Billionaire entrepreneur and Shark Tank host Mark Cuban has recently been in the news and appeared before the Senate to advocate for health care reform to lower drug prices. His biggest targets are Pharmacy Benefit Managers (PBMs), the entities that negotiate prices with drugmakers and pharmacies on behalf of public and private health insurance plans. Cuban blames various PBM practices for inflating Americans’ drug prices.

PBMs decide what drugs the plans’ “formularies” will cover or not. The three biggest PBMs process 80% of American drug prescriptions and are owned by large insurers. While Cuban is commendably trying to disrupt insurers’ business models by providing low-cost generic drugs direct-to-consumer through his Cost Plus Drugs business, many of his suggestions about PBMs would restrict, rather than boost, competition while leaving American patients and taxpayers with higher bills.

Why Cuban’s PBM critique misunderstands incentives and costs

PBMs use the bulk-buying power of pooling patients across millions of plans to secure lower prices from drugmakers and pharmacies — benefiting smaller health plans. While some PBMs offer a flat-fee-for-service model, most are paid commissions based on a percentage of the rebates they negotiate from drugmakers. Cuban alleges that this model perversely incentivizes drugmakers to hike their drugs’ publicly listed prices to give PBMs bigger commissions. 

However, this characterization ignores the fact that PBM rebates are generally passed to health plans, thereby helping to offset insurance premiums. Reducing PBM commissions to zero would only lower the price of a $100 drug by $5. The Congressional Budget Office found that forcing PBMs to pass negotiated rebates directly to the customer at the point of sale would increase taxpayers’ costs of funding Medicare and Medicaid by $177 billion over 10 years. 

Banning PBMs from using formulary placement to secure rebates, as Cuban recommends, would also eliminate PBMs’ “high-powered incentive” to negotiate larger rebates, likely leading to higher premiums. And forcing them to publicly release commercially sensitive pricing information would undermine trade secrets and further compromise PBMs’ ability to negotiate better deals, giving drugmakers and pharmacies leverage to raise prices at health plans and their clients’ expense.

Many PBMs already compete by offering clients more transparency. And contrary to Cuban’s claims, industry-wide data also shows that PBMs often steer patients to generic drugs, and evidence of PBMs steering patients to costlier branded drugs is mixed. It’s also unclear that PBM rebates are to blame for list price hikes. Research finding that rebates and list prices have risen together fails to find a link between the two.

Independent pharmacies, spread pricing and the limits of PBM blame

Cuban also accuses PBMs of abusing their buying power to pay independent pharmacies below-cost drug reimbursement rates, thereby driving them out of business. However, independent pharmacies typically get higher reimbursement rates than chain pharmacies, with independent outlets growing by 9% between 2011 and 2021, especially in metropolitan areas. While many have also closed, especially in rural areas, leading to so-called “pharmacy deserts”, this is largely due to population decline in those areas, which reduces the local pharmacy’s buying power. 

Pharmacies that survive and continue servicing these areas include chain and mail-order pharmacies, many of which are PBM-owned or affiliated. Restricting PBM business models and negotiating practices may further hurt these businesses and their customers. Many independent pharmacies also survive by joining Pharmacy Service Administrative Organizations (PSAOs). These entities pool multiple pharmacies for negotiating leverage, much like PBMs do with health plans. 

The Shark Tank star has called to end “spread pricing,” whereby PBMs pay pharmacies different prices for drugs than they charge plan sponsors and pocket the difference. However, “spread pricing” is favored by many health plans for keeping prices predictable and stable by transferring the risk of an increase (and thus a reward for a fall) in drug acquisition costs to the PBM.

The United States is the only country to rely on PBMs, and Americans pay two to three times what foreigners pay for patented drugs. But PBMs are a response to this situation, not the cause. Unlike single-payer health care systems worldwide, the United States Centers for Medicare and Medicaid Services (CMS) is generally prohibited from using its buyer monopsony power to negotiate lower prices. Instead, prices are generally pegged to the US private market. This incentivizes pharma companies to inflate what they charge health plans, raising the price of every drug that CMS — which services 160 million+ Americans — acquires. 

PBMs generally lower costs for plans by negotiating prices on their behalf, much like public insurers in Australia and Britain do. Importantly, when accounting for the 91% of US drug purchases by volume that are generics, a recent University of Chicago study finds that US drug prices are actually 18% less on average relative to comparable developed nations. And much like Cuban’s own initiative, PBMs that steer patients to generics play a role.

Competition, not blanket restrictions, is the real reform path

Cuban is right that a highly consolidated health care sector characterized by costly entry and regulatory barriers, as well as opaque pricing agreements, creates opportunities for market power abuse. Individual PBMs have been successfully sued for antitrust violations and for not passing rebates to clients.

More competition, not more regulation and restrictions around commercial practices, is the answer. An explosion in health care regulation in recent decades has forced firms to consolidate to spread out the increase in fixed compliance costs. Cuban has rightly called for the Food and Drug Administration to lower costs and reduce barriers to generic drug entry and competition.

Allowing more drugs to be sold over-the-counter instead of requiring a prescription would also foster competition and lower prices. Allowing interstate insurance purchases, reducing mandated benefits that drive up plan costs, and ending tax penalties that favor employer-sponsored plans over alternatives would also help, while addressing concentrated insurance markets.

Cuban is already doing his part by selling generic drugs at cost plus flat fees and markups through Cost Plus Drugs. Since he entered the market, CVS Caremark, Express Scripts and OptumRx have unveiled their own contracts favoring more transparent, flat or defined fees and markups. And though Cuban has differentiated Cost Plus Drugs from these by noting that the PBMs still don’t publish their net prices, use different transparency standards or benchmarks, and continue to control pricing structure, more options for different customers is what competition is about.

PBMs certainly warrant scrutiny over potential anticompetitive behavior. But banning entire classes of contract options and negotiation practices that usually benefit health plans and their clients would hike costs and reduce competition where it is badly needed.

[Kaitlyn Diana edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.