Despite the White House’s promise of aggressive action to end skyrocketing drug prices and the enactment of a new state law that is supposed to cap the state’s prescription spending under Medicaid and Medicare, local consumers and patients likely won’t see relief at the pharmacy counter any time soon.
Under a new law that went into effect April 1, Illinois Department of Healthcare and Family Services’ management of prescription drug benefits will now be handled by large, multi-billion dollar corporations called pharmacy benefit managers (PBMs) whose job is theoretically to maximize prescription coverage while minimizing the amount of taxpayer dollars invested in Medicaid and Medicare at the state level.
While this may sound like the perfect opportunity to help the state’s struggling coffers, it’s anything but a solution. In reality, patients and consumers from every socioeconomic background will see a loss of choice and access to medication, as well as higher premiums and drug prices under the state’s current managed care model.
The PBM Business Model
It starts with the nature of the PBM business model. PBMs are third-party administrators contracted by health plans, large employers, unions and government entities to manage prescription drug benefits programs. Originally intended to process claims on behalf of clients, PBMs profit at every stage of the supply chain from drug maker to patient. They are often called the “invisible middleman” because they are hidden between the patient’s insurance company, who the PBM works for, and the pharmacy, who the PBM reimburses for dispensing the prescription.
PBMs work with drug makers to develop the list of medications to be covered by a given health plan. In the process PBMs negotiate, and are incentivized by, manufacturer rebates -- which they keep in part or whole. The more expensive the covered drug, the higher the rebate. And while the term “rebate” usually means the buyer receives some money back post-purchase, this is not the case for prescriptions. The patient buys the product but the PBM receives the rebate.
PBMs are also responsible for reimbursing the pharmacy for dispensing the patient’s medication. The pharmacy, who has already incurred a cost for dispensing the medication, has no control over any aspect of the medication’s sale. It is the PBM who determines the patient’s copay and the PBM who determines in advance how much it will reimburse pharmacies for each medication covered under the drug plan. Under a secret PBM-developed system called the “Maximum Allowable Cost” (MAC) list, it is the PBMs who pre-determine how much each drug covered under the plan should cost, and this is the amount it reimburses all pharmacies but the ones they own. Often the reimbursement rates are well below the cost
of the drug, putting pharmacies in the position of having to fill a prescription at a loss. No one is sure how the maximum allowable cost for each covered drug is determined because PBMs are not regulated and not required to disclose their formulas for determining cost. PBMs consider this information a “trade secret”, leaving pharmacies with no choice but to appeal losses they incur in order to fill the prescription. Often those appeals are denied, or simply ignored by the PBM.
It would be hard enough for any business to remain open, solvent and contributing to the local economy in the form of job creation and paying taxes if the proprietor could not, by law, be paid enough to cover the cost of goods sold. For pharmacies it is particularly difficult because they are contractually mandated by PBMs to not just fill the prescriptions, but also to remain silent when a patient could get a better price on their medication by paying without insurance (a practice called buying at the “cash” price).
PBMs don’t want patients to know about better “cash” pricing and so include “gag clauses” in their contracts with pharmacies. But because pharmacies are dependent on having patients, and most patients depend on having a prescription drug plan to help offset the cost of expensive medications, pharmacies are left in a “take it or leave it” situation, business-wise. Most pharmacists take it, because they are in the business of providing care and the PBMs have the patients.
It should be noted not all pharmacies experience difficulties with PBMs, because some pharmacies are owned by PBMs. Besides administering prescription benefits plans, PBMs make money by owning and mandating the use of mail order and large retail chain pharmacies -- the cornerstone on which PBMs Express Scripts and CVS Caremark were built. And while it is clearly a conflict of interest for an organization that reimburses pharmacies to also own pharmacies, the practice is currently legally sanctioned and sold to unassuming insurance payers as a more “cost effective” solution to high drug prices.
Evidence has shown PBMs reimburse their own and “preferred status” pharmacies more for the same prescriptions dispensed by certain grocery store and medium-sized retail pharmacies and significantly more - an average of $60 more per prescription -- than they reimburse community and independently-owned pharmacies, though it is the independent and community pharmacies that serve the highest percentage of Medicaid and Medicare patients.
Evidence has also shown that PBMs engage in what could politely be called “questionable” marketing activities, including scare tactics that involve sending false or misleading letters and information to patients that imply - or directly state - the patient’s medication costs will greatly increase if they don’t transfer their prescriptions to a PBM-owned or “preferred” pharmacy. It’s not true, but patients have no way of knowing that unless they talk to their current pharmacy. Most patients don’t because they trust the administrator of their drug plan.
This is the deal Governor Rauner, himself a businessman, has made on behalf of the residents of Illinois, resulting in the state’s residents now paying these “invisible” PBMs three times: as insurance premiums, drug copays at the pharmacy counter, and taxes to sustain Medicaid and Medicare. It is how PBMs are profiting off everyone, even those who don’t require prescription medication.
Of course, it’s a deal no business or customer would ever make if the facts were clearly stated and understood (which they aren’t - remember, PBMs are not regulated and not required to be transparent. This is how they got to be a $300 BILLION industry), and unless something is done, the result will be an emerging “pharmacy desert”, as reported in the Chicago Tribune in January.
Fortunately something can be done. The Illinois House and Senate have drafted legislation HB 3479, a bill that would curb the practice of reimbursing pharmacies below cost and ultimately result in PBM licensure and the end of harmful practices such as predatory marketing and gag clauses on pharmacies.
Thereafter there will be more work to do, including changing the laws to make the use of gag clauses illegal and allow patients and their pharmacists to engage in open dialog about medication price. Drug pricing reform will be a long process, but patients and consumers can take back their right to affordable medication by becoming informed and participating in the legislative process.