Dozens of state and local governments are suing drug companies and pharmacy benefit managers, alleging that they’re unfairly hiking the price of insulin.
The plaintiffs say they’re fighting for patients. They’re less forthcoming about the fact that they’ve profited handsomely from the system they’re now decrying. For years, these cities and states have insisted on a cut—if not all—of the rebates that these pharmacy benefit managers extract from drug makers when negotiating over whether and how to cover specific drugs.
PBMs have come to dominate the prescription drug market. They’ve leveraged that power to enrich not just themselves but those that have hired them—including the cities and states now suing them. The losers in this dysfunctional market are drug makers and patients.
The lawsuits generally make two claims: that insulin prices are unreasonably high and that drug companies and PBMs are responsible.
The first claim does not withstand scrutiny. The price of insulin has been falling for years—and hardly constitutes a national emergency. A recent report from the drugmaker Lilly, for instance, reveals that the net price of the company’s Humalog brand of insulin dropped from $62 a vial in 2018 to just $26 last year. The company’s biosimilar insulin, Lispro, had a net price of just $17 a vial last year. (A vial typically lasts a month before expiring.)
The lawsuits are on firmer ground in their claim that PBMs are driving up costs for patients. And that problem is not unique to insulin.
PBMs demand rebates and other payments from pharmaceutical companies as a condition of favorable placement for a medicine on the formulary, or list of covered drugs, that they control.
If a drug maker doesn’t acquiesce, then the PBM may make it hard for the beneficiaries it represents to access that drug—say, by requiring more cost-sharing or stipulating that a person must try other drugs first. And that’s if the PBM puts the drug on the formulary at all.
These rebates and fees are typically figured relative to a drug’s list price. That incentivizes PBMs to prefer drugs with higher list prices. There’s more wiggle room to demand a big rebate—and thus a big payday for the PBM.
These rebates and discounts don’t make their way to patients. PBMs and the health plans that hire them hang onto them.
In fact, several of the state and local governments now suing insulin manufacturers and PBMs stipulated that their PBMs had to pass along the rebates they secured for the drugs their beneficiaries took. Those state and local government health plans chose not to pass along those savings to their beneficiaries.
These tactics have resulted in massive profits for pharmacy benefit managers. Between 2017 and 2019 alone, the industry’s gross profits grew by 12% to $28 billion.
Today, rebates and fees secured by PBMs account for 42% of each dollar of each dollar spent on brand-name drugs, according to one recent analysis. And the total value of those rebates and fees reached $72 billion in 2022.
Not only are patients on the sidelines of this scheme—their cost-sharing obligations are actually based on a drug’s undiscounted list price.
So PBMs—and the health plans that hire them—benefit twice. They collect big rebates from drug makers and artificially high copays from beneficiaries.
PBMs are getting rich by gaming the drug market at the expense of patients. States and cities didn’t seem to mind this when they signed their contracts with these same companies. Now the government plaintiffs are acting shocked, just shocked. But they won’t be able to fix the problem until they acknowledge their role creating it.
