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Rohit Gupta, vice president of analytics strategy and transformation at Beghou Consulting, addresses the controversial middlemen of the drug pricing world, the pharmacy benefit managers (PBMs). Can increased competition and other innovative solutions loosen their grip and prevent further consolidation?
Congress has put pharmacy benefit managers (PBMs) in their crosshairs recently. PBMs’ stated purpose is to control drug prices by negotiating with manufacturers on behalf of health plans. However, PBMs have become a powerful middleman. Their role impacts patients, pharmacies and pharma companies.
Patients don’t receive full rebates from pharma companies, as PBMs keep part of them. Pharmacies, especially small ones with razor-thin margins, struggle with PBMs’ “clawbacks.” Many “clawback” requests are often unpredictable, which poses a challenge for this low-margin industry. For their part, pharma companies must account for PBMs’ fees in their pricing and rebating strategies, which leads to higher sticker prices.
PBMs counter by arguing that they save payers (and, by extension, patients) money by increasing buyer power in negotiations with pharma companies. The Pharmaceutical Care Management Association argues that the Pharmacy Benefit Manager Transparency Act the Senate discussed last month would do “absolutely nothing to lower prescription drug costs. In fact, it risks raising drug costs for patients and employers providing health care coverage.”1
The reality, as it usually is, is somewhere in the middle. PBMs are unquestionably another powerful player in the drug supply chain. Therefore, they inevitably add costs to the ledger. That said, they can negotiate effectively with manufacturers, which can especially benefit smaller payers (including self-insured businesses) that would never be able to do the same.
Unlocking the black box of PBM fees, which the Senate legislation aims to do, could help ensure more of the rebates from pharma companies find their way to patients. It could also help small pharmacies by making PBM “clawbacks” more predictable. But Congress must be careful about creating additional regulations that would do nothing more than further complicate the PBM workflow, thereby strengthening large PBMs that have the resources to comply with increased complexity. Strengthening large PBMs would push the industry toward more consolidation. And with three PBMs accounting for the vast majority of prescription claims, industry consolidation is already a problem.2
So, what are the possible solutions? Simply put, more competition. And while there’s no silver bullet solution, Congress needs to encourage process improvements and innovations that could help loosen large PBMs’ tight grip on rebates and “clawbacks”:
Alternative contracting models: Companies that contract directly with manufacturers and work with payers and health systems to provide drugs to patients (e.g., Civica Rx) simplify the drug supply chain by cutting out PBMs entirely. They can also reduce costs by passing on rebates to payers and thereby reducing patients’ copays. However, this PBM-free model is not scalable to the wider health care system. After all, it’s not feasible for small health plans to negotiate directly with manufacturers. Along the same lines, resource-strapped small pharma companies would have a difficult time negotiating with multiple payers to ensure wide availability of their therapies.
Transparent pricing models: By selling drugs at manufacturing cost plus a 15% markup, a fee for pharmacy labor and shipping costs, Mark Cuban’s Cost Plus Drug Company aims to simplify the purchase of medicine for patients. While this model works well for generic drugs, it won’t work for high-priced specialty drugs. After all, Cost Plus must offer drugs at a lower price than a patient’s copay for it to be an appealing option. This scenario is never achievable for drugs that can cost $100,000. Having said that, generics are a substantial piece of the pie and, therefore, this model will increase competition.
Innovative PBM models: There are PBMs that have adopted a transparent model (e.g., eschewing rebates and spread pricing, only charging a flat service fee, etc.). Rightway Healthcare, EmsanaRx and RxPreferred Benefits are three examples, and these PBMs actually partner with the Cost Plus Drug Company. Of course, these PBM models are not yet mature, and unseating established PBMs will be quite an uphill climb. Still, the emergence of these players and their partnership with Cost Plus signals a promising move toward more competition.
Despite the limitations of these three models, they represent efforts to disrupt the status quo and increase competition and transparency, which is what the industry needs.
Black and white arguments on both sides of the PBM debate ignore the complexity and nuances of the issue. While the current drug supply chain model leaves much to be desired, there is a place for PBMs in that supply chain. Congress is right to look at PBMs, but it must be careful not to inadvertently strengthen seller power (at the expense of innovation and the patient). Congress should focus on finding ways to increase PBM competition.
Rohit Gupta is vice president of analytics strategy and transformation at Beghou Consulting.
1 PCMA Statement on Senate Commerce Committee Hearing on Anti-Competitive Legislation - https://www.pcmanet.org/pcma-statement-on-senate-commerce-committee-hearing-on-anti-competitive-legislation/
2 Beckers Hospital Review. PBMs Ranked by Market Share - https://www.beckershospitalreview.com/pharmacy/pbms-ranked-by-market-share-cvs-caremark-is-no-1.html