Will PBMs Survive the Rush of Legislative Proposals to Restrict Their Practices?
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.
