Big Beautiful Bill threatens the Costco of health care

You’ve probably never wondered why you buy peanut butter from the grocery store instead of directly from the J.M. Smucker Company or your TV from an electronics store instead of directly from Sony or Samsung. Many products’ paths from manufacturer to consumer go through middlemen. While it may seem like middlemen are a superfluous layer in the economy, in fact, they are providing a great service to consumers and manufacturers, though that service is difficult to observe.

Retailers are the most apparent form of middlemen. They strike deals with manufacturers and offer a variety of products and product types for customers to choose from. The stocked shelves are the clearest benefit, but behind the scenes, the retailer is curating choices, working with the manufacturers to choose which products and which versions of products to offer, and pushing the manufacturer to offer lower prices for the opportunity to be in the store.

Of course, this means that the retailers charge consumers slightly more than they pay the manufacturers or wholesalers. Even accounting for that, consumers are better off. Not only do they have the ability to compare and contrast different products easily, but they still are likely paying a lower price, even with the retailer’s markup.

Costco is a notable example of how, even a middleman that takes a portion of the discount it generates on behalf of consumers, a company can still offer shoppers prices below their competitors. Costco achieves this via several deliberate mechanisms that require considerable effort, careful research, and a store of expertise and experience.

Pharmacy Benefit Managers (PBMs) are essentially a Costco for prescription drugs. Their customers are insurance companies instead of the patients themselves. Like retailers, PBMs negotiate deals with drug manufacturers and pharmacists, trying to put together a suite of products at a reduced price to entice insurers to “shop” with them. The markup at Costco, the difference between the price the shopper pays and the price paid to the manufacturer, for PBMs is called the price spread.

Buried deep in the Big Beautiful Bill in Title II, Subtitle D, Subpart B is Section 44124 “Preventing the Use and Abuse of Spread Pricing.” Congress has considered passing such a provision previously, but opted not to. CBO estimates the provision would save a whopping  $261 million over ten years, about half of what it spends on the Corporation for Public Broadcasting, which many argue is such a small cost, there’s no value in cutting it.

Policymakers believe price spreads in pharmaceuticals are abusive. They have been working to ban the practice for years. Many states have already done so. The risk of implementing such a policy is it reduces the incentives for the PBMs to lower costs of drugs the way Costco lowers the prices of its products. If PBMs cannot benefit from reducing the prices they pay, they will stop. The result will be that the spread is pocketed by the pharmacists. Overall costs won’t be reduced; they’ll just shift to the pharmacists.

One of the major purposes of PBMs is to reduce the costs of drugs, and by many measures, they’ve been extremely successful. While the US is often criticized for having higher drug prices than other countries, this is not the case for generic drugs which make up 91 percent of drug purchases by volume. American prices are 33 percent lower than in other countries. Further, practically every organization that needs to purchase drugs for beneficiaries employs a PBM to manage the process, and one must assume that PBMs are operating at a lower cost than these organizations’ best alternative, otherwise they’d stop using them.

Congress should reconsider their ban on spread pricing. On the surface it may seem like reducing PBMs’ profits will go to taxpayers, but reducing the incentives to lower prices will lead to higher prices than they bargained for.