How To Get Away With Corporate Murder: Unbundling And Disrupting Pharmacy Benefit Managers (Part 1)
If, as Mitt Romney said, a corporation is a person, then is it akin to murder if an idea takes down a company? What about if it takes down an industry?
“I don’t really know why some of my medications are from one pharmacy, and others from another. Some come from mail. I just know my daughter looks for the best prices. Sometimes insurance pays for part of the drug, sometimes it’s cheaper to pay out of pocket. I don’t know, it’s almost like they designed the system to confuse us,” says Samuel Bender, a 106 year old former veterinarian and local celebrity resident of Laurelmead, an active and independent senior living community in Providence, Rhode Island.
Bender’s intelligence and wit, like many other residents at Laurelmead, remain razor sharp.
What Bender and other residents of Laurelmead have difficulty in understanding, though, is the convoluted process by which their prescriptions are “insured” and “managed.” And while Bender has even dabbled in investing in healthcare for years, he still doesn’t have a firm grasp on the role of pharmacy benefit managers (PBMs), or how they have come to play such an outsized role in our healthcare system.
Outsized to the point that the Federal Trade Commission (FTC) recently voted unanimously to begin an investigation into the business practices of PBMs: their role in drug pricing, steering patients to their own pharmacies, fees charged to pharmacies, and use of prior authorizations to restrict patient access to therapies.
The good news for Bender, the residents of Laurelmead, and 300 million other Americans, is that there is a sea change coming: a confluence of factors that is likely to reshape the pharmacy benefit management landscape.
For those PBMs clinging to the ways of the past, the future is likely to be a painful and inevitable (if longer term) decline. But for forward-thinking PBMs, the future is bright: a better way to serve patients, a way to get out of the role of negotiating drug prices, along with a potentially larger and more profitable market opportunity. This new future is possible by rethinking the very role PBMs play and how they create value for their constituents and the healthcare system.
Because there is a better model.
The remainder of this article will provide a background on the role of the PBM and how they developed over time, the question of whether PBMs add value to the system or not, how a multitude of factors are raising questions about the business viability of the PBM. Part two describes what a future state of what the PBM can look like and what benefits those would bring, what the barriers are to achieving such a state, and what each constituent can do to get started bringing about such a state.
But first, what is a PBM, really?
Pharmacy Benefit Managers Explained
A simple way to think about a PBM is as a company whose job it is to manage prescription drug costs on behalf of a client or a population. A more thorough review is available elsewhere, but a short list of the functions that a PBM provides includes:
Network of pharmacies: Contracting and managing a network of contracted pharmacies
Formulary: Establishing a list of pharmaceutical products eligible for insurance coverage/ payment
Rebates: Negotiating payments from pharmaceutical manufacturers for formulary preference
Claims adjudication: Processing prescription medicine claims from contracted pharmacies for PBM members (consumers)
Utilization management: Developing utilization management programs (such as prior authorization or “step-therapy”)
Adherence programs: Offering programs to help individual members take medication as prescribed
Mail pharmacy: Operating mail order pharmacies to deliver prescriptions directly to members’ homes
Historically, the PBM business had not been particularly controversial, as they played a largely administrative role and charged their clients (health plans and employers) administrative fees. But when the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 was enacted and created a new Medicare benefit (known as Part D), it changed the incentive structure for PBMs.
New incentives led to a new business model, a shift from administrative transaction revenue to retaining rebates from pharmaceutical manufacturers.
The new business model led to increased profitability, but also questions about the business practices of PBMs, including: whether PBMs have perverse incentives that result in continually increasing drug prices; whether PBMs’ rebate practices come at the expense of Medicare beneficiaries; and whether PBMs are inappropriately profiting off of “spread pricing” and associated opaque pricing terms kept confidential from their own clients.
More recently, new fees for service lines of business have been added on as additional revenue and profit sources. Some PBMs have gone so far as to establish their own group purchasing organizations (GPOs). “A group purchasing organization increases our purchasing power with pharmaceutical manufacturers, improving our ability to negotiate,” explains Cigna’s Steve Miller, former Chief Clinical Officer and current consultant with the company.
Miller’s reasoning doesn’t resonate with everybody. “They [PBMs] already had plenty of bargaining power and were using that quite effectively. It’s unclear from what they’ve publicly said what the value proposition is to the rest of the healthcare system. The value proposition to the PBM is somewhat clear,” notes Howard Deutsch of ZS Associates.
From the outside, it’s easy to be cynical: a GPO could be a shell company through which the PBM categorizes and recategorizes income streams, allowing the PBM to, at arms-length, determine how it defines “rebates” and therefore guarantee its clients that it is indeed passing along 100% of rebates (but not other income streams) to them. In fact, some research suggests that this is precisely what is happening: PBMs’ gross profit has increased from $25B to $28B even as retained rebates have decreased, as a result of increasing administrative and data fees.
A Big Question: Do PBMs Add Value To The Healthcare System, Or Abuse Their Position? (And Is This Even The Right Question?)
Is $70 per American per year a reasonable price to pay to corporate overlords in return for access to prescription drugs? This is effectively what each of us 338 million Americans contribute to the collective $23.8 billion that PBMs earn in profits each year. (It’s also worth noting that at $70 per person, those of us who are uninsured don’t utilize PBM services at all, and others that contribute may face high prices that effectively mean some prescription drugs are not accessible at all.)
Not surprisingly, this question has spurred debate. A recent OpEd in the Wall Street Journal argued that PBMs create substantial value for the industry, creating a net savings of $145 billion each year. Perhaps not surprisingly, this figure comes from a study funded by PCMA, the trade association representing pharmacy benefit managers. Further raising questions, the study author appears to rely on dubious assumptions: “Although generics would exist even without PBM services, I estimate that 15 percent of drugs dispensed are generic because of PBM services.” It’s unclear why the author would assume this, and he does not explain the rationale to support this or many other assumptions underlying his calculations.
Perhaps the author’s lack of convincing assumptions is because he did not have access to sufficient data from the PBMs themselves. Or that the data were too much to understand given the complex role that PBMs play and the many relationships they hold with different stakeholders, or the inability to tie data from one side (pharma) to another (pharmacy) to another (paying client). Indeed, the fact that PBMs are so complex, and only they hold the data, may be the root of their problem: that PBMs are a black box.
The idea of PBMs as a black box - taking in information from all sides but sharing little to none - contributes to many questions that industry leaders, policymakers, regulators, payers, and patients are raising. Questions around PBM business practices include (but certainly are not limited to):
Prescription price increases: whether PBMs’ rebate agreements with pharmaceutical manufacturers encourage a system in which both sides are financially motivated to see increasing prices.
Unfair payment and clawbacks: if PBMs utilize their market size to compel pharmacies to agree to unnatural terms, including payment below drug acquisition costs and payment claw backs at the sole discretion of the PBM after the dispensing of the prescription.
Steering patients: how PBMs leverage their administrative role to steer patients from certain pharmacies to their own mail- or specialty-pharmacies (in particular if their own pharmacies are charging the patient more) or from certain drugs to others for which the PBM receives a rebate.
Rent-seeking: over the past 15 years, pharmacy benefit managers’ profits have soared, with some accusing the largest middlemen of becoming oligopolist rent-seekers.
Of course, in many of these cases, the PBMs are acting at the behest of their clients: large employers and health plans. Some claim that it is the clients that have become addicted to rebates. It’s also fair to note that when PBMs compete in the market, they often are at the mercy of benefit consultants and brokers (who represent the plan sponsor client); some of these benefit consultants reportedly require PBMs to cut them in on a per prescription fee in order to put them in front of prospective clients.
In the end, debating the question, “Do PBMs add value or abuse their position?”, misses the point entirely. (And certainly, they do to an extent.) The better question is: Is there a better model than the current PBM model?”
And perhaps one additional question: who would benefit from a different model?
The good news is that the answer to the last questions is easy: yes, there is a better model.
Why should PBMs embrace a new model when they’ve been so successful to date?
Because when your house is on fire, you don’t worry about the knicknacks inside before rushing out the door. And right now, the PBMs’ house is directly in the path of a raging wildfire.
The Raging Wildfire Surrounding The PBMs
In the midst of election season, it’s unusual to find common ground among politicians. Yet there is a bipartisan consensus that is skeptical of the role of PBMs. “There is widespread bipartisan support for examining PBMs and looking into whether they are causing Americans to pay higher prices for prescription drugs,” wrote Senators Maria Cantwell (D-Wash) and Chuck Grassley (R-Iowa).
Together, the two have introduced the Pharmacy Benefit Manager Transparency Act of 2022. The legislation, which was unanimously approved by the Judiciary Committee last year, prohibits a number of the types of activities that have been described, including spread pricing and payment claw backs from pharmacies.
These efforts come on top of other federal efforts, including the Inflation Reduction Act, which contained provisions more directly aimed at pharmaceutical manufacturers but also has implications for PBMs - not the least of which is that the federal government will start negotiating some drug prices. The bipartisan 21st Century Cures Act contains measures to address “information blocking” among healthcare stakeholders (including plans) and technology actors. And additional legislation and policy including the No Surprises Act, Transparency in Coverage Rule, and a Final Rule addressing hospital price transparency.
While none of these policies directly target PBMs, the writing is on the wall.
Regulators are also paying attention to the role of PBMs. “There is nothing inevitable about the current structure of the [PBM] market or the current business practices that occur and are permitted,” noted FTC chairperson Lina Khan in a recent speech. Earlier this year, FTC voted unanimously to begin an investigation into PBM business practices. FTC’s focus, like that of policymakers’, will be on topics including fees and clawbacks to pharmacies, the impact of rebates, complicated methods to determine pharmacy reimbursement, and others.
It’s not just federal policymakers and regulators turning the screws on PBMs: states are getting in on the action. As state Medicaid expenditures on prescription drugs have increased and administrators have difficulty answering questions about the flow of funds, many state legislatures are enacting laws that impact contracted PBMs. From requiring more transparency around rebates and price to banning spread pricing, many states are aggressively targeting the funds that flow to various middlemen in the pharmacy industry.