For several decades, a heated debate on the continually rising price of medicines in the US has centred on pharmacy benefit managers (PBMs), groups that are frequently characterised as intermediaries who encourage increased costs to bolster profits.
Last month, the role of PBMs in rising healthcare costs was at the forefront of a Congressional hearing, the third in a series of hearings focused on PBMs that started last year. Politicians displayed rare bipartisanship as they grilled representatives of the three largest PBMs in the US—CVS Caremark; Express Scripts, part of Cigna; and Optum Rx, part of UnitedHealth Group—for their role in rising drug prices.
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Committee members accused PBMs of anticompetitive behavior, increasing drug costs while professing to reduce them, and charging arbitrary fees. The PBMs argued that the reason for high costs was pharmaceutical manufacturers clinging to exclusive rights to medications through “patent thickets” so they can charge exorbitant prices.
Pharmaceutical Technology spoke with several independent experts to understand each side of the argument and explore what is behind the US’s drug pricing issues.
The need for PBMs
While prescription medications were once bought in cash like any commodity in the US, by the 1980s, insurers were offering pharmacy benefits to cover these costs. However, insurers were unsure how to price risk for a drug’s benefits. To account for this, they hired PBMs to process prescription claims and devise formularies to compare drug values.
In the 1990s, Congress legislated that Medicaid should be given the best drug prices on the market through rebates or refunded discounts from manufacturers. A decade later, the commercial market also adopted this rebate approach. In this landscape, PBMs were nicely positioned to take on a new role of negotiating rebates for their customers—the insurers or healthcare plans—and to receive a percentage of the rebates as their fee in return.
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By GlobalDataPBMs argue that rebates are incentives to reduce drug costs as much as possible since this affords them the greatest proportional fee. However, others, like the US Congress representatives at the hearing, claim that rebates create incentives for PBMs to deliberately seek drugs with higher prices. Manufacturers can then carve out larger rebates while maintaining profits under the guise of offering savings, and PBMs can claim a more lucrative cut.
“In 2011, rebates and charge backs were around 27–29% of net revenue for pharmaceutical manufacturers. By 2019, they became 67% of net revenue,” says Dr. Kevin Schulman, a health economist and professor of Medicine at Stanford University, California. This, Shulman believes, is evidence that despite their insistence that manufacturer greed drives high prices, “PBMs have benefited from the patent thickets through greater and greater rebates”.
Rebates in exchange for preferential inclusion on favourable tiers of drug formularies is a feature of the US healthcare system. At the hearing, Dr. Patrick Conway, CEO of OptumRx, said formularies are meant to allow customers, “to choose the drugs and pricing solutions that best fit their needs and meet their affordability, predictability, and accessibility expectations”. Representatives from the three PBMs at the hearing claimed that financial considerations in formulary construction are made only after scientific analysis by independent review boards.
However, Shulman notes, “somewhere between 2012 and 2014, PBMs started excluding products from formularies. – they had a new tool to drive up rebates even higher.” By excluding certain drugs from coverage, Shulman argues, “PBMs increasingly pushed [manufacturers] to offer larger and larger rebates to maintain their [place] in the formulary.”
Competitive tactics
A major criticism of the PBMs involves spread pricing, which the Congressional hearing report defined as “where the PBM charges payers more than what the PBM reimburses the pharmacy, and the PBM pockets the difference, or ‘spread.’”
In 2018, the Ohio Attorney General found that Centene Corp., working with the PBM CVS Caremark, cost the state nearly $225m through spread pricing. Dr. David Kreling, Professor Emeritus at the University of Wisconsin-Madison, had an acerbic description of PBMs: “The layman’s phrase that I heard a colleague once say to describe PBMs was they’re ‘margin suckers’. They would pull from the margins that the pharmacies got, [and] they would pull from the margins that the manufacturers would try to make.”
Since state Medicaid programs are some of the biggest payers on the market, taxpayers often bear the cost of this spread pricing approach. The Congressional Budget Office estimates that eliminating spread pricing against Medicaid-managed organizations would reduce federal spending by $1.1bn in 10 years.
On the other end, independent pharmacies are forced to contract with PBMs for reimbursement rates lower than the wholesale drug costs. The Congressional report says low reimbursement means pharmacies absorb up to 11.5% of a drug’s cost to dispense it. This pressure may be behind roughly 6% of independent pharmacies closing between 2010 and 2018.
Still, Dr. Joey Mattingly, Associate Professor at the University of Utah, points out that drug manufacturers also play a role in this issue. As a trade-off for the investments needed to drive R&D to bring a new drug to the market, manufacturers are granted a period of exclusivity. During this exclusivity period, manufacturers are granted the ability to decide list prices. “Coverage plans shield consumers from the true cost of those therapies”, Mattingly notes. This means that manufacturers are not as beholden to consumers’ cost-benefit analyses as they might be in a cash-pay market.
Vertical Integration
Last month, the Federal Trade Commission (FTC) released a report in which the agency describes PBMs as, “serving as health plans and pharmacists, and playing other roles in the drug supply chain as well. As a result, they wield enormous power and influence over patients’ access to drugs and the prices they pay.” Kreling notes that, “[PBMs] would direct patients to mail service pharmacies—their own, often times—and they would get the payments from the prescriptions dispensed directly.”
The report notes that CVS Caremark, Express Scripts, and Optum Rx have established Cordavis Limited, Quallent Pharmaceuticals, and NUVALIA, respectively. Each of these is an offshore entity that partners with manufacturers to market drugs under a different trade name.
Regarding breakups of PBM conglomerates, Matthew Roberts, an attorney at the Birmingham, Alabama-based law firm Maynard Nexsen, says the FTC is looking into whether the structure of these entities creates an anticompetitive impact on the market.
Possible solutions for the future
Permeating the Committee’s hearings have been reminders that, regardless of who the guilty party is fault, patients pay for high drug prices.
Kreling proposes a royalty system wherein drug developers sacrifice their exclusivity rights to drugs in return for royalties from generic producers, easing pressures to maximise profits during this period.
According to Shulman, regulatory and legal remedies can be used to target unscrupulous business practices. Additionally, PBMs can be made to have some obligations to patients rather than to themselves. “PBMs work for themselves. They don’t work for patients. They don’t work for employers. They are responsible to their shareholders, and they are profit-maximising,” says Shulman.
Still, the best way to control prices without quashing innovation remains unclear. The FTC is poised to regulate PBMs to curtail the worst of their behaviour. The US government recently mandated price controls on 10 high-profile drugs.
“Very few people in Congress understand the healthcare market”, said Shulman. “I don’t think that there’s a clear answer coming from either Republicans or Democrats,” notes Mattingly. As the US presidential election looms, many consider the fight against high drug prices to be on the ballot.
