Two immense problems plague the prescription drug marketplace: The costs of prescription drugs are spiraling out of control, and few people are able to access accurate information about drugs’ effectiveness, safety, or side effects, all of which are needed for wise use of these drugs.
Pharmacy benefit managers (PBMs) are contributing to the cost problem and failing to address the information problem. These companies administer prescription drug coverage for large corporations, unions, municipalities, insurance companies, federal and state governments, and the Medicare and Medicaid programs. Three companies currently dominate this marketplace: Express Scripts, Caremark, and Optum. The deficiencies of these companies and other smaller PBMs create an opportunity for other entities to address both problems and entirely disrupt the prescription coverage industry.
Amazon (AMZN) has obtained wholesale pharmacy licenses in at least a dozen states and may be preparing to launch a pharmacy benefit manager business. If it does, and it addresses the pricing and information problems, Amazon would totally transform the prescription coverage marketplace. If it enters this arena and ignores these problems, expect another large company — like Walmart or Anthem (ANTM) — to shake up the marketplace instead.
Pharmacy benefit managers could easily foster price competition. They determine the drugs that will be included and favored on their formularies. These lists identify all drugs that a health plan covers and create different tiers requiring different copayments or coinsurance for different types of drugs.
PBMs could make their formulary decisions based on the actual prices of drugs, after factoring in all price reductions. Instead, they enter into secret deals with manufacturers and require them to pay rebates that the pharmacy benefit managers purportedly pass through to their clients. Pharmacy benefit managers also arrange to collect other secret payments that these companies keep for themselves.
Pharmacy benefit managers’ secret deals create perverse incentives for manufacturers to increase their drug prices, not decrease them. The more money that PBMs extract from manufacturers, the more manufacturers raise their prices.
Also, since pharmacy benefit managers refuse to disclose drug-by-drug rebate information, a health plan can’t determine if its PBM is favoring the lowest net-cost drugs in each therapeutic category or higher-cost drugs due to the secret monies the PBM is collecting. Making matters worse, if doctors and patients can’t see the net cost of drugs (the cost after factoring in rebates that are passed through), how can they select the lowest-cost drugs, and how can price competition exist?
Today’s pharmacy benefit managers also don’t disclose how much they retain in total manufacturer payments or what services they purportedly perform to earn those payments. As a result, no one knows the extent to which PBMs’ conflicts of interest affect the decisions and choices they make.
For example, many — if not most — pharmacy benefit managers contract with manufacturers to be paid what are known as inflation protection rebates. When a manufacturer increases the list price of a drug annually by more than a certain percent (say 3 percent), it must pay back some of the increase to the pharmacy benefit manager. But pharmacy benefit managers typically retain the price protection rebates they’re paid and don’t pass them through to their customers. As a result, PBMs profit when drug prices increase while everyone else incurs higher costs.
Despite the large sums that pharmacy benefit managers earn, they do nothing to assemble and disseminate information about drugs’ relative effectiveness, safety, or side effects. And they aren’t likely to do so in the future, since they derive a large portion of their profits from negotiating secret deals with manufacturers to collect hidden amounts of monies for favoring higher-cost drugs.
Amazon could create an entirely different model
For any marketplace to work effectively, people need to know the actual prices and the comparative usefulness of competing products. When it comes to prescription drugs, they currently know neither. As a new pharmacy benefit manager, Amazon could provide both sets of information and vastly improve the entire system. Here’s one way Amazon could do this:
Assume that Amazon decides to open a new pharmacy benefit manager on Jan. 1, 2020. Between now and then, it would need to build two software systems that together would disseminate essential information about every drug’s actual price, as well as its effectiveness, safety, and side effects.
Amazon’s next step would be to implement a new method to create price competition: pricing drugs openly, rather than by entering into secret deals with manufacturers. Amazon would do this by requiring every manufacturer to simultaneously identify its net price for every drug — including all price reductions from rebates, other payments, coupons, and the like.
Having announced its new approach to drug pricing, Amazon would conduct its first Bid Day. At a single point in time — say Sept. 1, 2019, at 9:00 a.m. — the new PBM would require every manufacturer to submit its price for each of its drugs, inclusive of all price reductions, telling each manufacturer that its submitted drug prices would be used for the first six months of Amazon’s PBM operation. Amazon would also warn manufacturers that those failing to submit drug prices on the Bid Day would have their drugs identified with the drugs’ current (high) list prices.
Every six months thereafter, Amazon would conduct another Bid Day, allowing manufacturers to change their prices for any drug for the next six-month period.
Amazon would also make clear that it would identify all Bid Day drug prices on a new app, together with information about every drug’s effectiveness, safety, and side effects. This information would be based entirely on reliable sources, such as information manufacturers submit to the FDA to obtain drug approval, along with information submitted thereafter to satisfy FDA post-approval requirements, and other independent drug evaluations, such as Cochrane Reports.
Amazon’s app would be organized by drug and by therapeutic category, allowing any user to easily find and compare the prices of drugs and their effectiveness, safety, and side effects in every therapeutic category. Amazon would make the app available to all plan beneficiaries obtaining drugs from Amazon’s new PBM, as well as to the public.
If Amazon implemented this approach, it could create a marketplace that fosters real competition for every type of drug.
In therapeutic categories in which multiple generic drugs are available — such as diabetes treatments, drugs that lower cholesterol or high blood pressure, or drugs to treat depression or ADHD — makers of brand-name drugs would either drastically reduce their prices or lose a large percentage of their market share to generic competitors.
In therapeutic categories where generic drugs are not available but there are multiple brand-name drugs and some biosimilars — such as in many of the high-cost specialty drug categories like growth hormones and treatments for hepatitis C, multiple sclerosis, and rheumatoid arthritis — makers of brand-name drugs and biosimilars would be forced to compete and continuously reduce their prices to retain market share.
For therapeutic categories in which drug alternatives are not available, such as many high-cost cancer treatments, patients would have ready access to information revealing the limited effectiveness and toxic side effects of many drugs. This information would tend to decrease utilization, and therefore likely decrease costs.
For example, a recent study looked at 36 cancer treatments the FDA approved between 2008 and 2012 based on surrogate endpoints (like tumor response rates or progression-free survival), rather than on overall survival. Four or more years after approval, only five of the drugs had been shown to actually improve overall survival. The remaining 31 either didn’t provide any overall survival benefit (18 of the 36) or still had not demonstrated any impact on survival (13 of the 36).
If Amazon made information about these 36 drugs readily available, imagine how many doctors and patients might avoid the drugs with limited effectiveness and toxic side effects. Imagine how much money might be saved.
With the availability of such information, it’s likely that manufacturers would reduce their prices to reflect the drugs’ limited value. Equally important, manufacturers might devote more time to discovering drugs with greater value, knowing that drugs with little or no value would be doomed to limited sales.
Revolutionizing the marketplace
Creating price competition and then providing everyone with easily accessible information about every drug’s price and its effectiveness, safety, and side effects will revolutionize the marketplace for prescription drugs. Amazon could accomplish these goals and simultaneously expose the distorted conduct of existing pharmacy benefit managers, forcing them to change.
If Amazon doesn’t engage in this marketplace disruption, another company undoubtedly will.
Linda Cahn is a nationally recognized expert in prescription coverage and the founder and head of Pharmacy Benefit Consultants and the National Prescription Coverage Coalition.