On Thursday, a coalition worthy of a wacky ensemble buddy comedy pressed the state not for a subsidy or a handout, but for something much more valuable. Labor unions, business leaders and mayors asked the state to use market forces to lower prescription drug prices.
The state hires a business called a pharmacy benefits manager (PBM) to handle its prescription drug purchases. PBMs negotiate with drug makers to determine what drugs are covered under insurance plans and at what price. Their formulas are complex and opaque, which has made them a ripe political target in recent years.
PBMs can reduce an employer’s or insurer’s prescription drug expenditures by negotiating volume discounts and managing efficiently a large volume of complex drug transactions. But an increasing number of studies (some summarized here) are finding that bad incentives and a lack of price transparency make it hard for customers to produce greater efficiencies and greater savings.
The answer is to change the incentives in ways that empower purchasers, not sellers and contractors.
New Hampshire hires its PBM by putting out a request for proposals and having a group of reviewers pick the best one. Last year it used this process to sign a three-year, $212.4 million contract with Express Scripts, one of the nation’s dominant PBMs.
But there is a better way. Corporations and the federal government have for years employed an online reverse auction to force contractors to bid aggressively to win their business. It works sort of like eBay, but in reverse. The buyer starts the auction, and contractors place their bids. The auction then cycles through multiple rounds, with contractors having the chance in each new round to outbid each other.
- MIT marketing professor Sandy Jap found that online reverse auctions “not only save buyers money but also can increase the competitiveness of the supply base. Suppliers that participate in open-bid auctions are able to benchmark competitors and their cost structures, which can lead to greater efficiency for all suppliers.”
- University of North Texas professors also found in 2004 that online reverse auctions “A large number of studies have demonstrated that ORAs not only improve the buyer’s purchasing efficiency, but also reduce its overall procurement costs” and that sellers “also benefit from new business opportunities to increase their sales.”
- A 2011 study found that they drive prices down, create efficiencies, save time, produce real-time market pricing, and increase competition.
- A GAO report found that they may have saved federal agencies more than $100 million in 2016 alone.
- New Jersey recently switched to an online reverse auction for its PBM contract to save a reported $1 billion.
New Hampshire has the potential to save tens of millions of dollars by creating an online reverse auction process for awarding its new PBM contract next year.
That’s what the wacky coalition on Thursday pressed the state to do. Public-sector unions and local elected officials correctly see the potential to lower their own drug costs too.
Prescription drug prices continue to rise because our complex web of laws and regulations prevents the creation of competitive marketplaces in which consumers can comparison shop.
An online reverse auction takes a step in the right direction by employing market forces — not heavy-handed regulations — to reduce state prescription drug expenditures for the state and its employees.