Experts tell Assembly panel PBM market power may raise drug costs and squeeze independent pharmacies

Two health‑economics experts told the Assembly Health Committee that pharmacy benefit managers’ growing market power and vertical integration can raise drug spending and weaken independent pharmacies.

Professor Kakani of Cornell and Anna Keltenbach of Veradent Research described how PBMs — intermediaries hired to manage prescription benefits — negotiate with manufacturers and pharmacies, often collect payments from manufacturers for formulary placement, and sometimes own pharmacies that dispense drugs. "About 80% of the market is controlled by three firms," Professor Kakani said, adding that affiliated pharmacies now account for a large share of dispensing for some drug types. Both witnesses cited recent federal reports showing PBM‑owned pharmacies can receive higher reimbursements and that PBMs can steer profitable prescriptions to affiliated outlets.

Why it matters: Witnesses said those dynamics can raise plan sponsor spending, push up premiums and increase patient out‑of‑pocket costs when pharmacy charges or plan formulas use inflated list prices. They also warned that independent pharmacies, especially those in low‑income or minority communities, can be excluded from preferred networks and face opaque post‑sale fees that risk closure and reduce local access to medicines.

Evidence and policy ideas: Keltenbach pointed to the Federal Trade Commission’s staff findings and a House oversight report documenting higher markups and steering of specialty generic drugs to affiliated pharmacies. Professor Kakani quantified mechanisms that matter to policymakers: restricting what PBMs pay affiliated pharmacies (for example, linking payments to average acquisition costs such as NADAC), ensuring unaffiliated pharmacies are reimbursed at no less than acquisition cost in preferred networks, and adopting pharmacy network adequacy rules to protect access in vulnerable areas.

Both experts described an alternative pay model for PBMs: replacing price‑linked compensation with a bona fide per‑member‑per‑month fee that covers PBM services and expected net drug costs. "Delinking compensation from the list price would alleviate the incentive to prefer high‑list‑price drugs," Professor Kakani testified. Keltenbach cautioned that delinking should not be structured in ways that implicitly index fees to drug prices and urged standard contract templates and stronger enforcement to make competition meaningful for smaller plan sponsors.

Committee concerns and limits: Committee members pressed witnesses on the national versus state‑specific evidence and legal limits for state action, including ERISA preemption of some rules for self‑insured plans. Both witnesses said many national trends apply in New Jersey but noted that network adequacy rules may be preempted for self‑insured plans and that some remedies — for example, seeking federal enforcement or multistate coordination — may be required for systemwide issues.

Next steps: Witnesses recommended targeted state steps that reduce conflicts of interest (reimbursement limits, reimbursement floors, network adequacy standards where legally permissible) and increased transparency such as standardized contract proposals and whistleblower protections. The committee’s ongoing legislative work on PBMs and an anticipated return of another bill (A‑4953) were noted at the hearing.