How Pill Middlemen Like CVS Are Bilking the Health Care System
The outrage mob was at it again last week. This time, the target of their ire was, of all things, CVS Pharmacy. The fracas was the result of some clever antagonistic marketing by Pill Club, a San Francisco-based startup. It’s a company that acts as a sort of online pharmacy, providing customers with birth control pills and other contraceptives.
Angry with CVS Caremark over the high prices it was charging, Pill Club publicly insisted that the company was depriving women of health care. Of course, feminist Twitter outrage ensued and #CVSDeniesCare and #BoycottCVS quickly popped up. CVS, for its part, tried to quell the storm by releasing a statement saying Pill Club had been offered the same rates as any other pharmacy.
So it goes: CVS fell victim to yet another “leftist mob” demanding special treatment. For that, conservatives might be tempted to defend CVS against the slings and arrows of outrageous fortune. But the company doesn’t deserve it—not by a long shot.
CVS Caremark is a pharmacy benefit manager (PBM), a middleman between drug manufacturers and pharmacies—including online distributors like Pill Club. PBMs are hired by health insurers in order to negotiate prices, handle insurance claims, and oversee the distribution of drugs. Ostensibly, they should reduce drug prices, using their network to negotiate, making life easier for pharmacies, customers, and insurers alike. But this isn’t always the case.
Our Frankenstein’s monster of a health care system has created an abundance of “rent-seekers,” the term economists give to firms that exploit highly regulated markets and make profits they otherwise couldn’t. And PBMs like CVS are the worst of the bunch. They use monopolistic conditions, secrecy, and deception to inflate their profits at the expense of consumers, exploiting their role in America’s decidedly non-market health care system. As Republican Congressman Doug Collins once said, “they act as monopolistic terrorists on the market.”
CVS Caremark, Express Scripts, and OptumRx are some of the worst rent-seekers in the American economy. In a 2018 article, The Economist argued that PBMs, not drug manufacturers or insurers, were the recipients of the greatest excess profits in the U.S. health care system. According to the magazine, “excess profits from healthcare firms are equal to $200 per American per year” and “middlemen capture $126 of excess profits a year per American.”
One of the main ways that PBMs seek rent is through their negotiation of rebates from drug manufacturers. And generally, to retain a PBM’s favor, drug manufacturers will readily cough them up. In turn, PBMs split the dough between themselves and the insurance company—placing the majority of it in their own pockets, of course.
Just how much, then, do they make off these rebates? Since the payments are kept strictly confidential, it’s hard to pin down the exact number. But considering the fact that insurers received $89 billion in rebates from PBMs in 2016, it’s safe to say they make a lot.
And it gets worse.
There are plenty of instances where a customer would actually be able to purchase drugs at a lower price without insurance. But PBMs don’t like this competition, so their contracts with pharmacies often include gag clauses—preventing pharmacists from even telling customers that cheaper options are available. According to the USC Schaeffer Center for Health Policy and Economics, prescription drugs are overpaid for 23 percent of the time.
PBMs like CVS have made a pretty penny off America’s failing system of employer-sponsored insurance. If the market were ever truly freed, they would be crushed. Prescriptions are a product, and they would finally be treated like one. After all, I don’t need a third party to negotiate the price I pay for a car. Why should my medicine be different?
America has embraced a broken system of employer-sponsored health insurance. Industry lobbyists have done everything in their power to ensure that alternative forms of health care coverage are limited. And it’s not as though government has proven to be much help. In 2018, Congress passed a law eliminating gag clauses and urging greater price transparency. But this proposal has drawbacks that ultimately limit its effectiveness.
Something’s gotta give. As long as consumers are several steps removed from the actual processes governing drug prices, they’ll continue to be taken advantage of. It’s not as if these third parties are doing anything to stave off addictions or help Americans make wiser decisions about their medicine. All PBMs do is make people poorer in exchange for nothing. That’s why CVS doesn’t deserve anyone’s sympathy. If the outrage mob wants to take on one of the biggest bullies in the health care system, then let them fight.