Challenges and Opportunities in Building a Sustainable Specialty Drug Benefit:
Conflicting Financial Interests
Nearly every employer is aware that skyrocketing specialty drug costs, if left unchecked, will threaten the financial viability of the entire health care benefit.1,2 However, most do not know that pharmacy benefit managers (PBMs), the organizations traditionally trusted by employers to make drug benefit decisions on their behalf,3 can be a major part of the problem of rising drug costs.4 In this paper, we summarize one of the three key deficiencies of the traditional employer-PBM business model. We explain why it has become dysfunctional, especially for specialty drug management, and why public attention to the problem has not translated into better service for employers. For this deficiency, we present alternative ideals—best practices to help employers achieve a drug benefit that is sensible, sustainable, and provides specialty drugs for patients who need them.
Traditional Business Model Deficiency: Conflicting Financial Interests
Ideal Business Model: Full Financial Alignment
For years, industry observers and politicians have accused PBMs of mysterious, self-serving business arrangements—concealed, according to one U.S. Senator, “with greater secrecy than HBO is guarding the ending of Game of Thrones.”5 For example:
- “Spread” pricing, in which the PBM charges the employer more than it pays the pharmacy and pockets the difference as profit, has been the target of several state audits6-8 and a current bipartisan Office of Inspector General investigation.9,10
- A Florida audit highlighted the common PBM practice of shifting business to PBM-owned specialty pharmacies, which dispensed only 0.4% of Medicaid prescriptions but collected 28% of profit.11 In that study, the only competitive pricing observed outside of the community pharmacy network was in a specialty pharmacy that was unaffiliated with a managed care organization or PBM.11 Audits conducted in other states produced similar findings.6,7
- Rebates paid by pharmaceutical manufacturers to PBMs in exchange for favorable formulary placement influence their drug benefit decision making.12 Because manufacturers typically offer rebates for high-cost brand drugs in therapy classes where lower-cost options are available, the payments create an incentive for PBMs to favor less cost-effective drugs, often over drugs that would be a “better buy” for employers and their members.13
Despite investigations of these practices and intense public criticism of PBM business operations,14,15 numerous attempts at federal legislation to mandate business transparency or a passthrough of all discounts obtained by PBMs to its customers, such as the Drug Price Transparency Act, Prescription Drug Rebate Reform Act, Prescription Drug Pricing Reduction Act, and Lower Health Care Costs Act,16-19 have all failed to pass into law.20-23 A handful of states have passed reform measures, including reporting requirements and restrictions on the redirection of business to PBM-owned pharmacies,24 but these have been piecemeal and subject to legal challenge from the Pharmaceutical Care Management Association (PCMA), the national trade association for PBMs.25,26
Summary: What Does This Problem Mean for Employers?
- In traditional PBM business models, the financial interests of the PBM and employer are not the same.
– Employers want prescriptions to be filled in the lowest-cost, most clinically appropriate setting. PBMs have a financial interest in directing business to their own pharmacies, even if costs there are higher.
– Employers want their beneficiaries to use the lowest-cost, clinically appropriate drug to treat their medical condition. PBMs have a financial interest in directing business to drugs with the highest rebates.
– Employers want to know how the PBM makes key decisions, like which pharmacy to use or which drugs to prefer on the formulary. PBMs have a business interest in concealing this information so they can design their offering to retain more revenue.
- Claims of “better deals” from traditional PBM business arrangements may or may not be true or may be intentionally designed to steer employers toward nontransparent deals. An employer that cannot see or measure the effects of spread pricing or rebates on decision making has no way to determine whose interests are served by those arrangements—theirs or the PBM’s.
- Intense public scrutiny and legislative actions do not consistently translate into protection of employer interests. When contracting with PBMs, employers must insist on protecting their own rights.
Action: What Should the Ideal PBM Arrangement Include?
- The PBM should obtain 100% of revenue from fees paid directly by the employer. It only makes sense that the customer paying the bill is the one whose interests the PBM will protect. So, the employer should be the PBM’s only customer.
- The PBM should not require use of their owned pharmacies or other providers when competitive alternatives are available. Decisions about where the employer directs their business should be based on quality and cost, not on the PBM’s financial interests.
The Bottom Line
Any employer-PBM relationship should be based on a financially aligned foundation. Without it, the PBM will likely actively work against the employer’s interests, and the relationship will never achieve the employer’s goals.
- Inserro A. Employers say specialty drugs a factor behind rising costs. AJMC Center for Biosimilars. April 17, 2019. Available at: https://www.centerforbiosimilars.com/news/employers-say-specialty-drugs-a-factor-behind-rising-costs-.
- Reed T. National Business Group on Health execs offer 2020 outlook on uptick in virtual care, impact of Amazon. FierceHealthcare. January 14, 2020. Available at: https://www.fiercehealthcare.com/hospitals-health-systems/national-business-group-health-leaders-offer-2020-outlook-activist.
- Eickelberg HC. The prescription drug supply chain “black box”: how it works and why you should care. American Health Policy Institute. 2015. Available at: http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf.
- Motheral BR, Fairman KA. Changes in PBM business practices in 2019: true innovation or more of the same? J Manag Care Pharm. 2020 Sep 1. doi:10.18553/jmcp.2020.20213. Online ahead of print.
- Wyden R. Wyden statement at Finance Committee Hearing on drug prices and pharmacy benefit managers. April 9, 2019. U.S. Senate Committee on Finance. Available at: https://www.finance.senate.gov/imo/media/doc/040919%20Wyden%20Statement%20at%20Finance%20Committee%20Hearing%20on%20Pharmacy%20Benefit%20Managers.pdf.
- Yost D. Ohio’s Medicaid managed care pharmacy services. Auditor of State report. August 16, 2018. Available at: https://audits.ohioauditor.gov/Reports/AuditReports/2018/Medicaid_Pharmacy_Services_2018_Franklin.pdf.
- State of Massachusetts, Health Policy Commission. HPC datapoints: cracking open the black box of pharmacy benefit managers. June 5, 2019. Available at: https://www.mass.gov/doc/datapoints-issue-12-printable-version/download.
- Silverman E. Spread pricing: from largely unknown to much scrutinized and criticized. Managed Care. September 20, 2019. Available at: https://www.managedcaremag.com/archives/2019/9/spread-pricing-largely-unknown-much-scrutinized-and-criticized.
- S. Department of Health and Human Services, Office of Inspector General. Medicaid MCO PBM pricing. February 2020. Available at: https://oig.hhs.gov/reports-and-publications/workplan/summary/wp-summary-0000434.asp.
- S. Senate. Chuck Grassley, United States Senator for Iowa. Grassley, Wyden ask HHS watchdog to investigate middlemen ‘spread pricing.’ April 10, 2019. Available at: https://www.grassley.senate.gov/news/news-releases/grassley-wyden-ask-hhs-watchdog-investigate-middlemen-spread-pricing.
- 3ΔXIS Advisors. Sunshine in the black box of pharmacy benefits management. Florida Medicaid pharmacy claims analysis. January 30, 2020. Available at: https://static1.squarespace.com/static/5c326d5596e76f58ee234632/t/5e384f26fc490b221da7ced1/1580748598035/FL+Master+Final+Download.pdf.
- Herman B. The drug rebate curtain. Axios. April 2, 2018. Available at: https://www.axios.com/drug-rebate-curtain-express-scripts-d3c93f14-e699-4a60-ac1d-9f81e5a658c0.html.
- Alston M, Dieguez G, Tomicki S. A primer on prescription drug rebates. Insights into why rebates are a target for reducing prices. Milliman. May 21, 2018. Available at: https://www.milliman.com/en/insight/a-primer-on-prescription-drug-rebates-insights-into-why-rebates-are-a-target-for-reducing.
- O’Reilly KB. Time to scrutinize PBMs’ outsized role in Rx decision making. American Medical Association. June 10, 2019. Available at: https://www.ama-assn.org/delivering-care/public-health/time-scrutinize-pbms-outsized-role-rx-decision-making.
- Welborn S, John P. Imagine there are no PBMs. It’s easy if you try. Stat. August 23, 2018. Available at: https://www.statnews.com/2018/08/23/pbms-rebates-drug-purchasing/.
- Bai G, Socal MP, Anderson GF. Policy options to help self-insured employers improve PBM contracting efficiency. Health Affairs blog. May 29, 2019. Available at: https://www.healthaffairs.org/do/10.1377/hblotg20190529.43197/full/.
- S. Senate. Mike Braun, U.S. Senator, Indiana. Braun introduces 3 bills to lower prescription drug costs. March 6, 2019. Available at: https://www.braun.senate.gov/braun-introduces-3-bills-lower-prescription-drug-costs#:~:text=WASHINGTON%2C%20D.C.%20%E2%80%93%20Today%2C%20U.S.,Transparency%20in%20Petitions%20Act%20(S.
- S. Senate. Mitt Romney, U.S. Senator for Utah. Romney, Braun introduce legislation to ensure drug pricing transparency. May 9, 2019. Available at: https://www.romney.senate.gov/romney-braun-introduce-legislation-ensure-drug-pricing-transparency.
- S. Senate. Mike Braun, U.S. Senator, Indiana. Senator Braun & Senator Grassley. The Hill: how the Prescription Drug Pricing Reduction Act can reduce drug costs. October 28, 2019. Available at: https://www.braun.senate.gov/senator-braun-senator-grassley-hill-how-prescription-drug-pricing-reduction-act-can-reduce-drug.
- gov. S.657. A bill to amend title XXVII of the Public Health Service Act to establish requirements with respect to prescription drug benefits. March 5, 2019. Available at: https://www.congress.gov/bill/116th-congress/senate-bill/657.
- gov. S.1384. Prescription Drug Rebate Reform Act of 2019. May 9, 2019. Available at: https://www.congress.gov/bill/116th-congress/senate-bill/1384.
- gov. S.2543. Prescription Drug Pricing Reduction Act of 2019. September 25, 2019. Available at: https://www.congress.gov/bill/116th-congress/senate-bill/2543/all-info#:~:text=Prescription%20Drug%20Pricing%20Reduction%20Act%20of%202019,drugs%20under%20Medicare%20and%20Medicaid.&text=increases%20the%20maximum%20rebate%20payable,the%20Medicaid%20Drug%20Rebate%20Program.
- gov. S.1895. Lower Health Care Costs Act. June 26, 2019. Available at: https://www.congress.gov/bill/116th-congress/senate-bill/1895/actions.
- National Community Pharmacists Association. 2019 state legislative wins for community pharmacists. January 17, 2020. Available at: http://www.ncpa.co/pdf/2019-state-legislative-wins-com-pharm.pdf.
- Gudiksen KL, Chang SM, King JS. Navigating legal challenges to state efforts to control drug prices: pharmacy benefit manager regulation, anti-price-gouging laws, and price transparency. National Academy for State Health Policy. October 2019. Available at: https://www.nashp.org/wp-content/uploads/2019/10/Legal-Challenges-to-State-Rx-Laws-final-9_12_2019.pdf.
- Supreme Court of the United States. Rutledge v. Pharmaceutical Care Management Association. Available at: https://www.supremecourt.gov/opinions/20pdf/18-540_m64o.pdf