Health Economist Shreds PBMs’ Claim of Large Cost Increase from “Any Willing Pharmacy” Medicare Proposal

Kevin Schweers
Published Online: Monday, July 28, 2014
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Claims by pharmacy benefit managers (PBMs) that a massive cost increase would result from legislation giving Medicare seniors in medically underserved areas more convenient access to discounted or “preferred” copays are “theoretically baseless,” a noted health care economist and antitrust expert argues in a new analysis.

Dr. David M. Eisenstadt, veteran of the U.S. Department of Justice Antitrust Division and Principal at Microeconomic Consulting and Research Associates (MiCRA), was asked by the National Community Pharmacists Association (NCPA) to analyze a PBM cost estimate that The Ensuring Seniors Access to Local Pharmacies Act (H.R. 4577) would raise Medicare costs by $21 billion over 10 years. 

(H.R. 4577 is a proposal that would allow seniors to pay lower, “preferred” Medicare copays at any pharmacy willing to accept the insurance plan’s reimbursement and other contractual terms.)

According to Dr. Eisenstadt’s analysis:
  • It’s “not a foregone conclusion” that pharmacies that are offering discounted/”preferred” copays would raise their prices if more, competing pharmacies are allowed to provide the same discounts.
  • The PBMs’ methodology for alleging higher costs is “theoretically baseless” and “neither the actual nor intended formula used to calculate the price increase is supported by any theoretical rationale.”
  • The PBMs mischaracterize the findings of a prior analysis by the Centers for Medicare & Medicaid Services (CMS) of preferred and non-preferred drug costs by claiming that it demonstrates unambiguously that non-preferred pharmacies charge higher prices to the government than preferred pharmacies. In fact, CMS disproved that assumption and concluded that “when both mail and retail pharmacies are included, some sponsors’ preferred network pharmacies are offering somewhat higher negotiated prices than are offered by their non-preferred network pharmacies. Thus, our hypothesis that preferred network pharmacy negotiated prices are lower than non-preferred network pharmacy negotiated prices was not confirmed.”
  • Exclusive, “preferred pharmacy” arrangements could be propping up drug costs by limiting competition. “The theoretical economics literature on this type of ‘loyalty discount’ show that their effects are at best ambiguous, and if applied to this industry, a number of studies demonstrate that this form of ‘discounting’ could be used to both exclude other pharmacies from preferred networks and raise prices above levels that would prevail in the absence of such discounts.” [Note: In a footnote, Dr. Eisenstadt references several articles from economics literature; I linked the above text to just one as an example.]

The latest PBM claim follows a long line of “the-boy-who-cried-wolf” instances in which PBM claims of enormous cost increases do not hold up to scrutiny.
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