Are you ready for more health care regulation in Maryland? Our state’s already-overregulated health care sector is primed for more government interference in the upcoming session of the General Assembly. One area that will surely be a hot topic (to a few) will be the issue of pharmacy benefit managers (PBMs). Legislators would do well to consider this issue closely and tread lightly.

In health care policy, there has long been a push to “bend the cost curve down.” In simple terms, this means to reduce the increase in overall health care expenditures. PBMs are one way to do this. However, reducing health care spending means that some people are making less money. In this case, smaller pharmacies suffer.

Essentially, PBMs offer services to insurance companies to manage these companies’ prescription drug benefits. They can negotiate lower prices for drugs, push the use of generics and take other steps to save money for their clients. For many independent pharmacists, the problem with PBMs is that they offer drug payment prices that these pharmacists consider too low. Some pharmacists report that PBMs do not even reimburse the full cost of some generic drugs, which forces these pharmacists to choose between turning away a customer and losing money on the transaction.

As a result, some pharmacists want states to mandate that PBMs reimburse pharmacists the full wholesale price of generic drugs. Lawmakers in Arkansas enacted such a bill last year. We may see such a push in Maryland this year.

In Arkansas, there was an inevitable lawsuit over its PBM legislation, also called Act 900. Writing for the Arkansas Project (a blog for the Advance Arkansas Institute, for which I also work), Caleb Taylor notes something interesting from the trial:

The main argument that the attorney general’s office has used to defend Act 900 is that PBMs have to be heavily regulated, because their business model allegedly hurts the profits of rural and independent pharmacies. However, the CFO reported that about half of his recently-opened stores were already profitable, and that the other half were on their way to profitability. In other words, it didn’t sound like PBMs were hurting profits too much.

I certainly feel for the pharmacists being squeezed by PBMs, but the effect of PBMs’ pricing practices may be overstated. Even if the cost-saving measures being taken by PBMs were detrimental to some pharmacies, is this really an area where lawmakers should intervene? After all, many business models evolve over time that end up cutting into the profits of other companies. This is true of how we buy our books (consider the effect of Amazon on Borders and Barnes & Noble), our tools (look at the effect of Lowe’s or Home Depot on your local hardware store) and our prescription drugs.

Regulation of PBM pricing will have the immediate effect of inflating profit for some smaller pharmacies in Maryland. That may sound fine, especially to pharmacy owners. However, consumers will ultimately suffer under such regulation. The wider effect of these price rules will be higher overall health care spending and less innovation in the delivery of health care services.

If spending cannot be controlled through the market policies of PBMs, there will be greater pressure to control it in other ways that will almost certainly hurt health care consumers.

It is difficult to say what legislation will emerge to regulate PBM operations in Annapolis, but there certainly will be some proposals. The pressure to reduce drug costs is one that every American should applaud, and state lawmakers should resist the temptation to prevent PBMs’ efforts to do this. Interfering in the complicated market processes that are in play will likely end up harming consumers in the end, even if there is a short-term payoff for one small industry.