No part of the U.S. health care system could be called simple. But the pharmaceutical supply chain — the way that prescription drugs get from manufacturing plants to the pharmacy counter — is more complicated than most. There are a wide range of players, each with their own agendas: pharmaceutical companies, pharmacies, and drug manufacturers and distributors, to name just a few.
Among these players: pharmacy benefit managers, or PBMs.
PBMs contract with insurance companies as specialists in drug pricing. Their role: haggle over prices with drug manufacturers to get the best deal for the insurance company. The savings — at least in theory — get passed on to consumers in the form of lower premiums and lower prices at the pharmacy counter.
Whether these savings do indeed get passed on remains an open question — one that Congress has recently taken up. A bipartisan committee released a report detailing several potentially troubling aspects of the industry. For one, PBMs are highly concentrated; by some accounts, the “big three” PBMs control nearly 80% of the market. Additionally, PBMs are often connected to (or owned by) other players in the supply chain, including pharmacies, health insurance companies, or both.
However, these features of the PBM market aren’t automatically anticompetitive, stressed Anthony LoSasso, Professor and Chair of Economics at DePaul’s Driehaus College of Businesses. As a health care economist, LoSasso is familiar with markets that are complex to the point of seeming impenetrable. And as someone whose work involves looking at the healthcare system as a whole, he is wary of how regulation might affect the system as a whole.
“I worry that efforts to try to regulate this complex system lead to unintended consequences that even well-meaning government agencies or legislators won't foresee,” he said. “So often, these regulations will end up being more costly and damaging than if they had done nothing at all.”
On September 11, LoSasso testified on PBMs before the House Judiciary Subcommittee on Administrative State, Regulatory Reform, and Antitrust.
Read on for his insights on PBMs: what they have in common with other middlemen in supply chains; why vertical integration doesn’t necessarily stifle competition; and what makes health insurance unique as a product.
Driehaus News: From an economist’s standpoint, what makes health insurance unique?
Anthony LoSasso: Health insurance is so unique as a product. It “pays off” when you get sick — but you don’t want to get sick! So what you’re actually consuming is peace of mind. That’s the product. It’s the knowledge that you will be covered if something very bad and costly happens to you.
The other thing is that, when we think about health insurance, we get very emotional. Far more passionate, I think, than we would if we were talking about homeowners insurance or auto insurance. I appreciate that. This is very important, because it directly impinges on people’s health. That’s a big part of why Congress wants to understand this issue. I think they came in there with a genuinely open mind and a desire to learn. And I think we all came away wiser for the experience.
DN: What do PBMs do, and what’s their place in the supply chain for pharmaceuticals?
AL: What I tried to do in preparing for the hearing is go back to first principles of economics. I tried to think about what the incentives are.
My argument is that, if you look at the pharmaceutical supply chain, almost everybody stands to gain from higher drug prices. The pharmaceutical manufacturers want higher prices. The distributors want higher prices. The pharmacies charge dispensing fees, so they want higher prices.
The PBM is arguably the only entity in that chain that benefits from lower drug prices. PBMs benefit from lowering drug prices because then they can arrive at a cheaper premium, which gets their insurance company more business.
DN: In economics, there is an ongoing discussion about vertically integrated firms. Basically, vertical integration means one company owns multiple — or even all — stages in a supply chain. Can you elaborate on that, and how it applies to PBM’s?
AL: When we say that PBMs are vertically integrated, it often means that the health insurance company also owns the PBM. In extreme cases, it also owns the pharmacies. The main example of that is CVS Caremark. You’ve got CVS pharmacies; you’ve got Aetna health insurance. And then you’ve got Caremark, which is one of the “big three” PBMs. They’re all owned by the same overall entity.
For a long time in economics, vertical integration has been viewed somewhat positively. It means that there’s a lot less pressure to make sure that each entity along the chain makes a profit. Basically, there are efficiencies.
That’s what the argument has historically been. But this really is very much an open question in economics. It's still an active area of research by economists who study industrial organization.
Vertical integration can sound scary. But it’s not automatically bad. We’re just dealing with a lot of unknowns.
DN: How does this affect transparency in health care markets?
AL: It's up to the PBM to try to negotiate with one drug company against another to arrive at the best prices they can. So it’s mysterious. It's behind the curtain.
But that's not unique to the pharmaceutical supply chain! Take the supply chain agreements between, say, grocery stores and apple orchards and distributors. That’s all pretty obscure to us as well.
But we take this very seriously, because drugs are such an important part of helping us stay healthy. So there’s an outsized effect on public opinion. Even though, like I said, we don’t typically ask for this same degree of transparency with other products we purchase on a regular basis.
DN: What does it mean to be a middleman in the health care market?
AL: One of the main messages I tried to convey to Congress is that so-called middlemen (which is usually used as a pejorative) are not new in business. In my statement, I made this comment that even the ancient Greek philosopher Plato expressed a great deal of skepticism around the role of middlemen in trade and society more generally. So in that sense, I told the committee, you’re in good company to be skeptical about middlemen.
On the other hand, something that's been around for thousands of years — an institution of this intermediation, as we might call it — must do some good. And so, in my testimony, I really viewed my role as communicating what PBMs are, at least ostensibly, trying to do.