Economic Analyses of House and Senate Bills in Colorado

Each of these analyses were written for Senators and House Representatives to assist in decision-making on whether to pass, amend, or veto a bill. After emailing them the analysis, I presented my findings at the Capitol in Denver, CO.

SB23-253 Compost Labeling Bill - Economic Analysis

04/12/2023

Bill Overview

SB23-253 bans non-compostable products from using misleading labels, images, or words that could indicate that the product is compostable. The intention of the bill is to allow people to easily identify a product as legitimately compostable.

SB23-253 categorizes certain compostable design elements such as the word compostable, certified stamp, beige or green coloring, and other labels with compost connotations. This bill restricts the use of these emblems and design elements to products that are certifiably compostable.

This bill directly addresses negative externalities and a market failure. These occur for two reasons. The first is the negative environmental impact of organic matter in landfills. The second is the lost value of properly composted items as fertilizer on farms.

The value that consumers put on compost creates an incentive for manufacturers of non-compostable items to misrepresent their products as compostable. Companies will falsely represent products to deceive purchasers. The misrepresentation causes consumers to inadvertently pay more towards non-compostables, and dispose of their trash incorrectly.

The provisions of this bill will internalize the externalities and promote a more efficient market. This bill should be passed.

Composting Benefits

The State of Colorado has determined that composting is critical to reaching the overall waste-diversion goals set by the Colorado Department of Public Health and Environment. The government has a legitimate interest in improving waste diversion because of the potential negative impacts of inappropriately handling waste.

From 2018 to 2020 Colorado’s composting rate dropped from 17.2% to 15.3% (CPR). As of 2022, the Department has aimed for 28% of waste to be either recycled or composted (RecycleCO). These goals have been put in place to alleviate the impacts that landfills and farms have on the environment and human health.

With regard to composting, the government has an interest in correcting its use because there are negative consequences to its misuse. For example, when organic matter is put into landfills, it increases methane emissions. Methane is a primary greenhouse gas that has contributed to global warming (NRDC). In the US, 17% of greenhouse gas emissions are from methane pollution (EPA1). Additionally, landfills make up a large portion of methane pollution because they are the third largest source of methane emissions (EPA1).

Another negative externality that compost has the potential to internalize is pollution from farm fertilizer. During rain events or snow melts, excess fertilizers can pollute nearby groundwater. The additional nutrients can pollute freshwater systems to the point of hypoxia, or dead zones in water bodies (EPA2). Algal blooms that produce toxins harmful to humans can grow as a result of the fertilizer (EPA2).

Compost as an organic alternative reduces the need for fertilizers that contain harmful chemicals. Organic matter that is turned into compost becomes a valuable natural fertilizer. Compost is rich in nutrients such as nitrogen, phosphorus, and potassium. These nutrients aid plant growth. Additionally, each 1% increase in organic soil matter will allow the soil to retain 20,000 more gallons of water per acre (NRDC).

In other words, when farms use clean compost instead of commercial fertilizer, it benefits the environment by limiting the negative externalities that fertilizers pose. Therefore, companies should be encouraged to provide compostable products and packaging. By regulating compost marketing SB23-253 encourages producers to make authentic compostable goods in order to internalize these externalities and move toward efficiency.

Greenwashing

SB123-53 will prevent companies from misrepresenting their packaging or products as compostable when in fact they are not. This practice is part of the overall practice known as greenwashing, whereby a company tries to make itself look environmentally conscious. Companies use words such as “natural,” “degradable,” and others that can be misinterpreted because the words do not have regulatory definitions that restrict their use. Consumers may misperceive brands that use labels that appear to be environmentally conscious when the products are actually made from non-reusable materials. This marketing technique is intended to confuse environmentally conscious customers.

A survey revealed that 66% of adults in the United States are willing to pay more for sustainable products (SB). When customers are willing to pay more for a compostable brand, manufacturers of alternative materials have the incentive to make their packaging look compostable. Any company has an incentive to use greenwashed designs if customers are willing to pay more. One result is an increase in consumer prices.

Products that use non-renewable resources are typically cheaper than those that are compostable. Some biodegradable materials cost two to ten times more than non-biodegradable materials (SFGATE). Companies that misrepresent their products as being compostable have lower costs than those that are genuinely compostable. The lower costs allow unsustainable brands to charge more than they should for their non-compostable products, but still less than what genuinely compostable products charge. The lack of customer knowledge creates a rent, or unjust price increase, for non-compostable products.

In a 2022 poll, company executives were asked to answer questions that gauged their company’s sustainability efforts. Out of the 1,491 executives, 58% of them admitted to overstating sustainability efforts to consumers and greenwashing existing at their company (Cloud). These companies take advantage of people paying more for eco-friendly products. When companies use green marketing strategies for their non-compostable products and price them higher, then the companies that are actually paying more to be environmentally conscious cannot compete fairly.

Compost Manufacturers

When non-compostables are found at compost manufacturers, they pose a market failure that is a result of asymmetric information. This misinformation is between the producer and consumer, where the manufacturer knows the product is non-compostable, and the consumer believes it is. The greenwashed product that is put into the compost negatively inflicts the compost manufacturer’s operations.

Plastics, glass, or other non-compostable products that are present in waste streams force the manufacturer to dispose of entire compost batches. When greenwashed contaminants end up in the compost, it increases the operating costs it takes to remove them. If fragments of non-compostable packaging, plastics, or any amount of glass are present, it causes the compost load to be rejected. When the contamination cannot be removed the entire compost load is taken to a landfill for disposal.

Many compost manufacturers encourage non-organic material contamination to be removed by the consumer (A1). It is the most efficient method for the composting facility to generate high-quality compost. As a result of greenwashing, compost manufacturers struggle with an increasing amount of contamination. This has caused the largest composter in Colorado, A1 Organics, to encounter 10% contamination in their compost. As a result, starting April 1, 2023, A1 will only accept food scraps, yard trimmings, and approved bags (A1).

Administrative Actions

This bill aims to discourage greenwashing. If passed, companies will be encouraged to produce products that are genuinely compostable because they will no longer be able to greenwash non-compostable products. Additionally, successful manufacturers such as A1 Organics could potentially return to accepting all compostable materials. The amount of compost in landfills will be reduced, and will instead supply environmentally friendly fertilizers. Finally, this will reduce the environmental and human health negative externalities caused by landfills and farms.

Under this bill, the Attorney General will promulgate specific regulations to establish appropriate standards. Any violations of those rules will be charged under unfair or deceptive trade practices. An education and outreach program will also be created to educate retailers, producers, and consumers about the requirements. A complaint forum to report unfair or deceptive practices will allow any person to report a violation.

To increase the economic viability of organic material and internalize externalities, government intervention is necessary. The General Assembly should pass SB23-253.

Works Cited

A1. “A Message from A1 Organics, Colorado’s Leading Organics Recycler.” A1 Organics, 27 Feb. 2023, https://a1organics.com/wp-content/uploads/2023/02/A1-Organics-NEWS-RELEASE-Changes-in-the-SSO-Stream-Fin.pdf.

CPR. “Colorado struggles to keep organic waste out of the dump.” CPR News, Sam Brasch, Sep. 14, 2022, https://www.cpr.org/2022/09/14/colorado-composting-landfills/.

Cloud. “Report: What it will take for CEOs to fund a sustainable transformation”, Google Cloud, Apr. 13, 2022, Justin Keeble, https://cloud.google.com/blog/topics/sustainability/new-survey-reveals-executives-views-about-sustainability.

EPA. “Composting At Home.” Environmental Protection Agency, 22 Nov. 2022, https://www.epa.gov/recycle/composting-home#:~:text=Improves%20the%20structure%20and%20health,the%20potential%20for%20soil%20erosion.

EPA1. “Basic Information about Landfill Gas.” United States Environmental Protection

Agency, 2023, https://www.epa.gov/lmop/basic-information-about-landfill-gas#methane.

EPA2. “The Sources and Solutions: Agriculture.” United States Environmental Protection

Agency, 2022, https://www.epa.gov/nutrientpollution/sources-and-solutions-agriculture#:~:text=Excess%20nutrients%20can%20cause%20harmful,nutrient%20losses%20to%20the%20air.

NRDC. “Composting 101.” Natural Resource Defense Council, Shelia Hu, 20 July 2020, https://www.nrdc.org/stories/composting-101#whatis.

RecycleCO. “Colorado’s waste diversion goals- Can composting get us there?” Recycle Colorado, Amy Randell, July 28, 2022. https://www.recyclecolorado.org/index.php?option=com_dailyplanetblog&view=entry&year=2020&month=07&day=27&id=77:colorado-s-waste-diversion-goals-can-composting-get-us-there-.

SB. “Majority of US Consumers Say They Will Pay More for Sustainable Products” Sustainable Brands, 29 Aug, 2022, https://sustainablebrands.com/read/marketing-and-comms/majority-of-us-consumers-say-they-will-pay-more-for-sustainable-products.

SFGATE. “Are Biodegradable Materials More Expensive?” SFGATE, https://homeguides.sfgate.com/gardening-gifts-plant-lovers-13771630.html.

HB23-1080 Alternative Energy - Bill Economic Analysis

03/15/2023

Bill Overview

Section 1 of HB23-1080, Affordable and Reliable Alternative Energy Act, implements a feasibility study of small modular reactors in Colorado. The bill aims to reduce the negative externalities associated with carbon dioxide emissions by introducing a new carbon-free, nuclear energy source.

Section 1 of the bill specifies the evaluation of State law modifications, economic feasibility, safety, and tax effects. The study will be given $250,000 from the General Fund towards implementation for the 2023-24 State fiscal year.

Carbon Emission Externalities

Carbon-based fossil fuels such as oil, coal, and gas are all major energy sources in the U.S. (Ritchie). These fossil fuels require invasive extractions and emit carbon dioxide when burned. A negative externality is a result that inconveniences or hurts others as a byproduct of someone’s market transaction operations. Externalities arise throughout the process of generating power, beginning with the extraction of fossil fuels.

Coal extraction requires strip mining or underground mining (Denchak). Oil and gas are typically taken from underground reservoirs by drilling on land or at sea. These techniques of extraction are destructive to the ecosystems because of complete uprooting of the land, pollution, and water toxicity. Wildlife, as a result, have less access to land used for resources, breeding, and migration. Additionally, waste from extraction that ends up in our water supply contains heavy metals and radioactive materials. These pollutants are linked to health issues such as cancer, birth defects, and neurological damage (Denchak).

Once the fossil fuels are burned, carbon dioxide emissions trap heat in our atmosphere. This contributes to global warming (Denchak). Breathing pollutants from carbon-based fuel can lead to short-term and long-term health problems. Studies have linked these pollutants to early death, respiratory disorders, strokes, asthma and other diseases (Harvard).

Nuclear Power Benefits

Nuclear power does not emit carbon dioxide. Instead it is powered by nuclear fission. Fission is the process of repeatedly splitting the nucleus of an atom into smaller nuclei. There is a release of heat and radiation during the splitting and the heat can be converted to electricity (ONE4).

The fission process makes nuclear energy a constant and reliable source of power. The design of nuclear power plants allow operations for one to two years before refueling. These plants do not require as much maintenance as coal and natural gas facilities. This allows nuclear energy to be supplied in extreme weather events or when pandemics limit human access (ONE4).

There is also an argument to be made that nuclear energy is not only more reliable, but also safer than other energy sources. When calculating safety, a study used deaths in the workplace of power generating plants and premature death as a result of air pollution to draw comparisons. The death rates for workplace accidents and air pollution are measured by deaths per unit of electricity produced (per terawatt-hour). The death rates for coal and brown coal are 57.3, 18.43 for oil, 2.8 for gas, and 0.03 for nuclear (Ritchie). Fossil fuels have much higher death rates than nuclear energy.

Nuclear Waste Externalities

The waste that remains after nuclear fuel is spent is a major drawback. In the U.S. 2,000 metric tonnes of nuclear waste are created annually. This is a major externality of nuclear power. The U.S. has accumulated more than 88,000 metric tons of low to high radioactive levels of waste (Shwartz). The low to medium radiation level waste initially accumulates in concrete spent fuel pools at the nuclear sites themselves. After a year, the waste can be put into steel cylinders called dry casts that provide a leak-tight confinement for the radiation (NRC).

Alternatively, the spent nuclear fuel with high levels of radiation is sent to geologic deposits. There is a nuclear waste repository site at Yucca Mountain Nevada. The site will reach capacity by 2036 and can pose a vulnerability in terms of national security (Ford).

The Waste Isolation Pilot Plant is another waste repository that is located underground in New Mexico. There are deep salt beds that can isolate the radioactive wastes making the geographic composition of the area uniquely suitable for radioactive material. However, this plant is restricted to defense-generated waste (WIPP).

Currently waste management technology such as dry casts have been made specifically for light-water reactors, or LWRs, which are gigawatt-scale nuclear reactors. The only commercial nuclear reactors in the U.S. currently are LWRs (ONE2).

Small modular nuclear reactors, or SMRs, currently produce less than 300 MW of electricity, and have been undergoing research (ONE2). SMR waste streams have significantly different radioactive chemical compositions from existing reactors. Many SMR waste streams have high concentrations of radioactive elements such as plutonium and uranium. SMRs will pose a challenge in finding a new waste storage approach. Their waste stream is more corrosive and radioactive than that of LMRs. Consequently, LMR storage methods would not be adequate (Krall).

Administrative Actions

The extensive externalities generated by carbon-based fuels require government intervention to reduce them. SMRs have the potential to be a reliable substitute if they are researched further because the externalities of burning carbon-based fuel can outweigh the externalities of nuclear spent waste. This bill should be passed. The focus of the study should primarily be on Part III (waste research and safety) of the bill. SMR waste management research is vital for this bill since nuclear waste also poses negative externalities.

Conclusion

Burning fossil fuel such as oil, coal, and gas releases carbon dioxide into our atmosphere. This bill aims to reduce carbon emissions by increasing nuclear power in the energy market. Nuclear power, if implemented correctly, has major health and environmental benefits. If this bill were to be implemented, it would provide a better understanding of how to achieve a carbon-free energy system. The General Assembly should pass HB23-1080.

Works Cited

Denchak, Melissa. “Fossil Fuels: The Dirty Facts.” NRDC, 1 June 2022, https://www.nrdc.org/stories/fossil-fuels-dirty-facts.

Ford, Aaron. “The Fight Against Yucca Mountain.” Nevada Attorney General Office, https://ag.nv.gov/Hot_Topics/Issue/Yucca/.

Harvard. “Fossil Fuels & Health” Harvard T.H. Chan School of Public Health, https://www.hsph.harvard.edu/c-change/subtopics/fossil-fuels-health/#:~:text=But%20burning%20them%20creates%20climate,spectrum%20disorder%20and%20Alzheimer’s%20disease.

Krall, Lindsay, et al. “Nuclear Waste from Small Modular Reactors .” PNAS, 31 May 2022, https://www.pnas.org/doi/10.1073/pnas.2111833119.

NRC. “Dry Cask Storage” United States Nuclear Regulatory Commission, 09 Jan 2023, https://www.nrc.gov/waste/spent-fuel-storage/dry-cask-storage.html.

ONE1. “Infographic: How Much Power Does a Nuclear Reactor Produce?” Energy.gov, Office of Nuclear Energy, 31 Mar. 2021, https://www.energy.gov/ne/articles/infographic-how-much-power-does-nuclear-reactor-produce.

ONE2. “Nuclear 101: How Does a Nuclear Reactor Work?” Energy.gov, Office of Nuclear Energy, 29 Mar. 2021, https://www.energy.gov/ne/articles/nuclear-101-how-does-nuclear-reactor-work.

ONE3. “Advantages and Challenges of Nuclear Energy.” Energy.gov, Office of Nuclear Energy, 29 Mar. 2021, https://www.energy.gov/ne/articles/advantages-and-challenges-nuclear-energy#:~:text=The%20nuclear%20industry%20supports%20nearly,higher%20than%20the%20local%20average.

ONE4. “Nuclear Power is the Most Reliable Energy Source and It’s Not Even Close” Energy.gov, Office of Nuclear Energy, 24 Mar. 2021, https://www.energy.gov/ne/articles/nuclear-power-most-reliable-energy-source-and-its-not-even-close.

Ritchie, Hannah. “What Are the Safest and Cleanest Sources of Energy?” Our World in Data, 10 Feb. 2020, https://ourworldindata.org/safest-sources-of-energy.

Shwartz, Mark. “Small Modular Reactors Produce High Levels of Nuclear Waste.” Stanford News, Stanford University, 20 June 2022, https://news.stanford.edu/2022/05/30/small-modular-reactors-produce-high-levels-nuclear-waste/#:~:text=Small%20modular%20reactors%2C%20long%20touted,the%20University%20of%20British%20Columbia.

USDE. “Missouri University Research Reactor Site Fact Sheet.” U.S. Department of Energy, Aug. 2021, https://www.energy.gov/sites/default/files/2021-08/MURRFactSheet.pdf.

WIPP. “WIPP information.” U.S. Department of Energy’s Waste Isolation Pilot Plant, https://wipp.energy.gov/wipp-site.asp.

HB23-1075 Wildfire Bill - Economic Analysis

02/07/2023

Bill Overview

HB23 1075 requires the Office of Emergency Management (OEM) to inform Colorado homeowners of evacuation and wildfire services. The resources would be posted on an interactive website with an evacuation and clearance time model that simulates a road network with closures, and traffic delays due to the fire. These models typically test many different route scenarios with hazard considerations to find the most effective one. OEM would not only provide the evacuation and clearance time model, but would also give contacts for receiving help, and information on individual safety in a consolidated format.

Section 2 of the bill addresses updating models for existing developments. The developer will provide the information to the local government to approve and implement.

Intention of Bill

OEM will collaborate with local agencies to provide the technical assistance for making the evacuation and clearance time model and interactive website. Once the model is completed the OEM and other local and State Agencies will inform the public of its existence.

Public goods are services administered by the government and paid for by taxes. The goods are non-rival and non-excludable, so they do not have a limited supply and are available to all citizens. This model cannot be exhausted by other evacuators’ use of it. However, this model is a local public good rather than a pure public good because it is only available to vulnerable areas, and only useful for the area it was modeled after. Each area gets their own evacuation plan in the context of that area’s transportation network.

The economic intention of HB23 1075 is to provide a local public good. The website provides people living in high wildfire risk areas with an emergency plan specific to their home to optimize evacuation time.

Analysis on Current Fire Evacuation Practices

People caught in a wildfire scenario have multiple ways of gathering information about the evacuation. At this time, the official site for updates is provided by the OEM. The emergency status page provides a link to a public information map that shows road closures and limited access areas. However the map is not interactive. Therefore setting a destination to get alternate routes is not an option. The bill would not only give an alternate route, but also the clearance time for a homeowner’s address.

Emergency and shelter contacts cannot be found directly on the current OEM sites. As people are focussed on fleeing, they also are forced to search the internet for the right number to call to find safety. The Red Cross is typically the wanted source, a number that cannot be found on the local OEM sites.

Some numbers often called are the evacuation shelters themselves. When East and North Boulder Recreation Centers open as evacuation shelters the staff are asked questions they are not prepared to answer (COB). Calls become jammed, and are typically redirected. The bill provides information on how to receive and locate evacuation information in proximity to your address, reducing confusion, stress, and wasted time from calling wrong numbers.

Public Goods and Costs

A study done on natural disasters showed some evacuation variables that were most significant to an effective procedure were: if an emergency operations center was used, time to complete the evacuation, and the level of community awareness regarding the alerting methods (Dotson). The bill optimizes each of these variables. HB23 1075 requires OEM as the emergency operations center, a clearance time model, and an outreach and education campaign. This bill will optimize the most significant predictors of an effective evacuation.

The impacts from people evacuating inefficiently delays and impedes the evacuations of others. A less efficient evacuation route will congest roads and slow down emergency responders. Providing this local public good will reduce negative externalities caused by inefficient evacuations.

Public health impacts are also an externality of poor evacuations. Individuals may be harmed both short and long term by exposure to smoke and ash. The potential loss of life is also one of the greatest externalities of a faulty evacuation. A clearance time model that can reduce exposure to wildfires has the potential to decrease the likelihood of these externalities.

Recommendations

The General Assembly should approve this bill. Where the marginal social benefit equals marginal social cost is the efficient point of local goods purchased. The public’s enhanced safety outweighs the costs of the evacuation and time clearance model. There is not an exact dollar amount of how much this bill will save the government. Since quantification is not readily available this evaluation has led to the conclusion that in the event of a wildfire this resource allows individuals to evacuate efficiently, therefore reducing both public costs and negative externalities.

The net benefits of providing this resource should exceed the costs of building it, since it is worthwhile to protect the public in a manner that encourages them to do more on their own. When people are correctly informed on evacuation measures, evacuations are executed more successfully.

Conclusion

In times of panic and quick decisions, a single resource that consolidates all information needs to be accessible for homeowners and emergency responders to save time. The clearance time model will reduce both public costs and externalities and increase welfare and health by practicing more efficient evacuations. The reduction in costs of public safety and health likely exceeds the cost of an evacuation model so the General Assembly should be in favor of HB23 1075.

Works Cited

Bihari, Menka, and Robert Ryan. “Influence of Social Capital on Community Preparedness for Wildfires.” Landscape and Urban Planning, Elsevier, 18 Apr. 2012, https://www.sciencedirect.com/science/article/pii/S0169204612000989.

Dotson, Jones, et al. Identification and Analysis of Factors Affecting Emergency Evacuations. Division of Preparedness and Response Office of Nuclear Security and Incident Response, https://www.nrc.gov/docs/ML0502/ML050250245.pdf.

COB, “Emergency Preparedness” City of Boulder, https://bouldercolorado.gov/guide/emergency-preparedness.

OEM, “Map of Evacuation and Pre-Evacuation Areas.” Boulder OEM, 17 Oct. 2020, https://www.boulderoem.com/map-of-evacuation-and-pre-evacuation-areas/.

Quinton, Sophie. “As Wildfire Risk Increases, Home Insurance Is Harder to Find.” The Pew Charitable Trusts, 3 Jan. 2019, https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2019/01/03/as-wildfire-risk-increases-home-insurance-is-harder-to-find.

Rosen, Harvey S., and Ted Gayer. Public Finance. McGraw-Hill Education, 2010.

Swallow, S., and A. Shafran. “The Social Costs of Homeowner Decisions in Fire-Prone Communities: Information, Insurance, and Amenities.” Ecological Economics, Elsevier, 3 Apr. 2013, https://www.sciencedirect.com/science/article/pii/S0921800913000803.

HB23-1201 Pharmacuetical Benefit Managers - Economic Analysis

05/04/2023

Bill Overview

HB23-1201 requires that the amount charged by an insurance or pharmaceutical benefit manager (PBM) to the employer, certificate holder, or policyholder for a prescription drug is less than or equal to the amount paid by the PBM to the contracted pharmacy for the drug.

This paper will refer to any entity negotiating on behalf of employers, such as health insurance carriers or pharmacy benefit managers, as “PBMs.” Employers, certificate holders, or policyholders are all entities that employ the PBMs. PBMs are hired to negotiate drug prices on their behalf for a health plan, such as health benefits that a company sponsors on behalf of its workers. This paper will refer to these entities as “employers” since they are employers, policyholders, or certificate holders negotiating on behalf of their employees that receive the health plan benefits.

PBM’s Function to Employers

When a new drug is available, the manufacturer sells the drug to wholesalers. The drugs are then distributed and sold from the wholesalers to the pharmacies. PBMs negotiate with drug manufacturers on behalf of employers and are paid rebates by the manufacturers. Rebates are a partial return of the drug price (the price the wholesalers pays to the manufacturers) to the PBMs who pass some or all of it through to the employers (NAIC).

PBM Traditional Income Model

The traditional PBM uses price spreading as its source of income (Navitus). The spread price is the difference between what PBMs charge to the employers and what the PBM pays the pharmacy. The PBM keeps the difference as income. The difference is referred to as “cost back.”

A hypothetical spread pricing model would go as follows; the pharmacy charges $10 to dispense a drug, and the cost back is $5. The charge the employer sees for the PBM’s service and the drug is $15. The employer does not see the pharmacy price to dispense the drug or what the PBM is earning, only the total cost.

This traditional model can potentially make an effective PBM in terms of lowering drug prices for employers. This is due to the PBM’s income being dependent on the rebate (Navitus). The traditional PBM model often includes a guaranteed safety net of the price employers pay for dispensed drugs. The dispensed drug price is guaranteed because traditional PBMs have fluctuating incomes that are dependent on the rebate they negotiate. The employer may favor PBM’s income dependency and a constant, guaranteed drug price since the employer would have low risk of fluctuating drug prices.

This bill prevents price spreading by restricting PBMs from charging employers more than the amount paid by the PBM to the contracted pharmacy for the drug. Therefore the traditional PBM model would be banned, and employers would not have a choice to hire a PBM that can guarantee a safety net drug price.

PBM Pass-Through Income Model

The pass-through PBM is an alternative income and pricing model an employer may hire or negotiate. Pass-through PBMs earn their income by charging an administrative fee. Essentially the rebate from the drug manufacturer to the PBM is being “passed through” to the employer, and the PBM is paid an administrative fee.

This is a completely transparent method of doing business. The employer is paying the same amount paid by the PBM to the contracted pharmacy for the drug plus an additional fee. The employer is then aware of the pharmacy drug cost and exactly how much the PBM is earning from the transaction (Araya).

A hypothetical pass-through model would look like the following; a pharmacy charge to dispense the drug would be listed as $10. There would be a negotiated administration fee of $5 fee. The total charge the employer pays is $10 + $5.

PBM Hybrid Income Model

Hybrid PBMs exist too. They are a combination of pass-through and traditional models. They generate some revenue from spread pricing but pass through a larger portion than the traditional model. To make up some of the revenue, they have administration fees associated with their income as well (Araya).

Administrative Actions

As of 2022, there are 66 PBM companies, some of which are pass-through PBMs (NAIC). CVS Caremark is an example of a PBM company that uses the pass-through model. They are one of the largest PBM businesses with 34% of the PBM market (MHE).

Employers voluntarily enter agreements with PBMs. If an employer wants a transparent PBM, they can negotiate with a hybrid PBM, or go to a pass-through PBM like CVS Caremark. Employers that choose to hire PBMs that use the traditional model have so voluntarily, in an environment where alternatives are readily available. Therefore, there is no reason for government intervention.

If the ultimate purpose of this bill is to lower dispensed drug prices for covered individuals, legislation that enforces laws against systematic exploitation would be more beneficial than HB23-1201.

Systematic exploitation may be explained by PBM’s potential ability to write biased formularies. Formularies are a list of prescription drugs that are covered under a patient’s health plan and that have been deemed safe by a PBM and a pharmacy and therapeutics committee (AMCP). The higher a drug is ranked on formularies, the more likely a physician is to prescribe that drug. Therefore manufacturers aim for high ranking on formularies in order to increase their drug sales (AMCP). Additionally, PBMs that have the goal of increasing their earnings would favor expensive drugs so they can receive a high rebate. Drug manufacturers have claimed that dispensed drugs are expensive because the high rebates that PBMs charge manufacturers have forced them to raise their prices to wholesalers (CW).

If PBMs have power with formulary ranking, to the point that they are able to exploit drug manufacturers, then the government should intervene. However, since there is no exploitation of employers because employers voluntarily hire PBMs, HB23-1201 should not be passed.

Works Cited

AMCP. “Formulary Management”. AMCP, July, 2019. https://www.amcp.org/about/managed-care-pharmacy-101/concepts-managed-care-pharmacy/formulary-management

Araya. “PBM Spread Pricing Explained”. Araya, David Barrington, Mar. 25, 2022. https://arayarx.com/pbm-spread-pricing-explained/#:~:text=PBM%20spread%20pricing%20can%20be,spread.

CHI. “Pharmacy Benefit Managers”. Colorado Health Institute, Ian Pelto, Aug. 28, 2018. https://www.coloradohealthinstitute.org/sites/default/files/file_attachments/Pharmacy%20Benefit%20Managers.pdf.

CW. “Pharmacy Benefit Managers and Their Role in Drug Spending”. Commonwealth Fund, Apr. 22, 2019. https://www.commonwealthfund.org/publications/explainer/2019/apr/pharmacy-benefit-managers-and-their-role-drug-spending

FHC “CVS Caremark shifts PBM model to 100% pass-through pricing and focus on net cost”. Fierce Healthcare, Evan Sweeney, Dec, 2018. https://www.fiercehealthcare.com/payer/cvs-caremark-launches-guaranteed-pbm-model-100-pass-through-pricing

MHE. “Beyond the Big Three PBMs”. Managed Healthcare Executive, Denise Myshko, Dec, 2022. https://www.managedhealthcareexecutive.com/view/beyond-the-big-three-pbms

Navitus. “Pharmacy Benefit News, Information and Expert Analysis” Navitus Health Solutions, Oct 21, 2021. https://blog.navitus.com/pbm-models-and-need-to-know-definitions-1.

NAIC. “Pharmacy Benefit Managers” Center for Insurance Policy and Research, Apr, 2022. https://content.naic.org/cipr-topics/pharmacy-benefit-managers

Truveris. “How Does a PBM Impact the Pharmacy Benefits Ecosystem” Truveris, Feb 17, 2021. https://truveris.com/what-is-a-pharmacy-benefit-manager-pbm-and-how-does-a-pbm-impact-the-pharmacy-benefits-ecosystem/#:~:text=Pharmacy%20benefits%20managers%20increase%20a,pass%20on%20to%20their%20clients.