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The Drug Industry’s Middlemen Are in the Hot Seat

When President Trump spoke on May 11 about his grand plan to lower drug prices, he singled out one particular bad actor with a particularly villainous name: “the middleman.”

“We’re very much eliminating the middlemen,” said Trump during his Rose Garden remarks that day. “The middlemen became very, very rich, Right? (Applause.) Whoever those middlemen were — and a lot of people never even figured it out — they’re rich. They won’t be so rich anymore.”

While the President mentioned a list of those who might qualify for this epithet—“drug makers, insurance companies, distributors, pharmacy benefit managers”—it was the last of these that got the most attention.

At issue, says the Trump Administration in its 44-page blueprint for lowering drug prices, “American Patients First,” isn’t quite that the PBMs are getting rich. (In point of fact, Mr. Trump tends to like that quality.) Rather, the “hidden negotiation and wealth transfer between drug manufacturers and PBMs,” which is now leading to “a direct increase on consumer out-of-pocket spending that likely decreases drug adherence and health outcomes.”

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FDA Commissioner Scott Gottlieb was even blunter in a speech the week before the president—suggesting that these hidden negotiations might even be “kickbacks”:

“To take one example, one of the dynamics I’ve talked about before that’s driving higher and higher list prices, is the system of rebates between payers and manufacturers. And so what if we took on this system directly, by having the federal government reexamine the current safe harbor for drug rebates under the Anti-Kickback Statute? Such a step could help restore some semblance of reality to the relationship between list and negotiated prices, and thereby boost affordability and competition.”

I won’t get into the nitty gritty of what exactly PBMs do. You can read my previous Brainstorm Health essay here and—definitely—read Katherine Eban’s 2013 feature in Fortune, “Painful Prescription,” here.

But in any case, I agree with the President and with Commissioner Gottlieb, the PBM business at large deserves extra scrutiny right now.

Notably, however, this may come from various states before it comes from Uncle Sam. Earlier this month, the Connecticut legislature easily passed its own bill to control prescription drug costs, Public Act No. 18-41, which is awaiting the signature of Governor Dannel Malloy. That bill, among other things, requires PBMs, beginning in 2021, to report to the state’s insurance commissioner any rebates they receive, including drug formulary rebates collected from pharmaceutical companies—and disclose what share goes to consumers.

And last week, the Chicago Tribune reported that officials were investigating whether PBMs in the Windy City were “violating the city’s deceptive marketing act,” as well as a so-called “gag rule” that prevents pharmacists from revealing key information that would be valuable to consumers—such as “when a customer’s prescription would cost less if purchased outside their insurer or pharmacy benefit manager’s plan,” city officials said.

The winds of change, even outside of Chicago and Hartford, are clearly swirling when it comes to PBMs. Count on new legislation from various quarters on this front. The rules may not make all of the backroom price dealing on drugs wholly transparent at first—but a little more light will surely help a bit.