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Pharmacy benefits managers


Middlemen who rose to the top

Feature

By Ruth Carol, Contributing Writer, August 1, 2022

Banner for pharmacy benefits managers

Pharmacy benefits managers (PBMs) may be in the middle of the distribution drug chain, but they are on top when it comes to profits.

PBMs had a humble beginning in the 1960s; they processed claims for insurance companies for a set fee. By the 1970s, PBMs were serving as fiscal intermediaries resolving prescription drug claims on behalf of insurers. Their role expanded, again, this time to managing prescription drug benefits for insurance companies as well as Medicare Part D drug plans, exchange plans, large employers, and other commercial payers. More recently, they have ventured into the retail, mail order, and specialty pharmacy business. As the role of the PBMs grew, so did their wealth and power. Today, PBMs control the bulk of the pharmaceutical sales in this country. 

Largest PBMs

“PBMs became so profitable at negotiating better drug pricing that many were either swallowed up by the insurance companies or insurance companies were swallowed up by them,” noted AAD/A President Mark D. Kaufmann, MD, FAAD.

In fact, the three largest PBMs in the country are either owned by or own an insurance company. They are CVS Health’s Caremark, Cigna’s Express Scripts, and UnitedHealth’s OptumRX. In 2021, these three PBMs processed an estimated 80% of all prescription claims, accounting for 33%, 26%, and 21% of the market share, respectively.

Some PBMs have become part of vertically integrated organizations, added Bruce Brod, MD, MHCI, FAAD, chair of the AADA’s Government Affairs and Health Policy (GAHP) Council. The latter bring PBMs together with insurers, specialty pharmacies, and health care providers, expanding their market share even further. Moreover, smaller PBMs often rely on larger ones for claims and pharmacy network management. When more than 260 million of the 298 million Americans with health insurance are covered by PBMs that constitutes a monopoly, he said.


Formularies matter

PBMs are increasingly restricting patient access to medications by adding more and more of them on formulary exclusion lists, according to a new report published by Xcenda.

In 2022, 1,156 drugs were excluded from at least one of the three largest PBMs’ standard commercial insurance formularies. This represents a nearly 1,000% increase in the number of excluded prescription drugs since 2014 when 109 were excluded. Between 2014 and 2022, the number of medicines excluded by one or more PBM increased, 34% on average, per year. Branded drugs without a generic or biosimilar alternative accounted for nearly half (47%) of total formulary exclusions, leaving patients with fewer treatment options.

Between 2014 and 2022, 151 dermatology medications were excluded from one or more PBM formulary, representing 11% of the total drug exclusions. Specifically, CVS Caremark excluded 81 dermatology drugs, followed by OptumRx with 67, and Express Scripts with 47.

The PBM’s role

“PBMs are the middlemen between the insurance companies, drug manufacturers, and pharmacies,” Dr. Brod explained. “They rule the roost in terms of pricing and benefits plans. They determine what drugs are covered by which health plan, what formularies they’re on, and what tiers they’re in. They even set patient co-pay amounts for medications.”

Because PBMs develop and maintain drug formularies on behalf of health insurers, they have a significant influence over which drugs patients use and how much their out-of-pocket costs will be. PBMs flex their purchasing power to negotiate rebates and discounts from drug manufacturers. Then they contract directly with individual pharmacies to reimburse for the drugs dispensed to plan members. “Their role is thought to be crucial in determining how much pharmacies get paid, the cost for insurers, and ultimately the cost for patients,” Dr. Kaufmann said.

Enter rebates

The rebates and discounts PBMs negotiate with the drug manufacturers are the key to their financial success. Increasingly, the amount of the rebate the PBMs negotiate is tied to the placement of drugs on a health plan’s formulary. The bigger the rebate, the better the spot. “It’s extortion, but it’s legal,” stated Mark Lebwohl, MD, FAAD, who made PBMs a top priority during his AAD/A presidency in 2015-2016. In other circumstances, these rebates would be considered illegal kickbacks. But in the case of PBMs, they are given a “safe harbor” from federal anti-kickback laws. Furthermore, there is no Sunshine Act for PBMs, like there is for physicians, obligating them to be transparent to the public or health care system, Dr. Kaufmann added.

“According to a 2017 report titled Follow the Dollar that traced the costs associated with insulin, PBMs kept 13% of the cost of the drug and the insurance company kept 59%,” Dr. Lebwohl said. Nowadays, a large portion of the rebate goes back into the pocket of the PBM, which is often one and the same as the insurer. A smaller portion of the rebate may go to pay employers that sign up for the insurer’s health plan.

PBMs also receive larger rebates for more expensive drugs because the rebates are often calculated as a percentage of the manufacturer’s list price. In other words, this current rebate system incentivizes PBMs to favor high-priced drugs over more cost-effective or affordable ones for patients. A bigger rebate also means a larger premium payment for the cost of the drug to compensate for that rebate, Dr. Lebwohl said. In addition, individuals who have high-deductible health plans or copays based on a drug’s list price will likely pay more for these prescriptions. “The discount doesn’t go to lower the price of the drugs or premiums paid by the patients,” he said. The only one who wins in this scenario is the PBM/insurer who is getting paid to raise the cost of drugs, Dr. Lebwohl added.

Rebates on the rise

Rebates and discounts paid by manufacturers to PBMs continue to skyrocket. In 2021, rebates/discounts reached $204 billion for branded drugs, according to a 2022 report by Drug Channels Institute. That’s up from $187 billion in 2020.

PBMs maintain that they pass rebates to insurers, which ultimately result in lower co-pays and premiums. But there is little evidence to support these claims largely because PBMs are not required to disclose the net prices they negotiate with drug makers. A federal rule that would have shed transparency on these transactions was scheduled to go into effect in January but was delayed.

On the other hand, various studies have shown that rebates have not lowered costs to patients. One analysis estimated that in 2019, rebates added approximately 30 cents per dollar to the price that patients pay for prescriptions to the tune of $143 billion. Another analysis suggests that, on average, a $1 increase in rebates is associated with a $1.17 increase in the list price of a drug.

Rebates aren’t the only tactics that PBMs use to determine drug pricing. Among them are copay clawbacks, spread pricing, copay accumulator cards, and step edits/prior authorization. Next month, DermWorld will explore how PBMs are driving drug prices and what the Academy is doing to combat PBM tactics at the state and federal levels.

Additional Dermatology World Resources

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