Is PBM disruption on the horizon?

The biopharmaceutical industry has long been frustrated as policy makers, the media, and the public conflate list prices with the net prices after rebates paid to pharmacy benefit managers (PBMs). Drug companies consistently take the blame for high patient out-of-pocket costs while PBMs escape notice.

The first PBM was founded in 1968. The original purposes for these companies were to process claims and to reduce administrative costs for insurers, determine patients’ eligibility for coverage, administer the plan benefits, and negotiate payments for payers.

By the 1980s, PBMs were functioning as a major force to reduce prescription drug costs: they forced drug companies with comparable products to compete to be listed on payer formularies by offering the lowest prices. Sixty PBMs competed among themselves to provide insurers and self-insured employers with the lowest costs for their services and the biggest savings. By 2016, consolidation reduced the number of PBMs by half. Today, 80 percent of Americans’ prescriptions involve three huge PBMs, which stand as intermediaries between drug companies and patients.

PBMs wield the power to not only increase what consumers pay for their medicines, but whether consumers even have access to those medicines in the first place. The National Community Pharmacists Association reports that PBMs add 30 percent to what patients pay for their medicine. A 2013 study by the Centers for Medicare and Medicaid Services (CMS) concluded that PBM-negotiated prices at mail-order pharmacies were up to 83 percent higher than negotiated prices at community pharmacies. The US Secretary of Health and Human Services has referred to the PBM business as a “startling and perverse system that has evolved over time.” In 2019, Senator Ron Wyden (D-OR), chair of the Senate Finance Committee, said that PBMs were as “clear a middleman rip-off as you are going to find.”

Adam Fein, Ph.D., CEO of Drug Channels Institute, calculated in January this year that, for the fifth consecutive year, brand-name drug net prices – what the manufacturers actually receive – had fallen. Corrected for inflation, the drop in 2022 was 9 percent. But list prices, or Wholesale Acquisition Cost (WAC), increased in 2022 by 4.9 percent. The difference resulted from rebates demanded by PBMs and discounts given to certain hospitals and health clinics as required by the federal 340B program. Fein notes that drugmakers sell their products for about half of their list price. Yet it is the list prices, inflated by the demands of PBMs, that lead to headlines about “skyrocketing drug prices” and calls for price controls.

For years, healthcare stakeholders, including drug developers and pharmacists, have called for reforms in the anti-competitive PBM practices with little response from Congress or the Executive branch of government. But that is finally changing. Recently, the Federal Trade Commission (FTC) unanimously voted to investigate how PBMs operate. A group of House Republican Congressman has asked the US Government Accountability Office to investigate PBMs, and Senators Maria Cantwell (D-WA) and Charles Grassley (R-IA) have introduced legislation to increase the authority of the FTC to regulate PBMs. Meanwhile, more than 40 state legislatures are currently considering measures to reform PBMs.

In February, the Commerce, Science and Transportation Committee held a hearing about PBMs. One witness, Debra Pratt, MD, PhD, a cancer specialist for Texas Oncology in Austin and vice president of the Community Oncology Alliance, testified that PBMs threaten patients’ access to care and cause “extremely expensive waste.” Ryan Oftebro, owner of a pharmacy group in Seattle and an associate professor at the University of Washington, said in his opening statement that a PBM raised the copay of a generic cholesterol drug (Crestor) from $15 to $141 for the same 90-day supply and highlighted that pharmacies have “zero negotiating power.” Erin Trish, Ph.D., an economics professor at the University of Southern California, noted that some PBMs have their own specialty pharmacies and have “an entrenched set of incentives…to essentially steer funds to themselves.” 

Senator Cantwell asked, “If you buy in bulk, you should get a discount. The question here is who is getting the discount?” Senator Marsha Blackburn (R-TN) said, “I’ve yet to meet a patient who says that PBMs have saved them money.” Senator Jon Tester (D-MT) declared, “I don’t know why the hell they even exist. There is no transparency in PBMs. When you combine that with anti-competitive tactics, this is a recipe where the only people who win in healthcare costs are PBMs.” The Committee reported the Pharmacy Benefit Manager Transparency Act from committee with a bipartisan 18-9 vote.

In late March, the Senate Finance Committee also held a hearing. Chairman Ron Wyden (D-OG) said, “The games PBMs play behind the scenes also appear to be driving up drug costs for many seniors.” Ranking Member Mike Crapo (R-ID) called for “an all-of-the-above approach to transparency that empowers consumers, plans, providers, and pharmacies to make informed, cost-effective and clinically appropriate decisions.” Representing pharmacies, witness Jon Levitt recommended that PBM rebates be limited to no more than 5 percent.

On the House side, Oversight Committee James Comer (R-KY) is also launching an investigation into what he describes as PBM “tactics that are harming patient care and increasing costs for consumers.” 

Reforms under consideration include prohibiting PBMs from spread pricing – adding onto the price negotiated with the drug manufacturer and pocketing the difference adding to the cost of drugs; ending clawback fees; requiring public disclosure of price concessions negotiated by PBMs; requiring PBMs to report to health plan sponsors rebates, fees and other compensation paid to PBMs.

Meanwhile, new entrants into the market are offering alternative models that include fixed fees, passing to payers 100 percent of the negotiated rebates. Other approaches include online pharmacies like Mark Cuban’s Cost Plus Drug Company, Amazon Pharmacy and CivicaScript, which offer prescriptions direct to consumers, eliminating the middlemen.

One way or another, given the bipartisan concerns and market competition, it seems inevitable that the $500 billion industry is headed for disruption.

To find out more about the implications of this ongoing issue for your company, please contact any of the authors.