Total profits alone booked by all of the agents in the value chain collectively amount to $23 of the $100 paid for drugs by consumers.

Although PBMs claim to be able to drive tough bargains with manufacturers and retail pharmacies over prescription drug prices, they seem to have only a modest capacity to do so. First, as can be inferred from data published by the International Federation of Health Plans, the prices Americans pay for drugs are the highest in the world. Second, the PBMs seem unable to resist the steep annual price increases for existing drugs that drug companies — even generic ones — routinely manage to impose on them. In early June 2017, for example, it was widely reported that Pfizer had raised prices on 91 existing drugs by an average of 20 percent since the beginning of 2017. There is a good chance that the PBMs will just accept such increases and pay them.

Insured patients typically are required to pay at the pharmacy a sum pegged to the price their PBM has negotiated with retail pharmacies. But the PBMs receive secret rebates from the drug manufacturers that the they claim are mostly passed on to the health insurers with whom they contract, who in turn claim to pass most of the secret rebates on to the employers with whom they contract. Given this secret rebate flow, one wonders what incentives the PBMs actually have to help keep drug prices low for consumers.

Probably nothing so clearly exposes the disregard for efficiency and costs with which Congress sometimes fashions health policy than the distribution of drugs for cancer and rheumatology treatments. These drugs are commonly administered on an ambulatory basis in the medical practices of oncologists and rheumatologists or in outpatient departments of hospitals.

Under the Medicare program (a major payer for these drugs) physicians and hospital outpatient departments are reimbursed for the drugs they infuse at the average sales price for the drugs reported by the drug industry to Medicare, plus a 6 percent markup over the ASP. With some of these drugs costing more than $100,000 a year, this 6 percent markup clearly provides a strong financial incentive for physicians to favor expensive drugs.

One would hope that in their clinical decisions most physicians would be impervious to this strong financial incentive. It was troubling, however, to behold the vehement opposition on the part of the American medical community, the pharmaceutical industry and members of Congress who front for the pharmaceutical industry to a proposal by the Innovation Center of the Centers for Medicare and Medicaid to experiment with alternative payment approaches.

The idea was to reduce the percentage markup on cancer and rheumatology drugs from 6 percent to 2.5 percent, and to increase the flat fee paid physicians and hospital outpatient departments for administering the drugs. That sensible idea had been recommended to CMS by the non-partisan Medicare Payment Advisory Commission (MedPAC).

In the face of this vehement opposition from powerful interest groups and from the members of Congress who carry their water, in late December 2016 CMS simply abandoned the idea of reforming this conflict-ridden drug reimbursement system. K Street lobbyists won out over plain common economic sense.

The role of Congress in driving up administrative expenses. I can think of no legislation ever to emerge from Congress that addressed the magnitude of this administrative overhead. It is as if Congress just does not care what health spending actually buys. On the contrary, every health reform emerging from Congress vastly complicates the system further and brings forth new fleets of non-clinical consultants who make a good living teaching clinicians and hospitals how to cope with the new onslaught. All of their income becomes the providers’ expense and thus ends up in the patient’s bill.

A classic illustration of this tendency is Congress’ introduction of Flexible Spending Accounts. They allow employed individuals to set aside a certain amount of money out of pretax income to cover out-of-pocket spending for health care in the coming year.

As is well known, or should be well known, any expenditure that comes out of pretax income or is deductible from taxable income is just another tax-financed subsidy in disguise. In this case, the larger the employee’s income and thus the higher their marginal tax rate, the larger that public subsidy.