Susan Dentzer: Why we have reached a tipping point on pharmaceutical spending 

Author Malcolm Gladwell famously wrote in a 2000 book about the phenomenon of “tipping points” — those moments when “critical mass, the threshold, [or] the boiling point” is reached and change occurs “not gradually but at one dramatic moment.”^a One historical case in point: the collapse of the former Soviet Union, which, though building for years, seemingly happened all at once in 1991.

Such tipping points also happen in healthcare, and one appears to be occurring now in the broad prescription drug ecosystem. A backlash building for decades over high prices and murky business practices is finally triggering real transformation across the drug supply chain — evident in everything from new governmental drug pricing regulations to a shake-up in the pharmacy benefit management (PBM) business. In effect, a sector “riddled with perverse incentives, and marked by sky-rocketing prices” — as Robin Feldman, JD, a UC Law San Francisco professor, described it in testimony to the Senate Finance Committee — is suddenly changing at least some of its questionable ways.^b

Big shifts for PBMs

In December 2023, for example, CVS Health — which operates more than 9,000 pharmacy locations and the nation’s largest PBM by market share, Caremark — announced that as of 2025, it would shelve longstanding pricing practices to adopt what it termed simpler and more transparent approaches “built on the cost of the drug, a set markup, and a fee that reflects the care and value of pharmacy services.”^c Other PBMs have announced similar approaches. These shifts would not have happened without the marketplace and political pressures reaching a boiling point such as that author Gladwell wrote about.

The case of skyrocketing insulin pricing

A prime lens through which to view this episode is the roughly $11 billion market for insulin medications taken by one in seven Americans. A 2021 report issued by the Senate Finance Committee concluded that insulin prices were skyrocketing as a result of a complex web of actions across the supply chain.^d For more than 15 years, manufacturers had been aggressively raising prices despite no significant advances in the drugs’ efficacy — including in the now-popular GLP-1 medications, the first of which was approved for U.S. use in 2005. The primary motivation for these price increases, the report said, was to enable manufacturers to offer larger rebates — in other words, price discounts — to PBMs and health insurers to secure preferred placement on these organizations’ prescription drug formularies.

This screwed-up system creates another set of perverse incentives: PBMs are less inclined to place lower-priced medications on their formularies, in part because they’re less likely to obtain large discounts on such drugs. And in a “you can’t make this up” scenario, even as the dollar value of rebates granted by manufacturers has climbed sharply, prices of the underlying medications have risen even faster.^e

Perverse incentives for PBMs

PBMs — particularly the three largest ones that manage 80% of the nation’s drug benefits — in turn have had their own ample incentives to keep prices high. Each time a drug is dispensed at a pharmacy, these organizations earn administrative fees ranging from 3% to 5% of the so-called wholesale acquisition cost, a benchmark price set by manufacturers. Thus, they earn more from these fees as drug prices rise.

Historically, however, PBMs have not revealed to health plans — the very clients for whom they are ostensibly managing pharmaceutical benefits — any pricing details, including the size of the rebates they negotiate with manufacturers, UC Law San Francisco Professor Feldman noted during her testimony before the Senate Finance Committee.

The complex nature of these pricing arrangements can have mixed effects on consumers. Even though the net effect of rebates is, in principle, to lower overall consumer costs, cost-sharing for Medicare beneficiaries enrolled in Part D drug plans is often based on a higher price than the one negotiated by the PBM and the drug manufacturer, the Senate Finance Committee’s report also found. Consumers who haven’t yet met the insurance deductibles in their commercial health plans may also pay the full cost of a drug, not the price net of rebate.^f

Immediate consequences

What has all this mess now wrought?

First, demands for greater transparency around rebates and their effects have led to legislation now before Congress. In particular, the bipartisan Lower Costs, More Transparency Act of 2023, passed by the House of Representatives in December, would institute multiple new pricing, reporting and audit requirements on PBMs. Among other provisions, PBMs would be required to pass on 100% of rebates, fees, alternative discounts and other remuneration to health plans, retaining an administrative fee only. The bill would also ban so-called spread pricing on PBMs’ Medicaid business, in which PBMs reimburse pharmacies at less than what they receive from Medicaid health plans for a given drug and retain the difference, or spread, as profit.

Second, the marketplace itself has responded, in part by creating very different models to get drugs into consumers’ hands. An example is Mark Cuban Cost Plus Drug Company, formed by Dallas Mavericks owner and “Shark Tank” star Mark Cuban. It bypasses PBMs, contracts with generic drug manufacturers, and now sells more than 2,200 drugs directly online to consumers at the company’s cost of purchase plus a 15% markup, a $5 pharmacy fee and a $5 shipping fee.^g

Marketplace responses

CVS’s recently announced new suite of approaches is the latest marketplace response, under which prices will reflect “the true net cost of prescription drugs, with visibility into administrative fees.” CVS also said this simplified and more transparent pricing strategy “will help consumers be confident that their pharmacy benefit is providing the best possible price.”

Earlier, in November, Express Scripts, the nation’s second-largest PBM by market share — owned by a subsidiary of Cigna — also announced a cost-based pricing model, under which clients will pay an estimated acquisition cost for individual medications with a small markup for pharmacy dispensing and service costs.^h

Legislative actions also target manufacturers

The looming transformations in the PBM business come atop other recent legislative changes affecting the other side of the supply chain: pharmaceutical manufacturers. Here again, diabetes drug costs are front and center.

The 2022 Inflation Reduction Act imposed a $35-per-month cap on out-of-pocket costs for insulin drugs for all enrollees in Medicare Part D (and many in Parts B and C), and four of the top 10 costly drugs whose prices Medicare will now negotiate with manufacturers are diabetes medications.ⁱ Over the course of 2023, the three largest insulin product manufacturers — Eli Lilly, Novo Nordisk and Sanofi, which control about 90% of the U.S. insulin market — all cut their insulin prices by 70% or more and adopted a $35 cap on out-of-pocket costs for all patients with commercial insurance.^j

An unavoidable conclusion

Clearly, the tipping point is at hand. We can only wonder: What other fraught areas of healthcare spending are next? 

Footnotes

a. Gladwell, M., The tipping point: How little things can make a big difference, Little, Brown and Company, 2000. 
b. Testimony of Robin Feldman, Arthur J. Goldberg Distinguished Professor of Law and Director of the Center for Innovation, University of California Law, to the Senate Finance Committee Hearing on Pharmacy Benefit Managers and the Prescription Drug Supply Chain: Impact on Patients and Taxpayers, March 30, 2023.
c. “CVS Health highlights path to accelerating long-term growth through building a world of health around every consumer,” CVS news release, Dec. 5, 2023.
d. Senate Finance Committee, Insulin: Examining the factors driving the rising cost of a century old drug, Staff Report, 2021.
e. Sood, N., et al., The association between drug rebates and list prices, the USC Schaeffer Center for Health Policy & Economics, Feb.11, 2020.
f. Roehrig, C., The impact of prescription drug rebates on health plans and consumers, Altarum, white paper, April 2018.
g. I checked Mark Cuban Cost Plus Drug Company’s prices (see costplusdrugs.com/medications) against my own list of medications delivered through my health insurer’s PBM and found that the savings to me would be modest. But for other people in different insurance arrangements, they could be substantial.
h. Express Scripts, “Express Scripts introduces new option to give clients maximum simplicity in drug pricing,” News release, Nov. 14, 2023.
i. CMS.gov, “Frequently asked questions about Medicare insulin cost-sharing changes in the prescription drug law (Updated July 2023)”; and U.S. Department of Health and Human Services, “Biden-Harris Administration moves forward with Medicare drug price negotiations to lower prescription drug costs for people with Medicare,” News release, Oct. 3, 2023.
j. Walters, W., Hughes, R., “Insulin as preventive care: Why not eliminate patient cost sharing?” Health Affairs Forefront, March 24, 2023.