What are pharmacy benefit managers?
Pharmacy benefit managers (PBMs) arose in the mid-1980s as third-party administrators acting as intermediaries in the drug supply chain. Their original purpose was to manage patient access to specialty drugs like insulin and chemotherapy agents through coverage and formulary design on behalf of payers. Medicare and Medicaid, for example, are forbidden by law from directly negotiating drug prices with manufacturers. Instead they rely on PBMs to negotiate on their behalf.
But many say that PBMs have grown too powerful and opaque. The three largest PBMs—Express Scripts, OptumRX, and CVS Caremark—now control more than 85% of the market, with revenues that exceed the very drug companies with whom they negotiate. For example, Dr. Trevor Royce and others reported in a recent JAMA editorial that in 2017, Express Scripts alone reported $100 billion in revenue, almost double Pfizer’s $52 billion. A business may find the sources of this revenue frustrating.
How PBMs make money
First, PBMs charge “supply chain fees,” theoretically in exchange for their information and efficiency advantages in running and managing the underlying prescription drug supply chain.
Second, PBMs traditionally engage in “spread pricing,” a fancy name for the simple practice of pocketing the difference between the manufacturer’s and insurer’s prices. Royce cites an Ohio Medicaid analysis that found that the cost to a pharmacy for a 30-day supply of the leukemia drug imatinib mesylate (Gleevec®) was $3859, with a cost to Ohio Medicaid of $7201, a difference of $3342, all of which went to the PBM.
Finally, PBMs take in substantial revenue from manufacturer rebates. The average rebate in 2008 was 10.4%. By 2019 the average rebate had grown to 26.1% (with an average of 66% for insulin). This would be great if that rebate were going to the employer. But instead the vast majority of those rebates go back to the PBM, which has caused administrators to label these rebates “kickbacks” instead. To make matters worse, some PBMs have used “gag clauses” to prevent pharmacists from telling patients when the out-of-pocket payment for a prescription would be less expensive than getting the drug through the patient’s health insurance drug benefit coverage.
Why does this matter to your business? Lauren Vela of the Pacific Business Group on Health said at the Kansas Business Group on Health’s 2019 Roundtable (paraphrased lightly):
“If you’re working with one of the Big Three PBMs, you’re not getting a good deal.”
What’s the solution?
We are unaware of any pending legislation in Kansas, though Ohio Medicaid managed care providers ended their contracts with PBMs in January 2019 and replaced them with a transparent “pass-through” pricing model. In this new “pass-through” model, a managed care plan pays the PBM 1) the exact amount paid to the pharmacy for the prescription drug, 2) a transparent dispensing fee based on survey data of pharmacy dispensing costs, and 3) a transparent administrative fee (replacing the “spread pricing” revenue).
Federal legislation prohibiting “gag clauses” was signed in 2018. Early in 2019, Health and Human Services proposed legislation that would eliminate the practice of kickbacks to PBMs through drug rebates, but the legislation was abandoned due to significant pushback from insurers and hospitals.
So what can you as an employer do with your current PBM?
Challenge clinical approvals for new drugs that are added to the formulary
Buy generics directly from the manufacturer (yes, you can do this!)
Look at your PBM contract to ensure:
You have access to your data.
You are allowed access to underlying contracts of your PBM (they may be incentivized to push certain medications if they have an agreement with a certain pharmaceutical company).
You can get out of your contract at any time.
For ways to cut your pharmaceutical costs by 5-10% with ZERO risk and without having to change your PBM or your formulary, be sure to check out [KBGH’s] Right Rx program that is available to our members.