Richard G. Frank’s testimony on the role of pharmacy benefit managers

Chairman Massie and Ranking Member Correa, thank you for inviting me to participate in this discussion of the role of Pharmacy Benefit Managers or PBMs. The cost of prescription drugs and the burden of those costs for individuals and families that need to be treated with prescription drugs involves the entire prescription drug supply chain. My testimony reflects my views and not those of any organizations with which I am affiliated. I will focus on four themes. First, I will touch on the original promise of PBMs. I will then discuss the market structure and the incentives facing PBMs. My third theme will be directed at steering of demand for products and delivery mechanisms by PBMs. Fourth and finally, I will offer some observations on the forces affecting the fortunes of retail pharmacies.

In considering these four themes, I arrive at several conclusions. At a high level, they are as follows.

• Undertaking efforts to improve competition and efficiency in PBM markets is sensible, but success in doing so will only contribute modestly to making prescription drugs more affordable.
• Much of the unhappiness with PBMs traces back to the dynamics in health insurance markets that have become increasingly vertically integrated. This development likely has resulted in less competition and regulatory avoidance conduct.
• Rebates on brand-name prescription drugs are frustratingly opaque and are in some cases subject to the exertion of market power. But they also create incentives for PBMs to work hard to get payers lower prices. As a result, they are common features of contracts between PBMs and payers.
• Consumers are increasingly exposed to significant out-of-pocket costs for prescription drugs. Some of this stems from the gap between list prices and net prices but also from the choices by payers and insurers to be increasingly reliant on cost-sharing in the forms of deductibles and coinsurance.
• Retail pharmacies face an array of challenging economic conditions threatening the survival of some of those operating in rural America. Yet much of what threatens these enterprises is not tied to PBMs.

My perspective is that of a health economist who has long studied markets for prescription drugs. In that role, I have at once a strong appreciation of the benefits that competition can bring to health care markets generally and the prescription drug market specifically. I also see many instances of market failures in health care markets that can benefit from interventions by various levels (local, state, federal) and agencies (regulatory and judicial) of government. My remarks today highlight market forces and incentives. Today’s pharmaceutical markets and supply chains are very much creatures of public policy and so many of my observations will reflect the consequences of prior legislation, regulations, and litigation. 

Read the full testimony here