It’s a good bet that most Americans have not the slightest idea what pharmacy benefit managers (PBMs) do, yet these companies have an enormous impact on what we pay for drugs. Now, the Trump Administration is moving to reform an opaque system in which PBMs drive higher list prices and keep rebates out of the hands of patients who deserve them.
As the Washington Post put it, “That rebate is not always passed on to consumers -- instead, it's mainly being pocketed by the insurers and the PBMs, a dynamic that prompts drugmakers to push prices even higher.”
Since rebates are proportions of list prices, the higher the list price, the more the PBM makes. This perverse incentive can, for example, discourage the use of biosimilar drugs, which are almost identical copies of more expensive biological products. Biosimilarsapproved by the Food & Drug Administration (FDA) must have “no meaningful differences in efficacy, safety, and purity” from a patented FDA-approved reference biologic. Their uptake has been hampered in the United States, in large part by the preferences of PBMs, which score greater rebates from biologics. (More on the biologic “rebate trap” below.)
‘A Pretty Good Place to Start’
In a hilarious segment of his Netlfix program, “Patriot Act,” on Feb. 17, Hasan Minhaj made a valiant attempt to explain how drug pricing works (beginning at 16:00 of the video on YouTube). “It’s hard to know what the most broken part of this system is,” he said, “but PBMs are a pretty good place to start.”
Minhaj showed a video from a large PBM, Express Scripts, describing what the company does (here it is on YouTube). “Some people think we make pills,” says the narrator. “We don’t. Some people think we’re an insurance company. We aren’t. Some people think we’re a middleman, but we’re not.” Then the video shows company employees doing just that – acting as middlemen on behalf of businesses, “negotiating with drug manufacturers.”
There’s nothing wrong with negotiations, but the system that PBMs have concocted goes beyond tough discussions with drugmakers. “A unique feature of the retail pharmaceutical supply chain,” says a 2017 study by the Berkeley Research Group, “is that retrospective rebates are negotiated by health plans or PBMs and serve to reduce the initial price of brand drugs after the point-of-sale. After a prescription is filled, the manufacturer frequently pays a negotiated rebate back to the health plan or PBM, which results in a lower net price.”
As a result, says the Berkeley study, brand and generic manufacturers collect only 58% of total U.S. drug revenues. Much of the rest goes to PBMs in the form of rebates. An article by Ellie Kincaid, assistant editor of Forbes for health care, cited Faisal Mushtaq, CEO of the company Truveris, which helps employers choose a PBM, as saying that “$100 billion of the $500 billion spent on pharmaceuticals in the U.S. is ‘wasted’ on the middleman.”
As President Trump said in May, announcing the Administration’s “American Patients First” blueprint in May, “We’re very much eliminating the middle men. The middle men became very, very rich.”
Now that the specific proposal on pharmacy benefit managers is out, it’s clear that “eliminating” PBMs is not the Administration’s aim. After all, through negotiations, PBMs do provide an important service, especially if the alternative is government price controls. What HHS Secretary Alex Azar wants, as he announced on Jan. 31, is a more rational, transparent system, with the right incentives:
Every day, Americans—particularly our seniors—pay more than they need to for their prescription drugs because of a hidden system of kickbacks to middlemen. President Trump is proposing to end this era of backdoor deals in the drug industry, bring real transparency to drug markets, and deliver savings directly to patients when they walk into the pharmacy.
Azar said the proposal “has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of the sticker shock.”
A System With Incentives for Higher List (But Not Net) Prices
Currently, PBMs negotiate with drug companies to determine which of their pharmaceuticals will be offered to members of insurance plans through forumularies, and at what price. Those deals typically include a rebate, which, unlike a typical discount, is paid by the manufacturer after the medicine is sold. Azar writes that the rebate amounts, on average, to between 26% and 30% of a drug’s list price. The system, as Azar says, provides “the most significant incentive drug manufacturers cite in raising their list prices every year, the pressure to provide larger and larger rebates.”
Media and politicians are continually citing list-price increases on drugs, but, contrary to appearances, drug manufacturers are not the beneficiaries.
Consider this report from the news service FiercePharma on Feb. 21 about the giant pharmaceutical company Sanofi:
As drug pricing continues to command attention daily in Washington, D.C., and elsewhere, Sanofi unveiled Thursday morning that it hiked list prices on nearly half its prescription products last year—but that net prices sunk.
The company raised list prices on 35 of 76 prescription medicines by an average of 4.6%, Sanofi reported. But despite those list price increases, net prices fell an average of 8% last year. In all, the company paid out 55% of gross sales in the form of rebates.
Nor was 2018 an aberration. In the past three years, the list price for Sanofi’s medicinesrose an average of 3.4% annually, but the net price, after rebates, fell an average of 6.2%.
Earlier, Reuters reported that Johnson & Johnson would be raising list prices in 2019 by an average of 4.2%. “However,” says the Jan. 11 article, J&J “expects the net price it actually receives for its medicines to drop. That is because drugmakers negotiate rebates and discounts off the list price with payers in order to ensure patient access to their products.” Pfizer estimated the effect of prices on total revenue growth in 2018 at “negative 1 percent in the U.S. compared with 2017.”
In our last newsletter, we showed that several sources, including the Consumer Price Index of the U.S. Bureau of Labor Statistics, reported that drug prices in the United States actually fell last year – despite anecdotes about increases for individual drugs.
The implication that drug manufacturers are reaping the benefits of price hikes is nonsense. The winners are PBMs. It is no wonder that in December, Cigna, a large insurance company, paid $68.5 billion to purchase Express Scripts, one of the three top PBMs, in the biggest corporate acquisition of the year in the United States. In an era when technology is taking the friction out of transactions, in what other sector would a middleman be worth so much?
As for the other two PBM giants: United Healthcare, the largest health insurer in the world and the number-five company (by revenues) on the Fortune 500, owns OptumRX, and CVS Health, which also comprises a pharmacy chain and the insurer Aetna, owns CVS Caremark.
The Biologic ‘Rebate Trap’
A particularly pernicious problem involves biological products, which are among the most powerful, popular, and expensive treatments. Biologics are clearly the future of health care – and, to a large degree, the present. For example, the biologic Humira, an anti-inflammatory, is the top-selling medicine in world. But many makers of biologics are able to fend off competition from biosimilars (roughly the biologic equivalent of generics) in large part because of the rebate system. Aaron Hakim and Joseph Ross, both of the Yale University School of Medicine, explained the “rebate trap” in a 2017 article in JAMA:
Rebate agreements between pharmaceutical companies, pharmacy benefit managers, and other payers create an incentive for payers to prefer more expensive branded biologics over biosimilars. Most pharmaceutical companies currently provide rebates to pharmacy benefit managers to support preferred position of their branded biologic drugs on payer formularies. In many biologic drug categories, such as the branded anti–tumor necrosis factor antibodies, rebates can reach up to 50% of the drug’s list price.
If a biosimilar manufacturer intends to upend the preferred position of the brand by offering a substantial price discount to the payer, the branded manufacturer can respond by withdrawing the rebate on the reference biologic, creating a “rebate trap.” For any patient continuing the reference biologic, a payer’s costs for that patient will double once the rebate is withdrawn…. The rebate trap ensures that payer total costs actually increase relative to costs prior to biosimilar availability.
The rebate trap, write Hakim and Ross, is the “most important” obstacle to the adoption of biosimilars for chronic diseases. A white paper from the Biosimilars Council last year noted that “Europe has approved more than 40 biosimilar medicines in the last decade and accumulated more than 700 million patient days of experience with biosimilars. FDA has approved 10 biosimilar medicines and only three of these have been launched on the U.S. market.”
In an interview with CNBC, FDA Commissioner Scott Gottlieb also placed blame on rebating agreements, citing them as a key contributor to “a lopsided playing field that disincentives biosimilar developers from making the sizable investment in bringing such products to market. I am concerned this will lead to reduced competition in the long-run and unsustainable costs.”
Changing the Kickback Laws
The Trump Administration’s remedy for the problems caused by PBMs is fairly simple. First, HHS would “expressly exclude from safe harbor protection under the Anti-Kickback Statute rebates on prescription drugs paid by manufacturers to pharmacy benefit managers.” Such rebates, now common practice, would become illegal.
Second, HHS, according to its Jan. 31 press release, “would create a new safe harbor for prescription drug discounts offered directly to patients.” In addition, HHS would mandate “historic new level of transparency to a system that has been shrouded in secrecy for decades.”
While the Administration can make these changes to Medicare Part D insurance without legislation, Congress would have to make changes in the Anti-Kickback Statute. “The reception on Capitol Hill,” where PBMs are well connected, “was mixed,” according to aBloomberg article. One reason for an initial lack of enthusiasm may be that PBM reform would make it harder to rail against drug manufacturers, a favorite political villain.
The Boomerang Effect From EpiPen
The recent focus on PBMs may, ironically, have stemmed from the public reproach suffered by the drugmaker Mylan for dramatically hiking prices on EpiPen. Mylan’s CEOHeather Bresch put much of the blame on PBMs, elevating the companies from obscurity.
In a 2016 article, Gottlieb, then a scholar at the American Enterprise Institute, referred to the EpiPen blow-up in encouraging a reform of the PBM system:
Mylan pointed to a long sequence of drug supply middlemen who get a series of rebates, mostly as economic inducements for helping drug makers sell their medicines. To fund these rebates, drug makers push up the list price of their pills, only to furtively pay much of the money back to pharmacy benefit managers later.
This byzantine model for selling drugs aids both parties–the drug makers who use the rebates to buy access on restrictive drug formularies, and the pharmacy benefit managers that take a cut from these rebates to improve their profit margins.
In the piece, Gottlieb noted that it was a 1996 court ruling on an antitrust case that helped put the current opaque “intricate system.” He advised legislation as “a simple way to improve the transparency, competitiveness and affordability of how drugs are priced and sold.” Two and a half year after Gottlieb’s article, the Trump Administration is taking steps to fix the problem.
It’s worth quoting two more paragraphs from Gottlieb’s piece:
The way this system is designed, it’s inevitable that there would be a growing disconnect between the publicized “list” price of a drug, and the real price that’s paid by large purchasers. The political class is using these anecdotes of excessive list pricing to further a legislative push for enactment of drug price controls. But the list prices that are being objectified are disconnected from the real costs, despite the best attempts of drug industry critics to blur these economic distinctions.
This doesn’t mean some patients don’t get stuck with the high list prices. It’s usually the underinsured or uninsured that can end up paying the full amount. It’s precisely the folks who can least afford these costs. But instead of seeking to leverage the confusion between perceived and actual costs, and pretend that the list price reflects the average price, Congress can act instead to end the nonsensical pricing.
Gottlieb focuses here on a critical defect of the current system – one that has been exploited by media and politicians. Anecdotes of high list prices serve what Gottlieb calls “the political class” well. Politicians gin up votes by pointing to list prices of drugs. But, as Gottlieb says, list prices can also have real-life effects, especially on the uninsured and people with insurance policies that force them to pay a proportion of the list price, even as PBMs are collecting rebates.
Gag Clauses, Spread Pricing, Unhappy Business Leaders
The system produces other outrages as well. Minaj pointed to one of them on Netflix. He showed a clip from PBS NewsHour of a Long Island, NY, pharmacist explaining how he would charge a customer $4 for a prescription for Metformin (an anti-diabetic medicine) if the customer paid for it. But if the customer presented an insurance card, then the PBM required the pharmacist to $10.84, of which the PBM itself pocketed $8.91. PBMs often prevent pharmacists from pointing out the chance for a lower price, but states are now proposing an end to such “gag clauses.”
As Axios has reported, the federal government isn’t the only battleground for PBMs. "You will be hard-pressed to find a state that now isn't looking into this," an Illinois pharmacist told the Columbus Dispatch, which has done in-depth reporting on PBMs in Ohio. That state’s government audited CVS and OptumRX and, wrote Bob Herman of Axios, “found that PBMs ‘kept $224 million through spread pricing’ — a practice where PBMs retain the difference between what they bill insurers and employers and what they pay to pharmacies.” West Virginia fired its PBMs, and Pennsylvania, Arkansas, Connecticut, and other states are investigating PBM practices.
In Kentucky, a state government report released last week charged that PBMs took $123.5 million in hidden fees from Medicaid programs through a technique called “spread pricing.” According to Robert Langreth of Bloomberg, “In Ohio, a summary report last year found that CVS and other PBMs took an 8.8 percent spread on name-brand and generic drugs from March 2017 to March 2018. That amounted to an average of $5.70 per prescription. Ohio officials told Medicaid plans to terminate spread-pricing agreements this year. In Kentucky, the spreads averaged $6.07 per prescription in 2017, and $8.70 per prescription in 2018.”
The Washington Post reported last year that state lawmakers have introduced at least 83 bills targeting PBMs across 33 states either being considered or that have been enacted, according to the National Academy for State Health Policy.
PBMs are supposed to serve businesses, which shoulder most of the costs of health insurance, yet a survey of 170 large employers last year by the National Business on Health found widespread disenchantment. Said a press release about the poll: “Three in four employers do not believe drug manufacturer rebates are an effective tool for helping to drive down pharmaceutical costs, and over 90% would welcome an alternative to the rebate-driven approach to managing drug costs.”
That alternative may soon be at hand.
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