By Amanda Frost, PhD Vice President, Research, PCMA
The law of unintended consequences, when an action produces unexpected effects outside of its goal. The ripple effect, a single small action causing a chain of larger reactions. The butterfly effect, where small changes early on lead to big unpredictable effects down the road. What do all of these have in common? The understanding that actions have consequences, even when we don’t mean for them to.
An example of unintended consequences is winding its way through the system right now. And the result could be fewer pharmacy benefit managers (PBMs) with greater market concentration at the top – the opposite of what policymakers have called for.
The Department of Labor (DOL) has proposed a rule that would mandate transparency reports from PBMs to their self-insured employer clients. Transparency to clients may sound like a laudable goal, but no action – and certainly no government regulation – exists in a vacuum. This regulation will risk destabilizing a dynamic PBM market that includes more than 70 full-service PBMs today.
The Law of Unintended Consequences: New Costs For Those Who Can Least Afford Them
Why should we worry about unintended consequences with this DOL transparency rule? As the writer Rob Norton succinctly summed up, “unintended consequences can add so much to the costs of some programs that they make the programs unwise even if they achieve their stated goals.” In other words, even if the outcome is as intended, the collateral damage created could outweigh any good.
And this rule comes with the significant potential for damage. Compliance with this rule would create substantial new requirements and burdens for PBMs, including the creation of new data pipelines, system redesigns, compliance controls, and legal reviews. PBMs are already building similar but separate systems to comply with the transparency requirements Congress put into law earlier this year.
Mid-market PBMs are telling us that they are not equipped to shoulder this second reporting regime an new burdens from the DOL rule. At least two PBMs told DOL that compliance would cost them over $1 million in additional costs annually. Perhaps that is not a sum that would be burdensome to a Fortune 50 company, but it represents a significant hit to a family-owned small business, as some PBMs are. It’s the little guys (and gals) that will struggle.
The Ripple Effect: DOL Rule Effects Employers, not Just PBMs
In the case of the DOL rule, the unintended consequences are not unanticipated consequences, a la Robert Merton. Rather, as economist Tony LoSasso recently put it, “The unintended consequence of blunt regulation is a familiar one: rules designed to discipline dominant firms would instead accelerate the exit of their smaller rivals.” We can anticipate that the overregulation created by this rule will cause massive ripples in the PBM market. Those ripples would look something like this:
- Implementation of the DOL rule creates increased administrative burden.
- Small and mid-size PBMs are not able to shoulder the increased costs and leave the market.
- Competition in the PBM market declines and employers have fewer choices.
I think we can all agree that these ripples create a net bad outcome. More PBMs in the market, creates more competition, and more choices for employers seeking PBM services. I would also argue that not only does the DOL rule have a cost that outweighs the stated goal, but the goal itself is unnecessary and is already being achieved via other means. Earlier this year, Congress passed the Consolidated Appropriations Act (CAA), which included sweeping PBM transparency standards. The reporting to employers required by the CAA is transforming the PBMs into the most transparent part of the drug supply chain. (Really the only transparent part of the drug supply chain, but I digress.) In comparison to the CAA reporting requirements, the proposed DOL reporting is overly burdensome, redundant, and less useful to employers.
The Butterfly Effect: Today, 70+ PBMs; Tomorrow…?
As DOL continues its work considering how to proceed with this rule, I hope it keeps two things in mind. First, the PBM market is comprised of over 70 full-service firms of varying sizes and business models; there are far more small PBMs than there are large ones. And second, the butterfly effect: seemingly small actions can have enormous, far-ranging impacts. A strong, competitive PBM market benefits employers far more than redundant transparency reports do.