A state bill that purports to help Wisconsinite patients with drug purchases is likely to instead benefit certain pharmacies and drug companies while increasing costs and undermining choice and quality in health insurance.
AB-773 didn’t get a floor vote in 2024, but will likely be debated when the Wisconsin legislature returns to session in January. It targets Pharmaceutical Benefit Managers (PBMs) – private firms that manage prescription drug benefits for insurers by negotiating with drugmakers and pharmacies on their behalf. The bill would impose transparency requirements on these negotiations and would restrict the arrangements PBMs can negotiate with pharmacies and drugmakers.
PBM clients include both private (usually employer-sponsored) insurance plans and public plans like those under Medicare Part D, with many insurers opting to vertically integrate with PBMs to lower transaction costs and boost efficiency.
Plan sponsors enlist PBMs to help negotiate reduced drug prices through the bulk buying power of pooling patients across many plans. PBMs also process prescription claims and decide which drugs are covered and what pharmacies are preferred under the plan’s formulary, usually making these decisions based on rebates or discounts that they negotiate. If insurers had to undertake PBM activities on their own, an estimated 40% of PBM services’ net value would be lost, increasing costs that would be passed on to plan sponsors and patients through higher premiums or drug costs.
Regardless of these benefits, many Americans today are aggrieved by high drug prices. And with information about PBMs’ contracts with pharmacies and drugmakers typically being unavailable to the public, some legislators and agencies like the Federal Trade Commission (FTC) blame PBMs for “inflating drug costs” and “squeezing” pharmacies based on circumstantial evidence.
AB-773 would address this by imposing auditing and transparency requirements on PBMs and restrictions on what PBMs can and can’t negotiate with pharmacies and drugmakers.
Though well-intentioned, many of AB-773’s proposals would increase costs and reduce choice for patients, employers, small businesses, government agencies and other PBM clients, while arbitrarily benefiting some pharmacies and drugmakers and hurting others.
For instance, AB-773 would force PBMs and their self-insured health plan clients to contract with any willing pharmacy or health provider that can meet the plan’s terms. Though seemingly pro-consumer choice, it would preclude PBMs from negotiating lower drug prices by steering patients to plan-preferred pharmacies to secure volume-based discounts. The bill also prevents plans and PBMs from incentivizing use of mail-order pharmacies, which typically cost less and appeal to patients seeking convenience, patients in remote places, and patients suffering from chronic illness. This too will increase drug costs while reducing patients’ benefits.
Additionally, the bill requires that plans and PBMs “freeze” plan formularies, or the list of covered drugs, for a year. Although this may increase predictability and certainty about covered medications, it would also raise drug costs by preventing plans from responding to changes in marketplace conditions over the year that let them benefit from newly released drugs or generic or over-the-counter alternatives to existing ones, and other factors affecting drug price. A 2021 study estimated that such a rule would raise the cost of prescription drugs for patients fully covered under commercial health plans by between $4.3 billion and $7.1 billion over a five-year period.
The bill also requires that discount coupons offered by drugmakers to induce customers to purchase their name-brand drugs instead of competitors’ substitutes be applied towards covering a patient’s deductible amount. Though this would let insured patients pay less for those drugs at the point-of-sale, it would also likely lead to higher premiums and reduced benefits as the status quo allows PBMs and health plans to ‘spread’ these discounts among all covered plans and patients.
The status quo incentivizes usage of lower-cost equivalent drugs, such as generics, which can reduce the cost of providing insurance without reducing treatment quality. Patients who don’t apply insurance towards their purchase can already apply drugmakers’ coupons fully to offset their costs.
Allowing plan sponsors and PBMs to spread coupon benefits also facilitates volume-based discounts for the plan’s preferred formulary drugs, which lowers coverage costs and thus helps lower premiums. A 2019 Congressional Budget Office study analyzed the adverse consequences of such well-intentioned mandates. It found that forcing the rebates that PBMs negotiate with drugmakers to be entirely passed to patients covered by Medicare and Medicaid at the point of purchase would raise taxpayers’ costs by $177 billion over 10 years due to limiting PBMs’ ability to spread costs and negotiate volume-based discounts.
When governments intervene in private contracts, they inevitably (and often arbitrarily) benefit some interests at the expense of others. Pharmacies and drugmakers that are less successful in negotiation than their competitors would benefit from many of AB-773’s provisions, while health plans, and often those they cover, would pay more.
The Wisconsin state government can help patients and lower insurance costs by creating and preserving conditions for robust competition, including the freedom for PBMs, insurers, pharmacies and drugmakers to negotiate. They won’t do it by picking winners.
Satya Marar is a visiting postgraduate fellow at the Mercatus Center at George Mason University specializing in innovation, competition and governance.
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