Pharmacy benefit managers have been under nearly constant pressure at the federal level for years by a host of entities, including the executive branch, Congress, the Federal Trade Commission and the media, for their alleged role in raising patient out-of-pocket costs and squeezing independent pharmacies. But thus far the intense scrutiny and ensuing debate haven’t led to much tangible action to restrain PBMs. Without enactment of legislation or legal enforcement, comprehensive PBM reform is still mostly a concept, not a reality.
To most lay people, the acronym PBM means nothing. But PBMs serve as key intermediaries at the center of the complex and often opaque U.S. pharmaceutical distribution chain. Most Americans’ prescription drug benefit—the portion of their insurance that involves pharmaceutical care—is managed by a PBM. In fact, PBMs negotiate the terms and conditions for access to prescription drugs of around 275 million Americans.
Following a series of recent mergers and acquisitions, the leading PBMs are now each part of healthcare behemoths that also include health insurers, pharmacies and healthcare provider services.
Congressman Jake Auchincloss of Massachusetts has been one of the most active lawmakers seeking changes to how PBMs operate. Last year he was instrumental in getting legislation passed in the House that aims to “lower prescription drug prices for Medicaid beneficiaries.” And he introduced a bill in June of this year that seeks to “tackle the manipulative practices of PBMs” that can harm pharmacists.
Auchincloss says that PBM reform is gaining momentum. It certainly appears that many different stakeholders are pushing for change: Lawmakers, regulators, attorneys general, pharmacists, patients, pharmaceutical companies, entrepreneurs such as Mark Cuban and more.
At a hearing on Capitol Hill late last month, Auchincloss featured as a particularly tough interrogator of PBM executives, with questions pertaining to how much they’re charging for certain generic medicines with low National Average Drug Acquisition Cost (a measure of a medication’s actual purchase price). He enumerated several instances of drugs with markups of more than 4,000%.
The hearing was part of the House Committee on Oversight and Accountability’s 32-month investigation into PBMs’ business practices. Executives from the three largest PBMs which control 80% of the U.S. prescription drug market—OptumRx, ExpressScripts, and CVS Caremark—testified before lawmakers. The PBM leaders defended their organizations, saying they work to lower prescription drug costs by negotiating with drug makers and managing pharmacy benefits on behalf of health plans and employers. But it’s the tactics PBMs deploy to steer patients toward their own pharmacies and prefer medicines with higher list prices that drew the ire of legislators on both sides of the aisle.
Prior to the hearing, the Committee had obtained 140,000 pages of internal documents and communications, in which there were more than 300 examples of the big three PBMs favoring drugs that on average cost at least $500 more per claim than the lower-cost alternative medication they excluded from their formularies, or lists of drugs they cover.
But despite a series of hearings and accompanying investigations in Congress going back to the late 2010s, the introduction of multiple pieces of legislation during that time, issuance of executive orders by the Trump Administration and a two-year inquiry by the FTC under the Biden Administration, we haven’t to this point seen material federal policy shifts or legal enforcement of rules on anti-competitive practices. There’s been much more talk than concrete action to alter the way PBMs do business. This raises the question of whether the latest grilling in Congress of PBM executives will matter.
FTC Interim Report And Lawsuits
Even though former President Trump frequently criticized PBMs and issued executive orders to rein them in, under his watch the FTC allowed consolidation to occur in the industry in the late 2010s. Due to their size and the manner in which vertical integration has rolled multiple entities in the drug supply chain into one conglomerate, PBMs have considerable control over which drugs are available to patients, at what price, and where patients can access them.
PBMs generally prefer that customers use their own affiliated businesses, which can create a set of conflicts of interest that can disadvantage unaffiliated pharmacies and raise out-of-pocket costs for patients. The concentration of power has been used to extract revenue from patients, drug makers and pharmacies.
Last month, the FTC asserted asserts that PBMs exert substantial, and in the agency’s view, undue influence over independent pharmacies. Additionally, the FTC announced lawsuits it is bringing against PBMs. The Wall Street Journal reported in July that the FTC is poised to sue OptumRx, Express Scripts and CVS Caremark over their drug pricing strategies, including with respect to insulin products. Also, the FTC plans to sue the three largest PBMs for “allegedly using negotiating tactics to steer patients to use more expensive drugs,” according to Axios.
All of this follows a two-year inquiry culminating in an FTC interim report, which accuses PBMs of raising patients’ out-of-pocket costs and driving independent pharmacies out of business, owing to what the agency deems to be anti-competitive practices stemming in part from consolidation in the PBM, health insurer and specialty pharmacy industries.
Spread pricing, for example, is a method where PBMs charge payers or plan sponsors a (sometimes much) higher price for medications than the acquisition cost and what they reimburse pharmacies, keeping the difference as profit. This has angered pharmacists around the country. Several bills in Congress have been introduced to ban spread pricing, including the PBM Transparency Act.
Another focal point of policy discussion has been rebates. These are payments from drug manufacturers to PBMs in exchange for moving market share toward preferred products on the formulary.
Higher rebates are premised on preferred formulary positioning of products over competitors. This implies not only that the drug is covered but that it is on a formulary tier with lower patient cost-sharing and fewer conditions of reimbursement such as prior authorization.
Additional rebates may be stipulated in contracts that include step edit requirements, meaning that patients must try and fail on the preferred drug before being able to access competing products.
When a patient fills a prescription for a medication that carries a rebate, the drug maker remits an amount to the PBM, according to terms laid out in the contract. Subsequently, the PBM passes through part of the rebate to the patient’s plan sponsor, while keeping a portion as profit.
From a drug maker’s perspective, rebates can function as a way to boost or maintain market share for products. Accordingly, PBMs can do a number of things to help ensure certain drugs get sufficient volume uptake. Their main tool for this purpose is formulary management, specifically placing a rebated product on a preferred spot on the formulary.
Rebates can mutually benefit PBMs and the manufacturers of the drugs that are given preferred positioning. Further, rebates can help to mitigate increases in beneficiary premiums by lowering net costs for health plans, employers and other clients for whom PBMs work.
But while rebates may help PBMs, health plans and employers financially, they have no direct positive effect for patients. They’re not directly passed through to patients at the pharmacy counter. Additionally, patients’ out-of-pocket costs are often calculated on the basis of percentages of list prices that are often substantially higher than net prices.
Blaming the pharmaceutical industry has historically been PBMs’ go-to defense. In a rebuttal to the FTC report, the trade group representing PBMs, the Pharmaceutical Care Management Association, issued a statement vociferously criticizing the Commission’s analysis for “falling far short of being a definitive, fact-based assessment of PBMs or the prescription drug market.” PCMA noted that of the five members of the FTC commission, two disagreed with the content of the report and one didn’t think it was appropriate to release the decision at this time.
PCMA contends that the FTC “completely overlooks the volumes of data that demonstrate the value that PBMs provide to America’s healthcare system by reducing prescription drug costs and increasing access to medications.”
Perhaps the final report will address some of the concerns PCMA raises, especially in light of the dissension among FTC commissioners. This would include a fuller picture of costs borne by patients and plan sponsors.
To defenders of PBMs, the intermediaries perform a critical mission, which includes containment of drug costs. To critics, on the other hand, PBMs behave badly, raising out-of-pocket costs for patients and driving independent pharmacies out of business. Ultimately, it will be up to regulators and the judicial system to decide on the legality of PBM tactics. In turn, enforcing rules or punitive penalties may lead to change. Furthermore, potential implementation of a slew of pieces of legislation aimed at curbing PBM power could expedite reform. Until then, however, it’s largely status quo in the American prescription drug supply chain.
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