During a Senate Judiciary Committee hearing on Tuesday, Sen. Mike Lee (R-UT) questioned Neeraj Sood, scholar and professor at University of Southern California, Schaeffer Institute for Public Policy & Government Service and University of Southern California Price School of Public Policy, about heathcare pricing.
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00:00Thank you very much, Mr. Chairman. Thanks to all of you. Mr. McDonough, I'd like to start with you.
00:04With PBMs controlling formulary design and drug access, what prevents PBMs from steering patients toward their own pharmacies, even if cheaper alternatives exist?
00:19It doesn't, I mean, that's one of the issues that's happening, is that patients are being steered to, a lot of times, to the mail order or to the brick-and-mortar pharmacies that they own.
00:28And so we don't even have that choice.
00:31And what's also concerning to me is the confusion that they bring into the marketplace, especially for our older patients who receive letters.
00:38They're not sure if they're supposed to go mail order.
00:41They don't know they have a choice, and they feel like if they don't do it, they're going to lose their benefit.
00:46And so they feel like they are being forced to do that.
00:49We see all kinds of letters that come to the patients that come to us to indicate that just adds to the confusion.
00:55I can imagine that this has the potential, at least, to harm independent competitors and to force consumers to pay higher prices.
01:06Have you seen that?
01:07Absolutely. Absolutely.
01:09Now, Mr. Scott, in the negotiation with drug manufacturers, scale appears to be really important to PBMs, and one can understand why it could be.
01:21Now, the top three PBMs are vertically integrated, and they control, as I understand it, what, about 80% of the market.
01:32So in light of that, how do smaller PBMs compete without the scale and the vertical integration that the big three who control 80% of the market have?
01:46Yeah, I'll try to be quick.
01:47I went too long for Mr. Durbin's question.
01:50Just real quick to address your steering question.
01:54PBMs in their design networks, when an employer hires them, just like you have a network of doctors and hospitals, a network of pharmacies, and they're looking at three considerations.
02:01When it comes to retail, geography, and then quality for the patient, and cost.
02:06And whether it's an affiliated pharmacy or not, those are the considerations in designing the network, and the data would tell us that there are not higher reimbursements for affiliated pharmacies than unaffiliated pharmacies.
02:17If there were, and it was costing the employer more money, then the employer would not use that PBM anymore.
02:24On your point about integration in the marketplace and scale, yes, scale matters in terms of being able to use group purchasing economics to achieve discounts from drug companies.
02:35That's an important piece of what PBMs do.
02:38Smaller PBMs, in addition to trying to provide discounts, can offer a more tailored, unique level of service, benefit, patient experience, other considerations that an employer may have in mind when choosing who they want to partner with.
02:51So it really gives some optionality in the market, and the smaller PBMs compete by doing things in a different way than some of the established companies.
02:59Okay, so you're insisting they can compete notwithstanding that.
03:01Now, Professor Sud, with vertical integration, spread pricing, and the somewhat inherently opaque nature of these rebate negotiations,
03:16how is pricing distorted, and how does it impede competition?
03:21So, if you focus on vertical integration, what it does is it creates conflicts of interest.
03:29So, for example, Senator, if I'm a health plan and I'm competing with you, and if I have my brother who owns a PBM,
03:38so let's assume JC is my brother and he owns a PBM, and he's providing services to you, how do you feel about that?
03:46That creates a conflict of interest because you're like, hey, he's my brother, he's not going to provide services to you because you're competing with me.
03:53So I think there is that conflict of interest that arises in dealing with health plans.
03:59It also, as Randy mentioned, it arises in steering patients to their own pharmacies rather than independent pharmacies.
04:06And as you said, since these plans are all vertically integrated, if I want to enter this market, it's a big hill for me to climb.
04:17Because now I need to be a PBM, I need to be a pharmacy, I need to be an insurer, all at the same time.
04:23And that is really tough to enter in this market.
04:26So what we'll be left with is two or three big firms that control majority of the market.
04:32In your view, are those two or three big firms using their scale and their market advantage so as to impede entry,
04:41to serve as a natural restriction on entry into the marketplace such that others can't get into that marketplace?
04:48I think so.
04:49That I think, again, these conflicts of interest create this incentive to kind of help your own pharmacies and your own plans,
05:00which hurts entry of other pharmacies and plans, which reduces competition in the market, and which increases costs.
05:09My attempt's expired.
05:10Senator Whitehall.