A recent study published in JAMA Health Forum reveals that approximately 70% of every dollar spent on widely used generic drugs under Medicare’s Part D prescription-drug benefit goes to intermediaries. The research, conducted by Johns Hopkins University and the University of Utah, sheds light on the distribution of spending and raises questions about the efficiency and competitiveness of the supply chain.
Who Receives the Majority of Medicare Part D Spending?
According to the study, the largest portion of Medicare Part D spending on generic drugs in 2021, accounting for more than 40%, is received by pharmacy benefit managers (PBMs). PBMs act as intermediaries between insurers and payers, managing prescription-drug benefits. Pharmacies receive an additional 17% of the spending, while wholesalers receive 12%. Surprisingly, only 30% of the spending reaches the pharmaceutical companies responsible for manufacturing the medications.
The Role of PBMs and “Spread Pricing”
Implications for Generic Drug Shortages
Additionally, the study sheds light on an important factor contributing to shortages of many generic drugs. With the majority of spending going to intermediaries, there is limited financial incentive for drugmakers to ramp up production. Consequently, drugmakers prioritize products that yield higher profits, leading to a scarcity of certain generic medications.
Medicare Part D and Beneficiaries
Medicare Part D prescription-drug plans serve over 50 million enrollees, as reported by the health-policy research nonprofit KFF. The study specifically focuses on generic drugs covered by Part D that have more than two manufacturers, exceed $100 million in total Part D spending, and are utilized by over one million Medicare beneficiaries.
These findings underscore the need to examine and address the role of intermediaries in the Medicare Part D prescription-drug benefit. By promoting a more efficient and competitive supply chain, policymakers can work towards reducing costs for patients and ensuring a sustainable pharmaceutical market.
The High Profits of Middlemen in Prescription Drug Market
The exorbitant profits of middlemen in the prescription drug market have sparked concern among researchers. According to a recent study, for certain generic drugs, these intermediaries garnered more than 70% of the Medicare Part D spending. A prime example is the blood-pressure drug amlodipine, where intermediaries’ gross profit accounted for nearly 87% of the spending per claim in 2021. Similar financial gains were observed with the cholesterol drug ezetimibe, the muscle relaxant baclofen, and the antibiotic doxycycline, among others.
However, simply banning the practice of “spread pricing” by pharmacy benefit managers (PBMs), as some lawmakers have suggested, may not address the underlying issue of insufficient market competition. Dr. Ge Bai, an expert in health policy and economics, argues that a comprehensive examination of the supply chain is necessary to find effective solutions.
It’s worth noting that this issue extends beyond Medicare. Employers who sponsor health plans for their workers also face similar challenges.
Recently, there has been an intriguing proposal to tackle this problem head-on: eliminating insurance coverage for low-cost generic drugs. Researchers from the University of Southern California’s Schaeffer Center for Health Policy and Economics suggest that middlemen have taken advantage of insurance coverage, driving up prices unnecessarily. By reducing coverage for these inexpensive drugs, premium costs could be lowered accordingly. Dr. Bai agrees with this approach, highlighting that insurance becomes inefficient when it encompasses low-cost medical services and products. The administrative complexity outweighs the benefits of pooling risks in a health plan.
Interestingly, some patients are already seeking alternatives to traditional insurance models. They are exploring cash-pay options like Mark Cuban’s Cost Plus Drug Co., effectively bypassing their health plans.
In summary, the prevailing profitability of middlemen in the prescription drug market is a cause for concern. While banning spread pricing may not be the ultimate solution, a comprehensive assessment of the entire supply chain is necessary. The proposal to end insurance coverage for low-cost generic drugs merits serious consideration, as it could lead to a more efficient and cost-effective healthcare system.