What the Heck is a PBM, and Why Does It Matter?

In my last issue—which was devoted to the causes of dramatically rising prescription drug costs and potential solutions, I suggested that two of the largest potential cost drivers were: (i) tactics used by pharmaceutical companies to extend the patent lives of their products (in order to delay generic and biosimilar competition); and (ii) the opaque practices of the Pharmacy Benefit Managers (PBMs) that act as intermediaries between health plans and pharmaceutical manufacturers.?

As each of these topics requires more than superficial consideration, I will devote this blog to PBMs, as they are difficult to understand and have been much in the recent news.

In late September, the Federal Trade Commission (FTC) said that it had?taken legal action?against the three largest PBMs – CVS Health’s Caremark, Cigna’s Express Scripts, and UnitedHealth’s Optum Rx, and their subsidiaries, which collectively control about 80 percent of all prescriptions in the United States.?

In its complaint, the FTC accuses these companies of inflating insulin prices and steering patients toward higher-cost insulin products to increase their profits. This was days after Express Scripts started the legal volleying with a federal?lawsuit?against the FTC, accusing the agency of making false and misleading claims about the PBM industry in a report published in July.

PBM Basics

Unless you are a healthcare industry insider—and even if you are—it’s difficult to understand exactly how PBMs work. While they are essentially invisible to the average health plan member, PBMs have a tremendous impact on which medications are covered, the prices paid for these medications, and how patients access them.

Here’s a summary of key PBM functions:

●??????? Formulary Management. PBMs create and manage formularies, which are lists of medications covered by a health insurance plan, based on safety, efficacy, and cost-effectiveness. This means that PBMs can influence which medications are prescribed by physicians and other licensed providers and thus available to patients.

●??????? Negotiating Discounts and Rebates.?PBMs negotiate with drug manufacturers to secure discounts and rebates on medications. The idea is that by leveraging their purchasing power, PBMs can lower the cost of drugs for the health plans they serve.

●??????? Pharmacy Network Management. PBMs establish networks of pharmacies preferred by their client health plans. They negotiate reimbursement rates for pharmacies, influencing where patients can fill their prescriptions and how much they pay out-of-pocket.

●??????? Claims Processing.? PBMs handle the administrative tasks of processing prescription drug claims, ensuring that pharmacies are reimbursed for the medications they dispense.

●??????? Clinical Management.? Many PBMs provide clinical services such as medication therapy management, adherence programs, and disease management initiatives to help optimize patient outcomes and reduce overall healthcare costs.

How PBMs Influence Drug Costs

While PBMs have been touted for their ability to save costs, their operations may contribute to increasing them. Here are several key mechanisms through which PBMs can influence drug pricing:

●??????? Rebate System.? PBMs negotiate rebates from drug manufacturers in exchange for favorable formulary placement. While these rebates can lower the net cost of drugs, they may not translate into lower prices for health plans or patients. PBMs have been accused of favoring higher cost drugs in the same therapeutic category so they can pocket higher rebates, and of indirectly encouraging pharmaceutical manufacturers to increase the list prices of their patent protected drugs in order to fund the requested rebates.

●??????? High Deductible Health Plans.? Many health plans now feature high deductibles, meaning patients pay more upfront for their medications. This structure can lead to increased costs for patients, as they often face the full list price of drugs before their insurance kicks in.

●??????? Prior Authorization and Step Therapy.? PBMs may require prior authorization or implement step therapy protocols, which can delay treatment and add administrative burdens. While these measures are designed to control costs, they can also lead to additional out-of-pocket expenses for patients if they need to try multiple medications.

●??????? Spread Pricing.? In some cases, PBMs may charge health plans a higher price for a medication than what they reimburse pharmacies for dispensing them. This spread pricing practice can inflate overall drug costs, as the difference is effectively a profit margin for the PBM.

What are the Alternatives?

PBMs mostly escaped public and regulatory scrutiny for many years, partially because prescription drug costs represented a smaller part of the overall health spend. But now that rapidly rising prescription drugs represent 27 percent of all employer health benefits costs, PBMs are in the spotlight.

In addition, PBMs are being scrutinized because their opaque practices make it difficult for patients, providers, and other stakeholders to understand the true cost of medications and the role PBMs play in the prices paid for them.

One solution that is gaining ground with health plans is the so-called “transparent” PBM model, in which the PBM passes all costs and savings on to health plans in return for an administrative fee. Mark Cuban’s Cost Plus Drug Company is the best-known PBM employing this strategy.

In 2022, researchers at Brigham and Women’s Hospital in Boston (a Harvard- affiliated hospital) compared the prices of 89 generic drugs sold by the Cost Plus Drug Company to the prices paid by Medicare Part D plans in 2020, and found that Medicare could have saved $3.6 billion on generic drugs by using Cuban’s company.

If further research confirms that the transparent model consistently produces savings without sacrificing safety and efficacy, market forces are likely to force the largest PBMs and their affiliates to move in this direction.?

Another strategy that has recently been employed by Blue Shield of California—a major health insurer with about 2.5 million members—is to purchase widely prescribed and particularly expensive drugs directly from manufacturers rather than going through PBMs.

Frustrated by the high price they were paying to CVS Caremark for Humira and the lower-cost biosimilar drugs that became available after Humira’s patent expired (Humira is used to treat inflammatory diseases like rheumatoid arthritis, Crohn’s disease, and psoriasis), Blue Shield of California decided to purchase it directly from one of Humira’s biosimilar manufacturers. This has reportedly cut the insurer’s cost by more than 50 percent, from more than $1,000 per month for each patient / member to about $500 per month,

If the combination of these market-driven strategies and PBM self-regulation does not produce meaningful results – or produce them quickly enough – political pressure will continue to mount for more government regulation (similar to the FTC’s complaint mentioned above). These regulations may mandate more transparency in PBM practices, as well as limitations on rebates, regulation of spread pricing, and other measures that might result in moderating the continued surge in prescription drug costs.

In addition, regulators are likely to take a closer look at how vertical integration affects drug prices since, for example, CVS Health owns not only Caremark – one of the three largest PBMs – but also a major insurer (Aetna), and the nation’s largest community pharmacy chain.??

As in many areas of our $4.5 trillion healthcare system, there will be continued – and justifiable – tension between our nation’s natural inclination toward free markets and our inability to sustain the system in its current form, as well as the fact that healthcare’s moral and ethical dimensions must be a major consideration in all efforts to set its future course.

Respectfully yours,

Web