Amid concerns about the escalating cost of prescription drugs, the Senate’s Health, Education, Labor, and Pensions (HELP) Committee held hearings this summer to frame the Senate’s efforts moving forward. The committee heard a broad variety of proposals ranging from utilizing outcomes-based payment to removing barriers for importation of Canadian medicines.
Eventually, the committee turned its attention to pharmaceutical supply chain structure and the role it plays in raising the cost of prescription drugs for patients. It was here that scrutiny of the muddled practices of pharmacy benefit managers (PBMs) intensified, and the members appeared capable of reaching a bipartisan consensus.
PBMs operate as intermediaries contracted by health plans to process prescription drug claims, implement utilization management tools, and determine the structure of a health plan’s drug benefits program. An evolution of their original role in which PBMs simply processed transactions and claims for a health plan, PBMs now play a key role in structuring a health plan’s business model. Given purview over a health plan’s drug benefit program, PBMs control a key aspect of the pharmaceutical supply chain. Their purchasing decisions determine which prescription drugs are available to a health plan’s policy holders, providing enormous influence over distribution and sales of manufacturers’ products.
These purchasing preferences are represented in the design of tiered formularies, where a PBM’s “preferred” drug is placed on a lower tier that requires a smaller co-payment by patients. Non-preferred drugs are placed on a higher, more expensive, tier or excluded altogether. Where possible, patients will gravitate toward the least costly effective treatment, making the tier a drug is placed on hugely influential for volume of sales. This system of drug benefit program design has made PBMs exceptionally effective at negotiating price concessions from pharmaceutical manufacturers by forcing a race to the bottom for advantageous tier placement on a plan’s formulary.
PBMs’ negotiating leverage in this respect is enhanced by the small number of PBMs that control the vast majority of covered lives in the United States. Only three PBMs control roughly three-fourths of all covered lives in the United States, making refusal to acquiesce to concession demands untenable. Market share losses of the magnitude controlled by the top three PBMs are prohibitive, and competing manufacturers are always waiting in the wings to underbid competitors.
The concentration of plans represented by only three PBMs is necessarily anticompetitive, but it is not an inherently deleterious development with respect to delivering lower drug costs to consumers. Indeed, the negotiating power afforded by such a concentrated market share necessarily lends itself to leveraging substantial concessions from pharmaceutical manufacturers during negotiations. Problems arise when consumers fail to realize the savings produced by this consolidation, and are met with onerous and escalating prescription drug costs instead.
When PBMs occupy the 6th, 7th, and 22nd spots on the Forbes 500 with the closest pharmaceutical manufacturer ranking 35th, stakeholders must wonder whether their collective bargaining power has been commandeered by PBMs to line their own pockets under the façade of delivering savings to patients. Profits earned by PBMs have soared over the course of the last decade while patients’ drug costs have increased, suggesting an immense incongruence between PBMs’ interests and those of their de-facto downstream clients.
Indeed, the manner in which PBMs generate revenue makes them subject to perverse incentives where escalating prescription drug prices are good for business. Instead of passing price concessions on to health plans, PBMs will often retain a substantial portion of the concession for themselves, leaving health plans, and ultimately consumers in the form of premiums, to bear the full cost of procuring the drug.
Due to the steep nature of rebates and other discounts produced by PBMs, manufacturers report retaining only between 40% and 60% of the list price of a drug. Because the list price does not accurately represent the actual revenue generated by the sale of a drug, the system of rebates exerts artificial inflationary pressure on list prices where pharmaceutical manufacturers will set list prices with the expectation of substantial concessions baked in. This is not inherently problematic as the list price does not represent the final cost of acquiring a drug, but because patients pay their cost-sharing obligations based on list prices, there is often a substantial difference between the actual cost to acquire a drug and what a patient pays at the pharmacy level.
This price differential is then recouped by a PBM in the form of a “claw back.” In this scenario, it would be cheaper for a patient to pay for their prescriptions out of pocket, but pharmacists are subject to gag clauses in their contracts with PBMs that prevent them from relaying this information. This asymmetric information economy prevents consumers from making informed decisions by obfuscating real costs in the pharmaceutical supply chain.
Legislators in Washington have finally begun to take notice of the harmful effects that the opacity PBMs have introduced to pricing in the pharmaceutical supply chain have had on prescription drug costs. Aside from garnering attention during the Senate HELP Committee hearing this summer, Sen. Ron Wyden (D-OR) sponsored legislation seeking to remedy the issue. His “Creating Transparency to Have Drug Rebates Unlocked (C-THRU) Act of 2017” was introduced last spring.
Wyden’s bill would require that PBMs that administer drug benefits for Affordable Care Act Exchange plans or Medicare Part D recipients operate with greater transparency. It would require disclosure of data concerning price concessions negotiated from manufacturers, establishment of a minimum percentage of rebates that must be passed back to health plan sponsors, and amendment of the definitions to make it harder for PBMs to reclassify rebate income to avoid passing it back to plan sponsors. The bill is not perfect, but offers transparency measures that provide stakeholders further elucidation of how money moves through the pharmaceutical supply chain, providing a clear path toward reducing unsustainable prescription drug costs.