Issue No. 31: Taking Dead Aim at the Role of Pharmacy Benefit Managers in Raising Drug Costs(Plus the Gag Rule and More on 340B)

President Trump’s May 11 speech on lowering drug prices took aim at pharmacy benefit managers, or PBMs. He didn’t mention them by name or acronym, but his intention was clear. “Our plan,” he said, “will end dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”
 
He added, in unmistakably Trumpian language: “We’re very much eliminating the middlemen. The middlemen became very, very rich. Right? Whoever those middlemen were – and a lot of people never even figured it out – they’re rich. They won’t be so rich anymore.”
 
A more detailed 44-page blueprint, issued by the Department of Health and Human Services (HHS) and titled “American Patients First,” took a more subdued tone. Clearly, PBMs are not going to be eliminated, but the administration, including not just the President but HHS Secretary Alex Azar and Food & Drug Administration Commissioner Scott Gottlieb, want reform.
 
A study by the Berkeley Research Group last year does a good job explaining the role of PBMs. “Within the U.S. healthcare system,” it said, “the flow of dollars in the pharmaceutical marketplace is a complex process involving a variety of stakeholders and myriad rebates, discounts, and fees—some of which are paid after a prescription drug is dispensed to the patient.”
 
Key players in that complex process are PBMs. Working for health insurance plans, they never take physical possession of drugs. Instead, “they aggregate the buying power” of their clients “by negotiating discounted purchase prices with retail pharmacies, purchasing drugs at discounted prices for delivery by mail, and separately securing rebates on brand pharmaceuticals from manufacturers.”
 
Rebates are the source of much of the Trump Administration’s animosity toward PBMs.

The PBMs negotiate with drug companies, offering members of insurance plans access to their medicines in return for rebates, which are payments made after patients receive their medicines. Who gets the rebates? Not patients themselves, but employers and their insurance plans (and the PBMs often take some of the rebate for themselves).
 
These rebates are substantial – an average of 34% of the net price of brand medicines offered by commercial and Part D Medicare plans in 2017, according to the IQVIA Institute for Human Data Science. Rebates for some classes of drugs – whose manufacturers compete to become plan offerings – are even higher. Rebates for some diabetes medicines are more than 70%.
 
Rebates present several problems. First, they are not transparent. Second, they provide an incentive by PBMs to prefer the medicine with higher list price. And, third, rebates raise the price on which a consumer’s own proportional share of a drug’s cost is calculated. For example, if a drug costs $50 and a consumer’s coinsurance is 20%, then her out-of-pocket cost is $10. But a rebate of, say, $15 may be made to the insurance plan and employer after the purchase, so the real cost should be $35, in which case the consumer’s coinsurance payment should be $7, not $10.
 
The PBM paradigm does not apply in other parts of the health care system. For example, if you visit your dentist you pay coinsurance based on a percentage of the cost of the service that the insurer has negotiated on your behalf with the dentist. A typical dental policy states: “Because your dentist is part of the Preferred Dentist Program, all in-network covered services are billed at a negotiated rate. This means covered services usually cost less than your dentist’s non-negotiated rates for these services.” But for prescription medicines, the coinsurance is based on the full retail price of the medicine at the pharmacy counter – no matter what discounts and rebates the PBM or the insurer has negotiated with the manufacturer.
 
The Way the HHS Secretary Sees the Problem
 
Azar’s blueprint starts with some emphatic language from President Trump’sState of the Union Address: “One of my greatest priorities is to reduce the price of prescription drugs.” Much of the document reflects that tone, with passages about “costs spiraling out of control.” The blueprint lists “High list prices for drugs” as the first of four “challenges in the U.S. drug market.”
 
So reforming the PBM rebate system is not the only objective of the blueprint, but, as Sam Baker writes in the Axios Vitals newsletter, “Azar very much sounds like a man who’s seriously gunning for pharmacy benefit managers’ rebates – the current system for negotiating bulk discounts on drugs.”
 
Specifically, the HHS blueprint states:
 
Consumers who have not met their deductible or are subject to coinsurance, pay based on the pharmacy list price, which is not reduced by the substantial drug manufacturer rebates paid to PBMs and health plans. As a result, the growth in list prices, and the widening gap between list and net prices, markedly increases consumer out-of-pocket spending, particularly for high-cost drugs not subject to negotiation. This is not only a financial challenge, but a health issue as well.
 
The blueprint then cites a study by W.H. Shrank and colleagues at Brigham and Women’s Hospital and the Harvard Medical School that “found that consumers asked to pay $50 or more at the pharmacy counter are four times more likely to abandon the prescription than a consumer charged $10.”
 
A report by HIS Markit, released May 14, began with just this proposition – that “high beneficiary out-of-pocket (OOP) costs are a common barrier to proper adherence.” In the first research of its kind, the study looked at the effects of passing through a portion of the PBM rebates on diabetes medicines topatients at the point of sale, or POS (typically, the pharmacy) rather than having all those rebates go to insurance plans, employers, and PBMs themselves. The study concluded:

We estimate that for each beneficiary using brand diabetes medicines in the Part D coverage gap or catastrophic phase, passing through a portion of rebates at the POS would reduce overall per beneficiary healthcare spending by $1,352 and lower patient OOP spending by $367in one year. Over the next 10 years, we project that passing through rebates at the POS for diabetes medicines could reduce total medical spending by approximately $20 billion. 
 
The HHS blueprint offers this judgment on the rebate system: “What had been a hidden negotiation and wealth transfer between drug manufacturers and PBMs is now a direct increase on consumer out-of-pocket spending that likely decreases drug adherence and health outcomes.”
 
So What’s the Remedy?
 
But the blueprint is also vague about how to remedy the problem. Instead, starting on page 35 of the document, it asks a series of questions – 18, by our count – to elicit public comment on actions that may follow.
 
One line of inquiry that seems to appeal to Azar is redefining the fiduciary responsibility of PBMs. Instead of working just for insurance plans, perhaps the PBMs should also be working for consumers. Here is a series of questions:
 
Should PBMs be obligated to act solely in the interest of the entity for whom they are managing pharmaceutical benefits?
 
Too often, negotiations do not result in the lowest out-of-pocket costs for consumers. Should PBMs be forbidden from receiving any payment or remuneration from manufacturers, and should PBM contracts be forbidden from including rebates or fees calculated as a percentage of list prices?
 
What effect would imposing this fiduciary duty on PBMs on behalf of the ultimate payer (i.e., consumers) have on PBMs’ ability to negotiate drug prices?
 
How could this affect manufacturer pricing behavior, insurance, and benefit design?
 
What unintended consequences for beneficiary out-of-pocket spending and federal health program spending could result from these changes?
 
The FDA Commissioner’s Concerns
 
The concerns of FDA Commissioner Gottlieb about PBM rebates predate his confirmation as FDA Commissioner a year ago. We noted in Issue No. 13 of this newsletter that Gottlieb wrote an article in Forbes in September 2016: “The need to rebate money to the PBMs, in order to drive formulary access, is…a principal reason that drug makers raise the list price on their drugs.” The current opaque system, he wrote, stemmed in large part from a 1996 court decision and may require legislation to fix. Gottlieb on May 3 suggested another approach: reinterpreting current federal law to block the practice. In a speech to the Food and Drug Law Institute, he said, “What if we took on this system directly, by having the federal government reexamine the current safe harbor for drug rebates under the Anti-Kickback Statute?”

Earlier, in a speech to the Pharmaceutical Care Management Association, the trade group for PBMs, he criticized “some PBMs” for being “complacent participants” in schemes to “hamstring biosimilar competition” – an issue we discussed in our Newsletter No. 23. But his main message in that address onApril 19 was to praise “the actions recently announced by some insurers that they would pass manufacturer’s drug rebates, often negotiated with PBMs, directly to their fully insured members with employer-based insurance – about 10 million covered lives.”

He was referring to a decision in March by UnitedHealthcare, one of the nation’s largest insurers and the owner of a PBM, OptumRX. “This is a bold action that will help create a fairer, more transparent market.,” said Gottlieb. “I hope that other insurers, employers, and manufacturers follow their lead. I also hope that your industry will continue to innovate to make it more transparent to pass along these rebates.”

Baby and Bathwater

As Gottlieb noted in his speech, PBMs play a critical role in “greater health care efficiency.” Some 260 million Americans have their drug benefits managed by PBMs. “That’s more covered lives than the health care systems in Germany and France combined.” He praised PBMs for their “success in generic substitution,” which is saving a quarter-trillion dollars a year.
 
Certainly, PBMs perform an important service in negotiating prices and “eliminating” them, as President Trump seemed to want, would create more problems than it would solve – especially if elimination meant substitution by government.

For example, in 2017, Express Scripts, a giant PBM with about 80 million members, used its market clout to hold overall per-person drug spending increases to 1.5% and unit-cost increases to just 0.8%. Because of the market power of PBMs, calls by politicians for the federal government to negotiate Medicare drug prices are senseless. Some 43 million Americans receive Part D drug benefits under Medicare, but Express Scripts alone has nearly twice as many members.
 
Targeting the ‘Gag Rule’
 
The President in his May 11 speech also said that his plan “bans the Pharmacist Gag Rules, which punishes pharmacists for telling patients how to save money. This is a total rip-off, and we are ending it.”
 
Trump was referring to contracts with PBMs and health plans that prevent pharmacists from telling consumers they could pay less out-of-pocket by not using their insurance. For instance, a month’s supply of blood-pressure drugs might be purchased by a consumer without insurance at a pharmacy for $10 in cash. But, with insurance, a consumer might have a co-pay of $15. Under some health-plan contracts, the pharmacist is not allowed to tell the consumer that she is better off not using her insurance.
 
Again, the federal government is not issuing a “ban” on such practices; instead, according to the Azar blueprint “HHS may [our emphasis] prohibit” gag-rule contracts. Once more, the document asks a series of questions, such as, “Should pharmacists be required to ask patients in federal programs if they’d like information about lower-cost alternatives? What other strategies might be most effective in providing price information to consumers at the point of sale?”
 
On May 17, Seema Verma, administrator of the Centers for Medicare & Medicaid Services (CMS), which is part of HHS, issued a sternly worded statement headlined, “Unacceptable Pharmacy Gag Clauses.” It said, in part, “We want to make it clear that CMS finds any form of ‘gag clauses’ unacceptable and contrary to our efforts to promote drug price transparency and lower drug prices.” Verma’s warning has no effect on commercial plans.
 
Courts and state governments are also taking up the issue.
 
A woman named Megan Schultz in Marin County, California, filed a lawsuit last year after she paid a $165 co-pay for a generic drug under her health plan that she could have bought from the same store for $92 if she had paid cash. “But her pharmacy didn’t clue her in,” said the Los Angeles Times. The article noted that “some 59% of independent pharmacists answering a survey by the National Community Pharmacists Assn. [NCPA] said they were subject to ‘gag clauses’ prohibiting them from volunteering” that the price would be lower if consumers paid cash themselves.

"PBM corporations are inserting costs into the system on virtually everyone in order to fuel their profits and reward shareholders," the newspaper quoted B. Douglas Hoey, head of the NCPA, as saying.

“In North Carolina,” the New York Times reported in February, “a new law says that pharmacists “shall have the right” to provide insured customers with information about their insurance co-payments and less costly alternatives. A new Georgia law says that a pharmacist may not be penalized for disclosing such information to a customer. Maine has adopted a similar law.”

340B Update

In our last newsletter, we focused on the 340B drug-discount program, established 26 years ago and now under increased scrutiny. The program was meant to help poor hospital patients. Under the law, if drug manufacturers want to be eligible to participate in Medicaid, they have to provide outpatient medicines at prices discounted by 20% to 50% to hospitals that serve a disproportionate share of low-income Americans. The hospitals were then supposed to use those savings for charitable care. But the requirements were vague, and the program’s purpose has been distorted.

The HHS blueprint, issued after President Trump’s May 11 speech, includes a long section on 340B’s history and deficiencies and points out that the 2019 budget proposes reforms to 340B to “ensure that the benefits derived from participation in the program are used to benefit patients, especially low-income and uninsured populations.”
 
Shortly after our newsletter on 340B went out, Adam Fein of Pembroke Consulting, publisher of the Drug Channels blog, released new data, showing that it was growing at a rate of 28.8% a year since 2014. In a presentation at the National Leadership Summit on 340B at Washington’s Newseum, he reported that discounted drug purchases under 340B, which is supposed to help hospitals care for lower-income patients, rose to $19.3 billion, up from $16.2 billion the year before. And, as Fein notes, as discounted purchases have risen, charity care by hospitals has declined, from 6.1% of total expenses in 2012 to 4.3% in 2016.

In his blog detailing the new data on the program, Fein wrote:

Let’s hope that our fractured political climate does not stop changes that would refocus the booming 340B program on genuine safety-net providers and needy patients. Frankly, I'm tired of hearing covered entities tell everyone "It's our money, we can do what we want."