Breaking the link between prescription drug list prices and compensation to middlemen like pharmacy benefit managers (PBMs) could cut a significant portion of the nation's annual drug tab, finds a new analysis from the USC Schaeffer Center for Health Policy & Economics.
PBMs, who negotiate drug benefits on behalf of insurers and employers, are typically paid based on a percentage of a drug's list price before rebates and other discounts are applied. Federal and state policymakers have proposed delinking PBM compensation from list prices in response to evidence that PBMs often steer patients toward higher-priced drugs — even when cheaper alternatives are available — to boost their own profits.
Shifting instead to a transparent, fixed payment model for PBMs and other intermediaries in the prescription drug supply chain would reduce annual net drug spending by $95.4 billion (or nearly 15%) without undermining pharmaceutical innovation, according to research from Schaeffer Center Director of Health Policy Geoffrey Joyce published July 24 in Health Affairs Scholar.
Fair Compensation
The U.S. spent $650 billion on prescription drugs in 2023 after factoring in discounts, with about one-third ($215 billion) flowing to PBMs, wholesalers and pharmacies — though the exact division of these costs is unclear. However, using simplified estimates, Joyce finds spending on these intermediaries would have dropped to $119.6 billion under fair and transparent compensation models.
Here's how those costs break down:
- PBMs: A fixed administrative fee of $4 per claim would result in total costs of $27.6 billion in 2023. Payments to PBMs could be reasonably adjusted for hitting cost and quality targets.
- Wholesalers: Entities that purchase drugs from manufacturers in bulk add about a 3% markup on average to the list price before selling to pharmacies, hospitals and long-term care facilities. Applying that markup to net prices instead would yield $19.5 billion in total revenues, less than the $27.5 billion these firms reported in 2023.
- Pharmacies: A $10.50 per prescription dispensing fee would have generated gross venues of $72.5 billion. That rate is commonly used by state Medicaid programs and aligns with the pricing model used by Mark Cuban's Cost Plus Drug Company.
Reform Implications
A proposal to delink PBM compensation from list prices was included in earlier drafts of sweeping domestic policy legislation before it was dropped from the final version that was recently enacted. However, policymakers have expressed continued interest in reforming PBM practices amid growing evidence that these firms use their considerable market power to artificially inflate drug prices and restrict access to essential medications.
Joyce warns that some commonly proposed reforms, such as those aimed at curbing consolidation and increasing PBM transparency, are too modest to meaningfully change PBM behavior given how quickly the industry has shifted tactics in the face of heightened scrutiny.
"Delinking compensation from list prices is the clearest and most effective way to tackle the warped incentives in the prescription drug supply chain that drive up costs for patients without adversely affecting manufacturers' incentive to innovate," says Joyce, who is also chair of the Department of Pharmaceutical and Health Economics at the USC Mann School of Pharmacy and Pharmaceutical Sciences.
