People don't care about total drug prices

They care about out of pocket costs, so PBMs are the RIGHT target in Biden's quest to reduce drug prices.

A week ago, Ike Brannon wrote a piece for Forbes entitled “Pharmacy Benefit Managers are the wrong target in Biden’s quest to reduce drug prices.” His piece reads like a copy paste of the Pharmaceutical Care Management Association’s website. I think his piece is off base for several reasons.

1) He’s an economist and takes the whole-of-society view of drug costs, and imposes that view onto individual Americans who rank “rising drug costs” as a major political concern. From my reading, most economists make this error. When individuals talk about “rising drug costs” they don’t usually mean the concept that total drug costs as a percentage of GDP is increasing. They mean that their personal expenditure on drugs is increasing. This is why Adam Fein, for example, derides politicians that bemoan rising drugs costs as “drug pricing flat earthers,” because drug unit costs society-wide are flat to falling when we take the broad view of the economy-at-large (utilization is increasing, though). But when voters call their representatives about rising drug costs, they aren’t complaining about unit costs. They’re complaining that their personal monthly expenditure for pharmaceuticals is increasing. These calls will continue in any world where we have personal cost sharing for pharmaceuticals, even a world where societal costs for prescription drugs fall dramatically over time, because the tendency in our society is that as we age, we take more prescription drugs. More prescriptions means more personal cost experience, even if the total cost is falling.

2) Because of the error that Mr. Brannon makes in interpreting the complaint of “rising drug prices,” he arrives at the conclusion that we should LIKE PBM rebates and we should lay all of the blame for prices at the feet of greedy PhRMA companies. But this is the same error. PBMs control benefit designs (directly in many cases, indirectly by inertia in the rest of cases) for prescription drugs. Control of the benefit design and the cost sharing is what annoys people about drug prices. In my experience, 99% of people don’t care two whits about the total cost of their prescription, only their own personal share of the cost. This is why PhRMA “coupons” and “eVouchers” work so well – they remove the sticker shock that people have at the pharmacy counter when faced with a high cost share, and blind them to the total cost of the prescription. The PBM’s control of cost-sharing (and therefore the high prices that people experience at the pharmacy) makes them the exactly correct target in Biden’s quest to reduce drug prices.

3) Mr. Brannon sees only the good in the scale and clout that the major PBMs have obtained – the ability to extract lower prices from sellers. He doesn’t acknowledge the problems that come with the monopsony power that they have obtained – the ability to direct people as to which medications they can take and which pharmacies they can use and how they pay for their prescriptions. That ability to force people to act in a certain way may have benefits to the PBM’s bottom line, and may have benefits in terms of total societal costs of pharmaceuticals, but it really deeply frustrates everyone who has to participate in the system, pharmacists, physicians, and patients. Besides, his argument is literally that the correct response to concentrated market power on one side of a transaction is concentrated market power on the other side. I fundamentally disagree with this point of view. It leads to a never-ending arms race – Pfizer buys Upjohn, ESI buys Medco. Glaxo buys SmithKline, Caremark buys AdvancePCS. The correct response to concentrated market power and abuses of power is to break that power directly, by breaking up the entities that have amassed power into less powerful chunks, and then to make those abuses of power beyond the pale of acceptable market behavior through regulation and law enforcement (see also, SmithKline v. Eli Lilly).

4) Mr. Brannon cites this article as supporting the concept that allowing big companies on both sides of a market is a good idea. The majority of the article is specifically about the harms that Most Favored Nation clauses (in pharmacy we call it “U&C”) and bilateral oligopolies have to independents and to consumers in that market. (sidebar: I had no idea how similar TV broadcasting is to the prescription drug market!) He seems to have read the article and reached the exact opposite conclusion as the authors – bilateral oligopolies are good actually!

We don’t have to have a world of constant arms races of which side of a bilateral oligopoly can get bigger faster. Such a world is kind to the interlocking and mutually hating cartels on either side, but harmful to everyone else. It doesn’t have to be like this. We can have a world where pharmaceuticals have the same cost sharing percentages as hospital care. We can break up big PhRMA AND the big PBMs AND the big wholesalers AND the big pharmacies. We can outlaw AWP. We can outlaw “lesser of pricing logic” aka MFN. We can have a world where no one is powerful enough to crush the little guy under their foot. All it takes is a little imagination, some hard work, and the willingness to stop listening to both sides of the PhRMA/PCMA cartels’ propaganda.