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Sky high

PBM tactics increase drug prices, lower patient access


By Ruth Carol, Contributing Writer, September 1, 2022

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Last month, DermWorld discussed the role pharmacy benefits managers (PBMs) play in the drug distribution chain. This month, we will discuss some of the tactics PBMs use that are driving up drug prices and impacting patient access to prescriptions.

PBMs are the middlemen hired by insurance companies to negotiate lower drug prices with pharmaceutical manufacturers. Despite their charge, the cost of prescriptions continues to soar. Moreover, patient access to medications is being impeded. As growing evidence suggests that the tactics PBMs employ are in large part to blame, policymakers and legislators are taking notice and may be acting against their questionable business practices, which the Academy has been combating for years.

Missed part one?

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

Medication costs skyrocket

In January, drug prices increased 5%, on average, for more than 450 different prescription medications. Moreover, drug prices have outpaced inflation every year since 2006, the AARP Public Policy Institute reports.

Medication prices in the United States average 2.56 times higher than those in 32 other nations, according to a 2021 RAND Corporation report. For branded drugs, U.S. prices average 3.44 times higher than those in comparison nations.

Consumers are overpaying for generic drug prescriptions by as much as 20%, according to research published in May by the USC Leonard D. Schaeffer Center for Health Policy and Economics. A 2018 Schaeffer Center analysis found that Medicare Part D stand-alone drug plans paid $2.6 million more for 184 common generics compared with cash prices paid by Costco members for the same medications.

While research and development costs contribute to high drug costs in the U.S., there are other not-so-obvious factors. Among those that PBMs use are step therapy/prior authorization, copay accumulators, copay clawbacks, spread pricing, and rebates/discounts (discussed in last month’s article). The practices employed by PBMs add up to billions of dollars in overpayment, researchers at the Schaeffer Center concluded.

PBM tactics that raise drug costs

Step therapy

Step therapy is a utilization management tool that requires patients to first fail treatment with less-effective, and often cheaper, drugs before the payer will approve the medication originally prescribed by their physician. In 2010, nearly 60% of commercial insurers were using step therapy. As of 2014, 75% of large employers reported offering employees plans that use step therapy. Moreover, health plans vary significantly in applying step therapy protocols, with 56% being more stringent than corresponding clinical guidelines, according to a 2021 study published in Health Affairs. While plans used 1.5 steps, on average, some used as many as eight steps in their process.

Dermatologists know all too well that step therapy can negatively impact patient outcomes and quality of life. Delaying access to the most effective treatments can contribute to disease progression as well as add to significant emotional and financial burden for patients. A 2020 study published in PharmacoEconomics found that patients with psoriatic arthritis whose health plans implemented step therapy had 27% lower odds of treatment effectiveness, largely driven by 29% lower odds of medication adherence, compared with patients who have the same disease, but did not have similar access restrictions. Patients with rheumatoid arthritis and psoriasis who experienced step therapy were more likely to be nonadherent or pay out of pocket for a medication compared with patients who did not experience these restrictions, according to a 2019 analysis by Xcenda. While 40% of patients stopped taking step drugs because they did not help, 29% stopped taking medicines due to cost, and 27% stopped taking them because the insurance company did not pay for them. Repeated denials can bury a physician in paperwork as they attempt to get life-changing medications to their patients, added AAD/A President Mark D. Kaufmann, MD, FAAD.

Working closely with state dermatology and medical societies, the Academy has been very effective fighting step therapy at the state level, noted Mark Lebwohl, MD, FAAD, who made PBMs a top priority during his AAD/A presidency in 2015-2016. To date, step therapy legislation has passed in 31 states and is pending in several others, he said. “While these step therapy laws don’t address the way the scales are tipped in favor of PBMs, they do require quicker turnarounds and create exceptions,” added Bruce Brod, MD, MHCI, FAAD, chair of the AADA’s Government Affairs and Health Policy Council.

Insurance companies that deny prescriptions in states with step therapy legislation could be breaking the law, Dr. Lebwohl said. “If you appeal the denial, there is a good chance you will get it approved as the insurance companies tend to back down,” he added.

Prior authorization

Prior authorization is another utilization management tool that requires patients to obtain approval from the insurer prior to getting the medication prescribed by their physician.

“Prior authorizations and denials are becoming much more prevalent, even for generic drugs that have been around for decades,” stated Brent Moody, MD, FAAD, former chair of the Academy’s Patient Access and Payer Relations Committee and deputy chair of the Academy GAHP Council, who is not alone in his observation. Despite a voluntary 2018 agreement among payer groups to reform the process, 84% of physicians report that the number of prior authorizations has increased during the last five years, according to a recent American Medical Association (AMA) survey. On average, nearly one in five prescriptions require prior authorization. Nearly 90% of commercial plans require prior authorization on Enbrel, Humira, Taltz, and Xeljanz, according to a 2019 analysis by Xcenda. Fixing prior authorization is a priority for the new AMA President Jack Resneck Jr., MD, FAAD, a longstanding AAD member, who cited it during his inaugural address in June.

“Insurance companies are targeting dermatology and rheumatology drugs because patients won’t die if they don’t get these medications,” Dr. Lebwohl said, “they will just be miserable.” When the PBMs can’t negotiate the deep discounts and rebates they want on these drugs, they put them on the prior authorization list, he said. In response, the AAD has created a customizable, clinically specific tool allowing dermatologists to easily download prior authorization appeal letters for select dermatologic drugs and diseases. “My staff can generate those letters in 30 seconds,” Dr. Lebwohl said.

Copay accumulators

Introduced in 2018, copay accumulator programs restrict the use of copay coupons to count toward patients’ deductible and out-of-pocket costs. Drug makers issue copay coupons to patients to help offset out-of-pocket costs, but the use of copay accumulators prevent patients from ever meeting their out-of-pocket maximums, Dr. Lebwohl said. Insurers maintain that coupons encourage patients to use brand name/specialty drugs as opposed to cheaper alternatives, increasing health care costs. A 2016 study did find that copay coupons increased branded drug sales by 60%, solely by reducing the sales of bioequivalent generics. Copay accumulator programs, which most insurers have implemented, are designed to direct patients to use cheaper drugs.

Some states have implemented laws that prevent PBMs/insurers from using copay accumulator programs, Dr. Brod said, while others have introduced copay accumulator legislation requiring payments made on behalf of patients to count toward their deductible or cost sharing. As of spring 2022, 14 states and Puerto Rico have enacted laws that address the use of copay accumulators by PBMs/insurers.

A federal rule, which was scheduled to go into effect in January 2023, would have required manufacturers who sell prescription drugs to Medicaid patients to ensure that PBMs and health plans include coupons and other copay assistance as part of patients’ deductibles and out of-pocket costs. However, the rule was challenged by the Pharmaceutical Research and Manufacturers of America (PhRMA), and a recent court ruling found that HHS did not have the statutory authority to impose the rule.

Copay clawbacks

When the price of the drug negotiated by the PBM is less than the patient copay, the pharmacy passes back the difference to the PBM; the difference is known as copay clawbacks, Dr. Kaufmann explained. As an example, the PBM buys a bottle of medication from the pharmacy for $1 and the actual cost of the drug is $4 without insurance. The patient is told to pay $11 for the prescription with a copay, and the $10 difference is given to the PBM. Previously, pharmacists were prevented from telling consumers that it would be cheaper to pay out of pocket for a prescription than use insurance. That changed in 2018, when the Patient Right to Know Drug Prices Act was passed prohibiting this “gag clause.” But this regulation does not ban the practice of clawbacks.

In May, CMS issued a Medicare Advantage and Part D Final Rule that includes reforms to PBMs’ fees, including lowering payments to pharmacies and allowing beneficiaries to share in the cost savings. This provision is expected to take effect on Jan. 1, 2024, a year later than CMS had initially proposed.

Spread pricing

Spread pricing is the difference between the amount the PBM pays the pharmacy for the medication and what it tells the insurer/employer that they need to pay, Dr. Kaufmann explained. The difference is the spread, which changes over time as drug prices change.

In some cases, PBMs, which also negotiate drug pricing on behalf of Medicare Part D drug plans, Medicaid, and exchange plans, have allegedly falsified the spread and are currently being sued by various states. Ohio Attorney General Dave Yost has sued three PBMs for overcharges resulting from spread pricing and other business practices. In Ohio, the state auditor found that PBMs kept $224.8 million of the $2.5 billion spent on Medicaid prescription drugs through spread pricing during a one-year period. Ohio is not alone. In Kentucky, PBMs keep $123.5 million in spread annually, while in Maryland, that figure is $72 million, according to state audits. At least 15 states had prohibited spread pricing in 2019 or planned to prohibit the practice in 2020, according to a 2021 Kaiser Family Foundation report.

Federal regulation to rein in PBMs stall

Legislative efforts to curb PBM practices have either fallen short or fallen away. Both passed in 2018, the Patient Right to Know Drug Prices Act and Know the Lowest Price Act have not increased transparency to his knowledge, said Neal Bhatia, MD, FAAD, who served as AAD/A vice president in 2021. “We have these acts in place, so it looks like the government is working for patient advocacy,” he said. “But they haven’t stopped PBMs from price gouging or getting kickbacks.”

Dr. Bhatia noted that Alex Azar, who was the president of Eli Lilly before becoming secretary of Health and Human Services (HHS) in the Trump administration, was close to implementing an HHS policy. The proposed rule would have taken the kickbacks away from PBMs and given them to patients to reduce their costs. “But it became very politicized and died on the vine,” he said. Dr. Kaufmann concurs. “If that proposed rule would have become law, the wall that PBMs hide behind would have been knocked down,” he said. In September 2021, HHS Secretary Xavier Becerra released a comprehensive plan to lower drug prices. The Drug Pricing Plan calls for collecting data from insurers and PBMs to improve transparency about pricing, rebates, and out-of-pocket spending, Dr. Brod said, adding, “So far, it’s a call for action.”

The Academy has supported federal legislation aimed at creating more transparency in PBMs’ operational structure, financial arrangements, and negotiation processes going back five years, Dr. Brod said. Among the more recent ones are the Drug Price Transparency Act of 2021, Pharmacy Benefit Manager Accountability Study Act of 2021, and Prescription Pricing for the People Act, all of which remain in committee. “PBMs are a powerful and well-funded lobby that has been effective at stalling further consideration of these bills,” he said.

New business models tackle soaring drug prices

New business models are being created to address escalating drug prices and increase patient access to medications.

In fall 2021, the Purchaser Business Group of Health (PBGH) launched its own PBM called EmsanaRx. Among PBGH’s members are AA, Boeing, Chevon, Costco, Hewlett Packard, Intel, Levi’s, Microsoft, Tesla, and Walmart. Like Navitus before it, EmsanaRx passes through 100% of the drug rebates negotiated with manufacturers to employers. Instead of paying a percentage of the discounts negotiated, employers pay a set fee for the administration of their pharmacy benefits. Dr. Moody is surprised that more large employers have not been more critical of PBMs because they are in a position to exert influence on how PBMs conduct business.

In January, Mark Cuban launched his Cost Plus Drug Company. The digital pharmacy charges a 15% markup on generic drug prices above the manufacturer’s price, a $3 fee per drug order for processing, and the cost of shipping. Basically, the company is acting as a PBM, Dr. Kaufmann said. “What Cuban is trying to do is make a transaction between a patient and pharmacy the same way every other transaction works in America,” he said. At this point in time, the company isn’t offering other services. Medicare could have saved $3.6 billion in 2020 — or 37% of the $9.6 billion it spent — on 77 of 89 generic drugs if it used Cost Plus Drug Company, according to Harvard Medical School researchers.

Some health systems, such as Kaiser Permanente, are starting to form their own PBMs to negotiate directly with pharmaceutical companies, Dr. Kaufmann said. At the Biologic Treatment Center at The Mount Sinai Hospital, a dedicated team advocates for patients in negotiation with insurance approvals for biologics. “Once the patients get their prescriptions, they go back to their referring physician,” Dr. Lebwohl said.

There’s also GoodRx, which has been around since 2011. GoodRx is a telemedicine platform and a free website and mobile app that tracks prescription drug prices in the United States and provides free drug coupons or discounts on medications. In 2020, GoodRx saved users an average of 79% off retail prices of prescriptions. “Pharmacies are now running medications through GoodRx on behalf of my patients,” Dr. Kaufmann said. “I use it myself.” Although he thinks GoodRx is helping patients save money on medications, the website also encourages consumers to use their telehealth experts to obtain prescriptions. “A dermatologist who refers a patient to GoodRx for better drug prices might lose the patient to a telehealth provider,” Dr. Kaufmann warned.

There are pros and cons to these companies, Dr. Brod noted. On the one hand, they provide additional options for patients. On the other hand, many don’t offer specialty drugs, and some have subscription fees in place or mail order options only, the latter of which is not helpful if the patient needs the medication immediately. Sometimes, more competition is good for consumers, but sometimes it leads to more confusion, he said.

“If the system wasn’t broken, we wouldn’t need these work-arounds,” Dr. Brod concluded. “They exist because we’re reaching a critical mass where patient access is being hurt and the administrative burdens imposed by PBMs on physicians in practice is becoming crippling.”

Tide may be turning

In May, the Pharmacy Benefit Manager Transparency Act of 2022 was introduced. The bipartisan proposal would ban deceptive unfair pricing schemes, prohibit copay clawbacks, and require PBMs to report to the Federal Trade Commission (FTC) how much money they make through spread pricing and pharmacy fees.

The same month, the Senate Subcommittee for the Committee on Commerce, Science, and Transportation held a hearing on Ensuring Fairness and Transparency in the Market for Prescription Drugs. During the hearing, expert witnesses called for strong consumer protection and federal regulation for PBMs.

In early June, the FTC announced that it will launch a PBM probe, requiring the six largest PBMs to provide information and records regarding their business practices dating back five years. The six PBMs are CVS Caremark; Express Scripts, Inc.; OptumRx, Inc.; Humana Inc.; Prime Therapeutics LLC; and MedImpact Healthcare Systems, Inc. The FTC acknowledged that PBMs often have enormous influence on which drugs are prescribed to patients, which pharmacies patients can use, and how much patients ultimately pay for prescriptions. Many of these functions depend on highly complicated, opaque contractual relationships. The PBMs have 90 days to respond.

This announcement follows a request for information about PBMs that resulted in more than 24,000 public comments, including from the AADA, and reverses an earlier vote this year by FTC commissioners. Along with the Alliance for Transparent and Affordable Prescriptions, the Academy called for reforming the rebate system; reducing costs for patients by calculating patient cost-sharing obligations based off the net price, not the list price; improving access to treatment by requiring PBMs to justify all formulary decisions; and eliminating unfair and deceptive PBM practices.

In mid-June, the FTC adopted a policy statement to more closely examine fees and rebates paid to PBMs by manufacturers in exchange for having their drugs covered or getting better placement on a formulary. The FTC is prepared to use its “full range of legal authorities” to combat any practices found to be illegal.

The FTC investigation could potentially shine a light on the business practices of PBMs and may ultimately lead to legislation calling for transparency in how PBMs operate, Dr. Brod said. Although he is encouraged and optimistic about the FTC inquiry, Dr. Kaufmann cautions dermatologists not to celebrate prematurely as both major parties still take money from PBMs. Although it is welcome news, Dr. Lebwohl said, “We have been disappointed over and over again by the government’s inaction on the gross overcharging of patients for many of our medications.” Dr. Bhatia noted, “It is long overdue for the government to step in and break this stronghold that PBMs have had over patient care.”

The fact that the FTC has taken such a broad-sweeping request for information is a strong indicator that both policymakers and regulators are seeing activities that warrant scrutiny, Dr. Moody said. “In fairness, until that process plays out and we see what conclusions the FTC draws, it’s hard to speculate what that outcome is going to be.” While a federal fix would be the easiest for the government to implement and enforce, and for stakeholders to understand, the legislative process is always a gamble, he warned. “The challenge with any federal solution is that it is a long, slow, and tedious process that is subject to multiple influences with no guaranteed outcome,” Dr. Moody added.

States move ahead with legislation

Meanwhile, states have taken the lead in combatting PBMs’ business practices. To date, 50 states plus the District of Columbia and Puerto Rico have statutes regarding PBMs, the National Conference of State Legislatures reports. According to the National Academy for State Health Policy, 35 states introduced 124 bills regarding PBMs in 2022.

Many states are passing laws largely because their Medicaid programs have been burned by PBMs, Dr. Kaufmann said. States are large purchasers of health insurance, even outside of the Medicaid program, Dr. Moody said, adding, “In many states, the government is the largest employer. It’s in the best interest of states to make sure that they’re getting the best value for their health care dollars.”

West Virginia is the first state to pass a law requiring that PBMs offer 100% of the rebates they receive from drug manufacturers to health plans. This law, which is in the rulemaking phase, could be a game changer if after it goes into effect, the state can collect data demonstrating a positive impact on patients, Dr. Brod said. “If West Virginia shows that the legislation reduces patients’ out-of-pocket costs and doesn’t disrupt the market the way PBMs claim it will, that could sway policymakers in other states,” he said.

Dr. Moody summed it up best. “With all the attention PBM practices are receiving now and so many people working toward solutions, I’m optimistic that we will be in a better place. Whether that will be in one year, two years, or five years is anyone’s guess.”