By David L. Hall
Amazon has become one of the world’s largest companies thanks to its ability to capitalize on market inefficiencies. With recent reports indicating that nearly 1 in 4 patients are overpaying unknowingly for their prescriptions, it’s no surprise that the company considered turning its attention to health care.
Medical care consumes nearly 20 cents of every dollar we spend, so hospitals, health insurers, drug manufacturers and pharmacies seem ripe for disruption. So it was unsurprising to see Amazon almost, along with some partners, enter the health care marketplace.
What did surprise some observers, though, was the news that Amazon planned to focus on pharmacy benefit managers, or “PBMs,” which are the firms that administer drug plans for health insurers.
But this focus makes sense. Wedged between drug companies and pharmacies, PBMs manage prescription drug benefits for most Americans, from those enrolled in private health plans to those enrolled in Medicare. PBM’s profit handsomely each year, they’re growing quickly, and they’re the chief reason why drug prices are eating up an ever larger share of personal spending.
The Economist magazine recently performed an analysis of the U.S. health care system which found that 15 years ago middlemen, like PBMs, accounted for approximately 20 percent of industry profits. Today their share is 41 percent. By way of example, they cite, “Express Scripts earns billions while having less than $1 billion of physical plants and no disclosed investment in R&D. This year the combined profits of three wholesalers that few outsiders have heard of are expected to exceed those of Starbucks.”
Right now, PBMs process 2 in every 3 prescriptions — and just five companies: Express Scripts, CVS Health, Prime Therapeutics, OptumRx, and Diplomat Pharmacy control over 70 percent of the market. Thanks to this clout, PBMs can extract huge rebates and discounts from manufacturers. Indeed, they typically convince manufacturers to rebate 33 percent of a brand-name medicine’s list price, according to a recent study from the Berkeley Research Group.
Tough negotiations over price are fine. The problem, though, is that patients rarely see the benefits of these savings passed on to them. A majority of commercially insured patients’ spending for brand-name medicines is based on the full list price — not the discounted price negotiated by PBMs.
Sometimes, a patient’s “share” of a drug’s price actually exceeds the negotiated price of the drug! Fairness would direct the savings to the patient. But more often than not, PBMs and health insurers simply keep the difference in these situations.
It’s no wonder why the chief operating officer of Rite-Aid, which is booming in Washington state, calls his company’s PBM its “growth engine.”
The health care industry would benefit from innovation in the drug supply chain. Passing rebates on to patients at the point of sale is a great place to start. Doing so might hurt PBMs, but it’s a consumer benefit whose time is due.
David L. Hall is the executive director of the Pacific Northwest chapter of TRIO, the Transplant Recipients International Organization.
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