For most businesses, labor is the largest expense in the operating budget. As the founder and president of Small Business California, I speak to many company leaders and they tell me that wages, benefits and related taxes account for as much as 70%, and growing, of total business costs.
According to the Bureau of Labor Statistics, compensation costs increased over 5% in the last year alone. They’ve been climbing over the past several years and, with the tight labor market, they’re likely to keep rising. As labor costs go up, the costs of goods and services go up, so prices go up. That’s inflation. And to keep up with inflation, employers have to keep raising wages. It’s a vicious cycle and complicated to break out of.
Given all that, one of the last things we need is to make it even more expensive to keep people employed, 31% of which is the cost of providing benefits. One of the most popular benefits offered by employers is health insurance and within that category, prescription drug coverage has the highest take-up rate. The take-up rate is the Bureau of Labor Statistics’ estimate of the percentage of workers with access to a plan who decide to participate in it.
Prescription plans are administered by pharmacy benefit managers and workers like them because they greatly reduce the cost of medications at the drug counter. Small and medium businesses, like the ones I work with, don’t have the scale to negotiate lower prices from pharmaceutical companies that are the biggest drivers of increasing prices, accounting for 65% of the net cost of every prescription. But PBMs have the clout to take on the drug manufacturers, squeeze their profit margins and get a better deal for patients.
Naturally, Big Pharma doesn’t like PBMs and has spent hundreds of millions of dollars in lobbying so far this year. The Pharmacy Benefit Manager Transparency Act of 2022 (S4293) was introduced in the U.S. Senate and fortunately did not get very far. It will be interesting to see if another attempt is made in the new Congress.
The amount of money spent lobbying against PBMs is more than any other business, almost double the amount spent by the next largest industry. Much of their focus has been on casting PBMs as “hidden middlemen” and they are, in a way. They operate in the middle, standing between patients and higher drug prices.
PBMs are the only part of the drug supply chain that gets their profits from the money they save the entire health-care industry. According to the National Bureau of Economic Research, PBM services add at least $145 billion in value to society annually. Meanwhile, the 10 largest drug manufacturers raked in over $700 billion last year alone. The median gross profit margin for the pharmaceutical industry is an eye-popping 76.5%.
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If lawmakers were serious about bringing down costs, they’d focus on hospital, physician and clinical services that make up over 60% of health-care expenditures. Interestingly, PBMs actually contribute to keeping people out of hospitals,
emergency rooms and doctors’ offices.
Each time a patient uses their insurance for a prescription, PBMs perform what’s called a drug utilization review, detecting any potential errors, such as drug interactions, incorrect dosages or other issues. In addition, they notify pharmacists when it’s time for a refill and make sure it gets to the patient, so they can take it properly, as prescribed.
According to a paper in the New England Journal of Medicine, “Poor adherence to medication regimens accounts for substantial worsening of disease, death and increased health-care costs in the United States. Of all medication-related hospital admissions in the United States, 33% to 69% are due to poor medication adherence, with a resultant cost of approximately $100 billion a year.”
Quality, affordable healthcare is of special interest to me, and the reason I co-founded a free, volunteer-powered health clinic for the uninsured and underserved. I advocate for programs that help the community so it makes little sense to me for policy makers to paint PBMs as the causal factor in high health-care costs when they actually reduce drug prices, as well as spending on hospital and physician services, while improving health outcomes.
It would be a mistake for lawmakers to take away a valuable service patients have simply because they don’t understand the complicated workings of the drug supply chain.
