by Stanton Mehr | Jun 24, 2025 | Uncategorized
For decades, the stated purpose of prior authorization (PA) for managed health care plans has been as follows: to ensure the appropriateness of a specific drug for any specific patient. The Academy of Managed Care Pharmacy states, “[PA] is an essential tool that is used to ensure that drug benefits are administered as designed and that plan members receive the medication therapy that is safe, effective for their condition, and provides the greatest value.” Or to put it yet another way, getting the right drug to the right patient at the right time.
The announcement in late June that major health plans and insurers are pledging to “smooth out the PA process” is just another in a long line of announcements along a similar theme. Prior authorization has been a basic component of pharmacy benefit management for almost 40 years, and a bane of providers and patients since then. A slew of complaints prompted United Healthcare back in the early 2000s to announce that it was removing prior authorization criteria for many therapies after analyzing data demonstrated that more than 95% of these PA requests were approved. Yet, PA practices are still going strong. The introduction of electronic PA (ePA) promised to speed approvals, perhaps even yielding real-time decisions, but implementation has been inconsistent and relatively slow.
As part of my work, I am sometimes asked to help analyze coverage policies and how coverage policies might be created for new pharmaceutical products or medical procedures. I can say without qualification that PA practices are as strong as ever. In fact, I can see little rationale on the part of the payers for reducing their use of PA criteria in these particular areas. It may be that innovations in medical practice and pharmaceutical care will always require more intense scrutiny than the use of older treatments.
As medical practice advances and once innovative therapies are newly promoted to first-line treatments, it is logical to assume that PA criteria would be reduced or removed entirely. In the past, we had seen that latitude be given to oncology treatments, but this was largely a concession to the reality of the variety of chemotherapies being used to treat individual patients with cancer and the fact that cost control was not practical on a public relations basis as well as on a patient care basis. It makes perfect sense that with the extremely high cost of medical innovation and new treatments, payers will continue to emphasize prior authorization which includes step therapy, confirmation of diagnosis, confirmation of severity of the condition, and other valid criteria for patient eligibility. This is to ensure the appropriateness and cost effectiveness of therapy—the very essence of what prior authorization was supposed to accomplish over 3 decades ago.
I would be surprised if the current push to improve PA processes results in significant patient-facing or provider-facing changes. The call for greater use of ePA is important and valid, and it should have been implemented years ago. This is the one element that likely will have the greatest benefit.
I remain skeptical of any pledge to curtail PA processes in general by payers, as I believe it is still an essential component of managed care, and it is needed even today to ensure high-cost therapies are being accessed and utilized appropriately. Until these high-cost therapies are not high cost (through generic or biosimilar competition) or that the risks of these therapies were found to be insignificant, the need for PA will remain.
by Stanton Mehr | Jun 11, 2024 | Uncategorized
Prescription digital therapies (PDTs) are apps that persons with disorders can only download to their smartphone with a doctor’s prescription. They are generally meant to be used as an adjunct to drug therapy and/or live counseling, depending on the indication. For example, for behavioral health problems like opioid-use disorder or substance-abuse disorder, they are prescribed by the behavioral health provider and used in conjunction with 
counseling sessions. In addition to addiction-related disorders, PDTs have been introduced for sleep dysfunction, post-traumatic stress disorder, attention deficit disorder, and a range of other mental health issues.
Unlike other digital health apps, PDTs can only be used by prescription, and they are considered an active form of treatment rather than a wellness app. They must be cleared by the Food and Drug Administration for use (like a medical device, not “approved” like a medication) They rely on cognitive behavioral therapy and often gamification, to engage the patient who has cravings, for example, between live sessions, and help them stay on medical treatment.
The American Psychological Association reported in 2018 that PDTs could potentially replace, in some cases, medication-based treatment. One might have thought the COVID pandemic, which made provider visits much more difficult and restrictive, might give a boost to PDTs as a powerful extension of active treatment. However, their potential value has not yet been matched by actual utilization, and manufacturers of PDTs have had a rough go of it.
First introduced in 2017 by Pear Therapeutics, PDTs and their manufacturers have had an uphill struggle gaining uptake by providers and coverage by health plans and insurers. Pear, a leading proponent and pioneer of PDTs, went bankrupt in April 2023. Akili Interactive, another early player, laid off nearly 50% of its workforce this year, and Better Therapeutics, which had developed a PDT for patients with type 2 diabetes, closed their doors this year.
Based on my past work with Pear and other PDT makers, part of this problem is self-inflicted, in terms of how PDTs are tested. Another issue relates to the lack of adequate coding for reimbursement. I’m not sure if their focus on mental health disorders is a contributing factor, but it doesn’t help (mental health disorder treatment is not always considered with the same priority by payers as other medical conditions).
Payers may be less-than-enthused about covering PDTs, because they wonder whether a manufacturer will still be operating in the near future. More often though, they express that their lack of coverage of PDTs is related to dissatisfaction with the clinical efficacy evidence provided by the manufacturers. The evidence is often related in terms like maintaining abstinence or adherence to medical therapy. Obviously, maintaining abstinence in a person with a substance abuse disorder is a key desired outcome, but the payers are concerned on two fronts: (1) the improvement is typically incremental and (2) the studies are almost never conducted over a sufficient term to determine whether a PDT has an adequate duration of response.
The key differentiating feature of a PDT over another digital app is that it is available only by prescription. The inference is that it is a more “serious” or “effective” approach. That same marketing characteristic, which should have been a benefit for manufacturers, also inherently limited its utility. As a prescription, payers would also have to ascribe some duration of approval before covering a refill. In a PDT’s case, 13 weeks, the duration of a clinical trial, is too short. Even if the manufacturer could prove that a significant population was helped by its PDT over that course, how many additional people would continue using the app or no longer receive significant benefit for a chronic condition like substance-use disorder? Thus, pricing the prescription could be a dicey prospect. Without long-term evidence that would convince payers, they would resist coverage, unless the PDT was priced very low.
The Digital Therapeutics Alliance, a trade association of PDT manufacturers and other interested parties, recently announced its own accreditation program to address the efficacy standards of PDT makers as well the security of the apps. Administered by a separate nonprofit, the accreditation program may add additional rigor and confidence to the evidence presented to payers in the future.
Right now, payers are skeptical that the existing evidence justify the prices on individual PDTs. Without supportive cost-effectiveness studies, health plans and insurers will not likely change their views.
by Stanton Mehr | Feb 13, 2024 | Uncategorized
A lawsuit filed by Johnson & Johnson employees against the drug manufacturer’s employee benefits operation on February 6 spotlights the potential, substantial liability for self-insured employers not adequately managing their pharmacy benefits. At issue is the money overpaid by J&J’s self-funded health plans for medications used by its members.
Ann Lewandowski, a healthcare policy and advocacy director for the company was the lead plaintiff filing suit in New Jersey federal court. The lawsuit alleges that J&J breached its fiduciary duty to its members under the federal Employee Retirement Income Security Act of 1974 (ERISA) to manage its employee benefit plans.
The lawsuit describes numerous examples of J&J’s health plans paying highly inflated prices for drugs that should be available as generics. One instance cited the antiviral drug combination abacavir and lamivudine, for which the company pays its PBM (Express Scripts) $1,629 for a 90-pill supply. That same pharmaceutical can be picked up at any pharmacy (without insurance) for $180. The multiple sclerosis drug teriflunamide costs as little as $40 out-of-pocket at a drug store, but the company’s health plans pay its PBM $10,200 for the same generic drug, according to the lawsuit.
Ms. Lewandowski’s attorneys wrote in the filing, “The burden for that massive overpayment falls on Johnson and Johnson’s ERISA plans, which pay most of the agreed amount from plan assets, and on beneficiaries of the plans, who generally pay out-of-pocket for a portion of that inflated price. No prudent fiduciary would agree to make its plan and beneficiaries pay a price that is two-hundred-and-fifty times higher than the price available to any individual who just walks into a pharmacy and pays out-of-pocket.”
She was first employed by J&J in 2021. The legal filing discloses that Ms. Lewandowsi is not currently active at J&J owing to a “dispute regarding a reasonable accommodation for a medical condition.” So, she may have an axe to grind with the company, but she seems to have found a fertile place to swing it.
The fact that J&J is a major manufacturer of drugs and especially branded products and biologics is not lost here. The lawsuit did not delve into the potential irony based on what it may pay for its own product, Remicade®, or for the several biosimilar infliximabs that are available. Too bad! Overall, the lawsuit focused on the widespread PBM practice of spread pricing, which contributes greatly to its bottom line (this is an issue for most PBMs, and especially the big 3). The language of the suit does not necessarily address rebating practices, especially for biologics.
However, this lawsuit should send shivers down the spines of self-insured employers throughout the country. In the past few months, we have been urging employers as plan sponsors to force their PBMs to seek the lowest net cost on biologic categories with biosimilar competition. This means accepting greater upfront discounts and low (or no) rebates. Why is this best for their workers? The answer is simple. If you pick up a specialty drug like adalimumab from the pharmacy and the upfront price is high, you will pay more out of pocket with a percent coinsurance than you would if the full discount was applied before paying for the drug. The rebate that might be applied would never reach the patient.
Ensuring their members have the lowest out-of-pocket costs for the best medications is key to fulfilling the fiduciary responsibilities of an ERISA plan. Therefore, similar suits will likely be filed; whether we expect the suits to be successfully adjudicated or settled will matter little. It will add much greater burden (1) on the self-funded employers to make better decisions on behalf of their members immediately and (2) on PBMs, which are experiencing extreme pressures today on their business practices and value.
by Stanton Mehr | Nov 9, 2023 | Uncategorized
Surely, these can be trying times for pharmacy benefit manager (PBM) C-suite executives. They have been through a revolving door of Congressional hearings, and their responses have resulted in a constant shower of legislative proposals to deprive them of the shield of confidentiality and revenues. The value of PBM services has never been scrutinized as much as it is today, possibly accelerated by the passage of the Inflation Reduction Act. This year, in particular, the role of rebates and the decision on whether to prefer a biosimilar over the reference product Humira® has exposed PBMs to even more damaging fire.
Historically, the growth of the PBM industry has been related to four factors:
- Its ability to negotiate effectively with pharmaceutical manufacturers on behalf of large populations (the health plans, self-funded employers, and state and local governments)
- The ability to create and manage broad networks of retail and mail-order (and now specialty) pharmacies, giving patients easy access to prescribed medications
- Develop and manage pharmacy benefits for their clients, including formularies, patient cost-sharing, and utilization management to ensure appropriate medication use
- The profit-making engine of spread pricing and rebate contracting
Although the fourth item is where all of the proposals are focused most heavily, the other three are subject to relevant discussion (especially number 1). This article will not discuss the individual PBM legislative proposals; they are constantly changing and shape-shifting over the course of months. Instead, we will address the core factors one by one, and how they relate to these proposals.
Effective Negotiation
This question is inextricably related to other key issues—rebates, transparency, and fiduciary responsibility. Is the PBM negotiating on behalf of the plan sponsor, the health plan/insurer, the patient, or itself? The fact that PBMs do not pass through the entire rebate savings they receive to their clients, forms a basis for conflict of interest. When they negotiate their deals with pharmaceutical companies, there is a built-in incentive for them to favor drugs with higher list prices and higher rebates for formulary coverage, because they will receive a greater share of the profit. This raises the question: Do PBMs have a fiduciary responsibility to anyone? One might expect that vertically aligned PBMs (i.e., OptumRx-UHC, Express Scripts–Cigna [Evernorth], or CVS Health-Aetna) would be fiduciaries for their respective health plans. Without transparency in terms of individual drug contracting, we may never know. We do know that patients receive none of the rebate benefits directly.
Today’s federal PBM legislative proposals (and many on the state level) address the hot button issues of fiduciary responsibility, rebate pass throughs, and PBM transparency.
Building and Managing Pharmacy Networks
This was an important question, back in the day, when independent community pharmacies were dominant. We’re talking about the late 1980s, when PBMs were just in their infancy, through the early 1990s, before the CVS, Rite Aid, and Walgreens chain drug stores bought out or nudged aside independent community pharmacies. Today, a few pharmacy chains represent most of the retail community pharmacies in the US (whether the recent Rite Aid bankruptcy and announced closures have an impact remains to be seen). Clearly, creating a retail pharmacy network and negotiating individual contracts with them is not the job it once was. And the PBMs are being questioned about the dispensing fees they have negotiated with or pay their contracted pharmacies, even those at chains owned by the larger PBM parent. Few people can say that their local pharmacy has been understaffed in recent years. Is this at least partly related to their dispensing-fee structures?
Today, with specialty pharmaceuticals accounting for more than half of drug expenditures in the US, the PBM’s specialty pharmacy network has taken a greater role. Some PBMs own their specialty pharmacies, which perform certain functions that benefit patients (prescription reminders, on-call health providers to answer patient questions, and financial assistance coordination), and others contract with smaller specialty pharmacies. This area will continue to grow, as the pharmaceutical industry cranks out a pipeline that increasingly favors specialty drugs. As such, it invites greater scrutiny by all stakeholders. Any willing provider mandates, highly discussed in the early days of pharmacy network creation, are beginning to pop up in today’s PBM legislative proposals.
Developing and Managing Pharmacy Benefits
This was a core competency of PBMs when I entered the managed care arena in 1987. The use of drug formularies was pioneered by hospitals and directed by their Pharmacy & Therapeutics Committees for decades (one of the first drug formularies was created by the Continental Army during the American Revolution) and focused on which drugs the hospital would stock.
There was a great need to create drug formularies for the burgeoning health plans of the 1980s and 1990s to cover the rapid growth of outpatient care. Information systems had to be created to allow pharmacies to check the formularies of any individual patient’s health plan/insurer and to ensure not only eligibility but copayment and final cost to the patient. Drug therapies became more complex and expensive over time, requiring more utilization management tools (prior authorization, step therapies, quantity limits) to ensure appropriate use and manage costs.
Today, tiered formularies continue to evolve beyond the standard three-tiered variety (e.g., generic-preferred brand-nonpreferred brand) towards four and five tiers (e.g., preferred generic-nonpreferred generic-preferred brand-nonpreferred brand-specialty). To the extent that the most expensive specialty pharmaceutical therapies are covered under the pharmacy benefit, PBMs are hard pressed to maintain levels of affordability, while dealing with copay coupons using maximizers and accumulators to create a viable drug benefit and appropriately addresses deductibles and other patient out-of-pocket costs.
The use of copay maximizers and accumulators are the subject of several PBM legislative proposals.
Spread Pricing and Rebate Contracting
Nearly all legislative subcommittee discussions and their subsequent proposals try to address these two areas of PBM revenue generation: spread pricing and rebates. Since the failure of attempts to remove the PBM safe harbor for rebate negotiation (which would have then redefined rebates as kickbacks and outlawed their use), legislators have sought to rein in their use, or at least make their use more transparent.
The biosimilar adalimumab example cited earlier highlighted the question: If a PBM is offered by the manufacturer a choice between a low adalimumab price that did not include a rebate and a high adalimumab price that did include the rebate, which would they choose? This is a no-brainer. They valued the rebate more than they valued biosimilar uptake. In 2022, US sales of Humira topped $21 billion, making it the most lucrative drug in the US, and generated billions in negotiated rebates. Fearing that they would lose the rebates, the top PBMs refused to exclude Humira from its formularies, opting for parity coverage with the biosimilars instead. This resulted in very low biosimilar uptake, threatening the sustainability of the biosimilar industry itself.
This helped shine a light on how rebates are damaging the ability of the US health care system to lower costs and pay for future innovations. Furthermore, it focused on the fact that the PBMs’ clients were not receiving the main portion of the rebate negotiated by the organization.
Spread pricing, another area that is not transparent to PBMs’ clients, has long been a point of contention. The PBM purchases drug from the manufacturer and reimburses pharmacies a lower amount once it is dispensed. The difference in pricing (the “spread”) is often substantial, and adds unnecessary costs to the health system as well as suppressing dispensing pharmacies’ revenues. Eliminating spread pricing is a priority in these legislative proposals as well.
The Ongoing Debate About the Residual Value of PBMs
In the end, we may see limited action, based on the inability of Congress to pass much of anything these days, as well as the PBM’s ability through lobbying efforts to deflect action that could harm their bottom lines. However, the question of the value of PBM services continues to pervade discussions of the US health system. Regardless of the outcome of these PBM legislative efforts, this question will stubbornly remain.
by Stanton Mehr | Sep 5, 2023 | Uncategorized
Passage in 2003 of the Medicare Modernization Act granted Medicare beneficiaries coverage, for the first time, to outpatient prescription drugs. The industry lobbied hard for the part D benefit, and it was a major boon for manufacturers, blasting open the gates for millions of seniors to receiving all sorts of outpatient drugs. This added hundreds of billions of dollars in revenues for the industry overall. It was paid for by the federal government, consumers (mostly through the deductible and coverage gap or donut hole), and insurers (i.e., consumers again, through premiums).
In 2022, passage of the Inflation Reduction Act (IRA) formally allowed the Centers for Medicare and Medicaid Services (CMS) to negotiate prices on specific medications that it deemed high expense. That meant not simply expensive drugs but lower-cost agents that are taken by many people, resulting in high cost to Medicare. With the announcement of the first drugs subject to the act in 2026, the pharmaceutical industry (including PhRMA and individual companies like Merck, Johnson & Johnson, and Novartis) filed lawsuits to prevent CMS from implementing the program. Their only true motivation is to forestall loss of revenue on lucrative products, such as Eliquis® (apixaban), Jardiance® (empagliflozin), and Xarelto® (rivaroxaban).
Applies Only to Drugs Approaching or Beyond Market Exclusivity Limits
All of the drugs targeted by the IRA’s price negotiation provisions will have been on the market beyond their intended market exclusivity: All have earned back their research and development (R&D) costs and all have been yielding consistently high profits for their respective manufacturers. For example, Xarelto was first approved in 2011, and by the time price negotiation produces benefits for Medicare, the drug will have been sold in the US for 15 years. According to Drug Patent Watch, the earliest date for generic entry will be December 2024 (I assume [but did not research] whether generics are actually being developed for this product). That would mean that competition should lower the price of the product in any case by 2026.
Another of these products, Enbrel®, should have been subject to biosimilar competition and lower prices by 2016. However, because of patent litigation Amgen may now extend its exclusivity to 2029, resulting in 30 years of marketing exclusivity and limited competition. The limited competition is the result of many other products in its anti-inflammatory class being introduced both as more effective and with additional indications. This has reduced the annual sales of Enbrel, and at the same time limited biosimilar development of other biosimilars for etanercept.
In subsequent years, CMS will announce additional products that will be subject to Medicare price negotiation, including those currently covered under Medicare Part B. Hopefully, the courts, and even the Supreme Court, will dismiss these suits outright, as Medicare’s ability to negotiate prices is neither unconstitutional or unreasonable.
Is Drug Innovation Truly Threatened?
The pharmaceutical industry is raising the usual objections or warnings, claiming that such negotiations will stifle innovation and have negative consequences for the industry. These claims are hollow. I say this from the developmental and economic perspectives.
Major pharmaceutical companies for many years have used a combination of R&D approaches to new drug innovation. The first is to innovate these products from scratch, creating the molecule in-house, and conduct all testing under their R&D departments. I’ve not seen an analysis of how much R&D is conducted in-house, but perhaps the majority of innovation has taken place through a second avenue. Start-up biotech companies develop the initial molecules, conduct the first phases of research, and are acquired by the major players for commercialization end marketing. This pathway for innovation will not be affected by Medicare price negotiation. To say that it might ignores the recent history of pharmaceutical innovation. The financial incentive for these new biotechs is too great to ignore: Acquisition by big pharma could be a multibillion-dollar carrot. That is how much pharma values start-up biotechs in bolstering their own R&D efforts.
Major pharmaceutical companies have threatened the loss-of-innovation argument in the past, and it hasn’t panned out. The amount of total revenues being reinvested into R&D by these major players is about 20%, but this may include acquisition of these start-up biotechs.
Stop Crying Foul and Pocket Your Profits
To forbid Medicare from obtaining price concessions and discounts (and God forbid even rebates) on behalf of its 66 million beneficiaries is inconsistent and anticompetitive. Another government entity, Veterans Affairs, has negotiated low pricing on its medications for decades. State Medicaid programs have done the same throughout the country. There’s no logical reason to exclude Medicare from achieving these aims, considering the size of the program and the limited scope of the IRA’s drug targets.
There’s little doubt that pharmaceutical companies will continue to receive a warm reception from investors, based on their historical returns. The threat to extended profits posed by the IRA is more than offset by the substantially higher price for pharmaceuticals paid in the US compared with elsewhere in the world. It could have been worse if the US decided to switch to a national tendering system, which is used in Europe.
In truth, the IRA poses a greater threat to the biosimilar industry and biosimilar development than it does to other innovative biopharmaceutical companies.
