Experts tell Assembly panel PBM structure can raise drug prices, call for transparency and incentive reform

Two university professors told the New Jersey General Assembly Health Committee that pharmacy benefit managers, or PBMs, are an important but opaque intermediary in the U.S. prescription drug market and that current incentives can raise costs for patients and payers.

PBMs bundle purchasing power and negotiate discounts with drug manufacturers, but ‘‘the more obscure’’ their contracts are, the more likely consumers pay too much, Rutgers law professor Michael Carrier told the committee. Carrier added that PBMs can favor brand or higher-priced formulations when manufacturers give larger rebates, and that consolidation among PBMs gives three large firms overwhelming market power.

The question of how PBMs affect prices matters because the apparent retail price of a drug often differs sharply from the amount manufacturers and patients actually pay. ‘‘The formulary is the list of drugs that the patient is able to take. That should be based on determinations of what is the best drug, what is the most cost effective treatment. It should not be given to a brand firm that happens to give a lot of money to the PBM,’’ Carrier said. He cited examples where a slightly discounted branded product occupied a preferred formulary position over a deeply discounted biosimilar because the brand paid larger rebates.

Professor Jeffrey Joyce of the University of Southern California presented empirical data backing the concern about opacity in the distribution chain. Joyce said national outpatient prescription spending in recent years shows a large ‘‘wedge’’ between list prices and net prices after discounts, and that intermediaries take a sizable share of that wedge. He said roughly one-third of current outpatient prescription spending flows to intermediaries and distribution rather than to manufacturers or consumers. Joyce summarized his view: ‘‘PBMs serve a very valuable role of claims administration…and their main function is as a group purchasing organization. There are two caveats: they retain too much of the savings… and they create perverse incentives where everyone in the supply chain prefers a highly rebated, high-cost drug over a lower-cost alternative.’’

Committee members pressed witnesses on specifics the legislature could address. Members and witnesses discussed: (1) closed versus open formularies (New Jersey law prevents closed formularies, the panel heard), (2) the design and effect of rebate pass-through laws that require rebates to go to plans or point-of-sale, and (3) the impact of vertical consolidation (PBMs owning insurers, retail pharmacies, and specialty/mail-order pharmacies).

Carrier and Joyce both recommended reforms that preserve PBM functions while changing financial incentives: require greater transparency of rebate and reimbursement flows; delink PBM compensation from list prices; and require fiduciary duties or fixed, auditable administrative fees rather than profit shares tied to the price of a drug. Joyce suggested a fixed administrative fee per claim plus outcome or cost-growth bonuses as an alternative to percentage-based payments tied to list prices.

The committee’s discussion also touched on policy tradeoffs. Witnesses and members agreed that some PBM activity produces savings for large purchasers and that manufacturers’ net prices matter for future investment in drug development. At the same time, the witnesses argued the current opaque mix of list prices, rebates, and post-sale clawbacks can harm uninsured patients and beneficiaries who face cost sharing based on list prices.

The exchange underlined several recurring themes for lawmakers: requiring clearer accounting for rebate flows, strengthening audit rights for plan sponsors, and considering statutory limits on PBM practices such as certain forms of spread pricing or ownership-driven pharmacy steering. Lawmakers also flagged outstanding questions for staff follow-up, including local data on pharmacy closures and precise fiscal estimates of particular reforms.

The committee did not take formal action on PBM-specific legislation at the hearing; members and the two academic witnesses agreed more detailed, evidence-based proposals would be required before drafting binding statutory changes.

The committee later received and debated two separate bills (coverage for stuttering treatment and changes to prior authorization for serious mental illness), which were handled as distinct agenda items.

Ending: The PBM presentations generated substantial committee interest and follow-up requests for data. Both professors recommended transparency and incentive changes; the committee asked staff to compile fiscal impacts and state-specific information for future deliberations.