaller rebates than for medications with substantial rebates,” CVS’s Rice said in his written testimony, though he didn’t provide any specific examples.

Impact on premiums

The rebates drugmakers pay out to PBMs can in turn be used to offset the monthly premiums of the health insurance plan’s members. Should the Trump administration’s rule requiring rebates to pass directly to patients be enacted, it could lead to higher monthly premiums.

Humana’s Fleming calculated out how Medicare recipients would be impacted by the Trump administration’s new rebate rule, of which everyone was against. He found that 17% of Medicare beneficiaries would see savings at the pharmacy counter as a result of rebates being passed through there, and 12% would save more than $US70 annually.

On the other hand, 83% would face higher prices for their prescription drug coverage via their monthly premiums. Those premium price hikes would be higher than any savings at the pharmacy counter, Fleming said.

Coming to a tentative agreement

While those testifying pushed back on the governments’ plans to remove rebates from their toolbox as a way to get lower prices, there seemed to be more agreement on another criticism of the PBM industry, a concept known as spread pricing. With spread pricing, a PBM may pay out one amount to a pharmacy (say, $US110), and turn around and charge the health plan it works with a higher amount (in this example $US140) for its services.

Among those represented at the hearing, Cigna and CVS said they both practice spread pricing, while Humana said it only did it for one type of plans, its self-funded businesses which account for about 200,000 members. UnitedHealth only offers the option for spread pricing to its commercial plans, while Prime was the only organisation that did not practice spread pricing.

When Democratic Senator Ron Wyden of Oregon asked if the companies would oppose legislative moves to ban spread pricing, Cigna, CVS, and Humana said they would support a ban. OptumRx said it was neutral, while Prime’s Kolar said he wouldn’t oppose such a move.

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