Most expert witnesses at a hearing of the Senate Finance Committee on Thursday agreed that pharmacy benefit managers (PBMs) — middlemen between the drug companies and insurers — drive up the prices of prescription drugs, leaving patients with higher out-of-pocket costs, and offered a range of suggestions on how to curb PBM abuses.

Historically, PBMs were paper-pushers who handled claims processes. Then, about 15 years ago, when the Medicare Part D benefit was established to cover seniors’ prescription drugs, PBMs offered to negotiate with insurers for better prices, explained Robin Feldman, JD, director of the Center for Innovation at the University of California College of the Law, San Francisco.

This is when the problems began, she said, with the price of 65 common medications nearly tripling. How and why that happened comes down to middlemen acting in their own self-interest, Feldman noted.

When a drug’s sticker price, or list price, rises and the PBM negotiates a discount or rebate, the PBM looks to be doing its job, she said. “It’s a little like a department store that raises the price of a coat before putting it on sale. The markdown looks great when you walk in but it’s not.”

PBMs usually keep a percentage of the rebate and that practice creates a “perverse incentive” that explains why so many common medicines’ prices have skyrocketed, she added. “Quite simply, higher prices put more dollars into PBMs’ pockets.”

Karen Van Nuys, PhD, of the Leonard D. Schaeffer Center for Health Policy & Economics at the University of Southern California in Los Angeles, highlighted her 2021 JAMA Internal Medicine research letter that found that Medicare would have saved $2.6 billion in 2018 on 184 drugs if patients had purchased them without insurance at Costco.

On top of these misaligned incentives, Feldman said, PBMs also have significant conflicts of interests. “The person negotiating on behalf of the patient shouldn’t be getting paid by the other side,” she noted, referring to the drug manufacturers. That kind of conflict of interest “undermines negotiation entirely.”

In their negotiations with drug companies, PBMs can also exclude a competitor’s drug and often do, Feldman said.

Sen. Ron Wyden (D-Ore.), chair of the committee, gave an example, noting that Civica Rx has a generic prostate cancer drug that costs $160, but the three largest PBMs are charging Part D plans over $3,000 for “the exact same drug.”

As a result of these actions by PBMs, Part D plans, and, indirectly, patients and taxpayers, now face a markup of nearly 2,000%, he said.

When he asked why PBMs charge such high prices, Van Nuys replied, “I think the short answer is because they can.”

Because there is no transparency, PBMs can charge the health plan or payer a higher price than they pay the pharmacy and keep the difference — otherwise known as spread pricing, she explained. Since plans don’t know what pharmacies are paid, they can’t tell when they’re being overcharged, she added.

As for ways to help mitigate what most senators believe are PBM abuses, the majority of witnesses called for increasing transparency in the market.

“If we’re able to shine that transparency on those rebates, we can actually lower the list price of drugs for all Americans,” said Jonathan Levitt, Esq, founding partner of Frier Levitt Attorneys at Law in Pine Brook, New Jersey.

Another witness, Matthew Gibbs, PharmD, president of Capital Rx, a non-traditional PBM start-up whose mission is built around transparency, called for replacing the average wholesale price, which he described as a “less than efficient pricing benchmark,” with the National Average Drug Acquisition Cost (NADAC), a CMS-developed benchmark.

The NADAC would serve as a “publicly available price and source of truth for drug costs … Every drug should have a price that is accessible to every American at any time,” Gibbs said.

Separately, Levitt also recommended developing a “true rebate safe harbor,” meaning that “PBMs could legally take a rebate fee or an administrative fee, but it would be limited to 3%, 4%, 5%, not 50%.”

Van Nuys, on the basis of her 2021 study, proposed ending insurance coverage for low-cost generic drugs. “In a cash market, there’s no third-party payer. There’s no spread [pricing]. The PBM is not charging a spread. So, Costco doesn’t have to pass those costs on to the patient,” she said.

One witness did not agree with the rest that PBMs are a primary driver of high drug costs.

“I believe there’s a lot of smoke and not as much fire as people think,” noted Lawton Robert Burns, PhD, of the Wharton School at the University of Pennsylvania in Philadelphia, who argued that rebates are channeled “increasingly to health plans,” rather than PBMs.

“I think the problem that we face in this sector is no or little competition in the specialty pharmacy area,” he added.

He also blamed Medicare Part D and Medicaid policies for “encouraging manufacturers to raise their list prices.”

As for increasing transparency, Burns argued that “there’s always a danger of collusion among the people who are revealing those prices. So you always have to watch out for that.”