Published by Forbes
Express Scripts, the largest pharmacy benefit manager (PBM) in the nation, is discovering just how much customer service matters. It may also be discovering that suing your biggest customer in court is generally not considered good customer service.
Should Anthem Inc. withdraw its business from Express Scripts as it has indicated, then clearly the largest for-profit health insurance company will have made the determination that the value provided by its current PBM is not worth the costs.
Such a determination by Anthem is not surprising.
When working as intended, PBMs can provide valuable services including improved pricing for health plans and employer groups, and creating operational efficiencies from managing drug benefits. In practice, these benefits appeared to be outweighed by the costs.
Paramount among these costs, PBMs are incentivizing higher list prices for medicines that enable them to create large rebates and discounts. Due to their “near-monopoly” position, PBMs have been able to exploit these discounts to grow their share of revenues at the expense of pharmacies and manufacturers – currently nearly one-third of gross expenditures on patented drugs are rebates and discounts.
Additionally, their near monopoly position enables PBMs to charge high and retrospective fees. The retrospective fees, such as the direct and indirect remuneration fees (DIR), are particularly problematic as they “claw back” revenues from pharmacies based on sales that were made months earlier. Consequently, unlike a typical transaction, many pharmacies will not know how much revenue they earned from the sale of a drug until months after the transaction has been completed.
PBMs also impose high costs and large bureaucracies that are more burdensome on small family-owned pharmacies, specialty pharmacies (such as pharmacies that provide tailored services for chronic patients), and long-term care pharmacies.
Due to the bureaucracy, high fees, and retroactive claw back provisions that PBMs create, smaller and Specialty Pharmacies often lose the ability to effectively compete. Perhaps worse, as a study by the Community Oncology Alliance documents, DIR fees “can wholly eradicate any profits to be made by Specialty Pharmacies, and in many instances actually result in Specialty Pharmacies losing money when dispensing their medications.” Patient care suffers as pharmacies find it more difficult to serve their customers, or even stay in business.
The large price gap also fosters an opaque and complicated pricing environment. From the PBMs’ perspective, this greater market complexity makes it is easier to earn higher profits. In fact, a January 2017 report from the Centers for Medicare & Medicaid Services (CMS) found that the rebates that drug companies pay are growing, but it is the PBMs that are benefiting.
From a health system perspective, this dizzying pricing environment distorts the pharmaceutical market to the detriment of patients.
For example, the large discrepancy between list prices and transaction prices cause higher patient co-pays than necessary because co-pays typically depend on the list prices, not the final transactions prices. The aforementioned CMS report found that while PBMs “may hold down total program expenses (and beneficiary premiums), it does not reduce the cost of drugs for beneficiaries at the point-of-sale.”
Therefore, even though payers only bear the costs from the lower transactions price, and manufacturers earn revenues based on the lower transactions price, patient out-of-pocket expenses are often based on the higher list prices.
For Medicare patients, the higher list prices and higher co-pays can accentuate some of the flaws with Medicare coverage. Specifically, the unnecessarily higher out of pocket costs for Medicare beneficiaries pushes these patients into the coverage gap (also referred to as the donut hole) more quickly.
In 2017, the coverage gap is $3,700 of spending on covered drugs – indicating that once a patient breaches this gap they are responsible for all drug expenditures until they reach the out-of-pocket spending limit ($4,950 as of 2017). A more transparent pricing structure would reduce patients’ out of pocket costs, and reduce the number of patients who must bear the costs created by the coverage gap.
PBMs, through the control of the drug formularies (or the list of drugs that are covered by insurance), also impose undue influence on the medicines patients can access. Often whether a drug is on the formulary at all, or whether it is a preferred drug, depends upon the size of the rebate the PBM receives, not whether it is the most appropriate drug (or the most cost effective drug) for the patient.
The strains between Express Scripts and Anthem exemplify these industry tensions. As with many economic problems, however, many of the costs currently being imposed on the pharmaceutical market can be reduced. Doing so requires reforms that lower informational barriers, improve pricing transparency, and promote greater competition.
Wayne Winegarden, Ph.D. is a Sr. Fellow in Business and Economics at the Pacific Research Institute, and the Managing Editor for EconoSTATS. This editorial is based on his review of the PBM literature, which can be found at www.pacificresearch.org.