Prescription reimbursement policies: Use scalpels, not sledgehammers

Each legislative session brings its own attempts – usually born out of frustration – to address real problems in ways that just wind up growing government’s size, scope and cost.

It’s indicative of sledgehammer-to-ant syndrome. Rather than kill ants and address the specific problem, this approach knocks down the entire house.

Obamacare an example

Perhaps no large-scale policy change in America better describes such an approach than the so-called Patient Protection and Affordable Care Act, which provided neither protection nor more affordable coverage or care for patients.

It’s not that there weren’t some problems that needed attention. Rather, the solutions Obamacare offered went way beyond the pest control needed to address the ants on the floor and instead tore the whole house down.

Obamacare not only didn’t fix the health care and coverage problems but exacerbated them. It’s as if it knocked our whole health-care house down only to discover the ants survived the demolition and grew in number.

Frustrated with Big Pharma

Campbellsville Republican Sen. Max Wise is frustrated that many small-town independent pharmacies are having a difficult time competing against those big and bad but very successful and market-dominating operations like Walgreens and CVS.

Wise said in a recent interview with Spectrum’s “Pure Politics” he wants to “protect” small independent Kentucky pharmacists from these evil pharmacy benefit managers (PBMs), the “middlemen” in the prescription-reimbursement process.

These PBMs are “making a lot of money and they’re not based here in Kentucky. We’re talking about those with jets flying in from New York and New Jersey and testified before and it’s really a slap in the fact for what our independent pharmacists are doing out there in the state.”

Is more government the answer?

Just as there’s an obvious problem with Wise’s thinking about PBMs who happen to fly into Kentucky on their jets (Don’t we want lots of people flying in here on jets?) and small independent pharmacies who find it increasingly difficult to compete against the Walgreens of the world, there’s also an obvious disconnect between his Senate Bill 5 and solving the problem of these independent pharmacists receiving reimbursements that fail to cover the cost of about 20 percent of the prescriptions they disburse.

While the “ants” here are questionable reimbursement rates, Wise’s legislation operates like a sledgehammer by proposing to move reimbursement for pharmacies completely away from Kentucky’s five Managed Care Organizations (MCOs) in the private sector and give control of all prescription reimbursements to state Medicaid agency.

Not only will using this sledgehammer force state and federal taxpayers to ante up the additional $240 million needed to cover the Obamacare rule mandating states pay a $10.64 dispensing fee to pharmacists (compare that to the private-market rate of $1), but the fiscal note accompanying Wise’s bill adds $36 million to the price tag as such programs cannot be done without hiring more state workers and other new government administrative costs.

Senate ‘priority’?

Wise calls his legislation “a priority bill of the legislature on the Senate side” and said: “there’s a lot of momentum for this to be passed forward because we want to see what’s fair and what’s fair for those pharmacists out there.”

“This is going to be a big fight,” he breathlessly heaved.

I could understand if you were talking about pensions or budgets or achievement gaps being “big fights.”

But prescription-drug reimbursement rates?

We have no qualms or hesitancy about fighting big-government progressives of all political parties over their insistence on growing welfare programs to “protect” one politically well-connected group instead of protecting everyone’s individual liberty and ensuring a level playing field upon which some businesses may succeed while others fail, then so be it. 

The ants will remain

However, Kentucky’s small independent pharmacists should know once SB 5’s sledgehammer swings and the house falls, the ants will remain. That $10.64 will be the reimbursement rate for the hundreds of Walgreens and CVS stores just as surely as it will be at the two Hines Pharmacy outlets in Bowling Green.

That’s why you don’t really hear the big boys weighing in on Wise’s legislative proposal. They’ll remain on the sidelines, let the little guys fight the battle and then use those higher reimbursement rates to drive their smaller competitors out of business, perhaps even at a faster rate than otherwise would have happened.

Certain areas of drug-reimbursement policies may by their very nature always be complex and complicated, and PBMs arguably have the least incentive of all stakeholders to make them more understandable. 

Transparency can help

However, in my discussions with pharmacists about this issue, there seems to be agreement that more transparency would be a more-effective approach in unraveling some of their complexities and finding more market-driven solutions than government bureaucracy.

Why not require PBMs to reveal their reimbursement rates for prescriptions, including how much is going to the manufacturers, insurers, employers and pharmacists?

Doing so would shine a light on the whole process, including how much savings on certain drugs – especially when prescriptions dispensed through the taxpayer-funded-and-subsidized Medicaid program are involved – gets back to taxpayers and insurers.

Bringing more transparency into the process may not be as popular with PBMs as maintaining the status quo. However, it’s likely they would see it as preferable to losing large chunks of their reimbursement business to a government agency.

If such transparency reveals monopolistic-like conflicts of interest or unholy alliances between the PBMs and big pharmacies, then – like a policy MRI – perhaps it will be clear where surgery is needed. Even then, a scalpel will be much-more effective than a sledgehammer. 

Quit hammering innovation success

What we must not do is punish success in the marketplace simply because it’s made some people wealthy.

PBMs started several decades ago simply by bringing efficiency to the reimbursement-claims industry. Then, they figured how to make their businesses more lucrative while still ostensibly serving patients and pharmacies.

They applied market forces to negotiate reimbursement rates aggressively, which made their operations more profitable, so much so, in fact, that some of the big pharmacies bought the operations so they would essentially have their own PBMs.

Independent pharmacists claim that 85 percent of Kentuckians’ prescriptions are filled by the one of the big-boy PBMs – CVS/Caremark, Express Scripts or Optum.

Like any other industry, does government have a right to take a sledgehammer to the PBMs just because they innovated and increased their success? 

‘Convoluted transparency’?

Wise’s silly statement as part of his interview that “there’s a convoluted transparency there that we’re not getting from PBMS of how much are you really making in this.”

How do you produce “a convoluted transparency”?

It seems college professor Wise’s academia combined with his frustration about pharmaceutical middlemen getting rich is clouding his thinking about transparency.

Either you have transparency, or you don’t. The very definition of the word means to be seen through and, according to just about any dictionary, is synonymous with translucency, limpidity, clearness and clarity.

Worse, Wise went as far as to say he wished “it was something, actually, that the Department of Justice and the FBI would look more into on that level.”

What, exactly, does Wise want them “look more into?” How PBMs grew from basically a transactional company to an aggressive and profitable negotiator of reimbursement fees? Does he want to do that for every successful business in Kentucky, or only the ones that are easily demonized and don’t fit into someone’s – maybe even his – politically correct world view?

While it may be easier to demonize PBMs and get into the weeds regarding prescription-drug reimbursements, Wise and his colleagues might want to keep in mind that if we don’t start hearing more out of Frankfort regarding issues that frustrated voters chose a new supermajority to deal with like pension, education and budgetary reforms, those same frustrated voters just might bring their own sledgehammer to the voting booth at their next scheduled appearance.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. He can be reached at jwaters@freedomkentucky.com and @bipps on Twitter.

To download a PDF version of this policy brief, click here