Americans are divided on many fronts: tariffs, building walls, and how to fix our broken health care system are just a few of them. One front that many seem to agree on is the replacement of outdated health care institutions, like pharmacy benefit managers, which cause market inefficiencies that result in skyrocketing medication costs.
Pharmacy benefit managers function the way travel agents used to, and benefit from price inflation. Replacing travel agents with a per-click transactional model opened up airline markets, and there’s likely nothing to prevent Amazon (AMZN) and others from bringing the same efficiencies to the drug world.
If you doubt that pharmacy benefit managers could go the way of the travel agent, start with this statistic: About 9 out of 10 drug purchases in the United States are for generic medications, and these in the aggregate consume about 15 percent of our annual spending on drugs. Purchasers could buy these directly from the generics manufacturers for about a third of that and just give them away. Next, they could “go direct” for the 1 in 10 branded drug purchases by removing rebates.
Rebates are profitable for pharmacy benefit managers, but they aren’t necessary for the rest of us, including pharmaceutical companies. The controversy surrounding rebates is that they would traditionally be considered “kickbacks” from drug manufacturers to pharmacy benefit managers to drive formulary positioning. Think of paying for shelf space in grocery stores. But this isn’t considered illegal because of so-called safe harbor regulations that protect the participants from criminal charges.
Those two simplifications would make it possible to do away with the unnecessary middlemen and make the purchase of drugs like buying any other widget, with purchasers knowing what the price is. Purchasers might even demand that they pay only for actual outcomes, and be willing to pay no more for medications than other developed countries. Then, for the first time, we would have a global free market in health care.
There are many opinions about what constitute the major problems with the current system of drug purchasing:
Rebates, says HHS. Alex Azar, secretary of the Department of Health and Human Services, has said we “need to move toward a system without rebates … such a system’s incentives, detached from these artificial list prices would likely serve patients far better, as would a system where pharmacy benefit managers receive no compensation from the very pharma companies they’re supposed to be negotiating against.” This realization has been decades in the making as rebates, which were originally steering mechanisms for pharmaceutical companies buying shelf space in formularies, has become the choke point for real competition and a primary driver of manufacturer price inflation for branded drugs in the U.S.
The business model, says Carl Icahn. Icahn initiated a proxy campaign and wrote an open letter trying to stop the merger between Cigna (CI), an insurer, and Express Scripts, a large pharmacy benefit manager, because the pharmacy benefit manager model is unsustainable and the merger would dilute value for Cigna shareholders. Although Icahn backed down on the proxy fight for practical reasons, consumers and purchasers should help block this merger because it would insulate Express Scripts within the larger Cigna umbrella.
We’ve been down this road before. Insurance carriers and pharmacy benefit managers were once integrated until it was clear that this blurred the line between the carrier, who was supposed to represent the purchaser, and the health care provider. If this merger is allowed to go forward, it should be with three ironclad requirements: Cigna 1) cannot prefer Express Scripts, 2) must include any willing service provider, and 3) cannot erect any legal, financial or procedural barriers to competition.
Financial reporting, says the SEC. In a letter to Express Scripts last fall, Joel Parker, senior assistant chief accountant at the Securities and Exchange Commission, said it wasn’t clear why the company believed that “accounts receivable from pharmaceutical manufacturers are a component of customer receivables considering that pharmaceutical manufacturers do not appear to be your customer.” In other words, the SEC can’t easily figure out who a pharmacy benefit manager’s customer is as money flows counter to a commonsense understanding of how its business model works. It is interesting to note that while two other large pharmacy benefit managers, OptumRx and CVS (CVS) Caremark, have similar models, the SEC made no requests of them. This could be because they have diversified their businesses, making it impossible to understand the underlying business models.
The supply chain, say Amazon, Berkshire Hathaway, and JPMorgan Chase. Jeff Bezos, Warren Buffett, and Jamie Dimon tanked health care stocks in early 2018 when they announced their brand of future disruption to the health care space. Speculation about their strategy to fix health care based on Amazon’s own disruption of many markets will likely center on removing the health care travel agent.
The lack of innovation, say the largest employers in America. In the National Business Group on Health’s 2019 large employer survey, employers believed that rising health care costs are one of the biggest issues facing them today. They also acknowledge the existing system needs to be disrupted and that they believe disrupters will come from outside of the current health care system. Large employers have been asking their current set of vendors to innovate but why would they when the status quo is so profitable?
The margin model, says the pharma industry. Pfizer CEO Ian Read said, “I would believe we’re going to go to the marketplace where we don’t have rebates … because that will reduce pharmaceutical prices at the point of sale and very positively removing the 40 percent subsidy.” If pharmaceutical companies do, indeed, have 40 points of margin to give up, as we have heard from other pharma CEOs, then someone isn’t telling the truth — CVS Caremark and Express Scripts claim they return 95 percent of the 40 percent subsidy back to the employers and their members. Unfortunately, it’s impossible today to tell where the double-talk is coming from. Making rebates obsolete would give us the answer and keep everyone honest.
Unfair competition, say American pharmacies. Gag rules in contracts between pharmacy benefit managers and pharmacies prevent pharmacists from telling their customers that they could get lower prices by paying cash. The very existence of such clauses should raise hackles as to the real business model of the pharmacy benefit manager industry.
Spread pricing, says Ohio State Medicaid. Ohio’s Department of Medicaid found in an audit that the taxpayers of Ohio paid $223.7 million over actual pharmacy charges in one year through what is called spread pricing. The state’s response was to require transparent pass-through pricing, to which the pharmacy benefit managers agreed. Purchasers are either unaware of this spread pricing problem, or willingly allow such pricing schemes in our contracts. Regardless, this doesn’t serve the people who pay and drives health care price inflation.
Are pharmacy benefit managers listening?
Apparently, they are. Both CVS Caremark and Express Scripts are reporting that their profitability has little to do with rebates and so their business wouldn’t be materially affected by changes to the rebate safe harbor. According to filings by Express Scripts as part of the Cigna merger, it claims the company retains only $700 million in rebates and that the effect of the safe harbor removal would be approximately 10 percent of its earnings per share. If true, it begs the question of why 90 percent of its profitability is tied to the 15 percent of the drug spend that Amazon could easily disrupt and whether it really is “valuable.”
Pharmacy benefit managers continue to make poor choices even under intense scrutiny. Look no further than the hepatitis C market and Express Scripts latest counterintuitive decision to exclude cost-effective Mavyret from its August 2018 formulary announcement while retaining more expensive therapies like Harvoni. In a head-to-head comparison with Harvoni, Mavyret worked for more genotypes, generally took one-third less time to achieve a cure, and is far less expensive. Mavyret can be purchased on the open market for less than the rebated cost of Harvoni through Express Scripts.
To be fair, the disappearance of the pharmacy benefit manager model won’t solve our health care cost problem; it’s just an obvious first step. We will still have to solve significant issues like inflated pricing for pharmaceuticals in the U.S., the continued practice of non-evidence based medicine, and the lack of accountability when the money that doctors and patients spend isn’t their own.
And let’s not forget: It takes two to tango. Rebates wouldn’t exist unless manufacturers were dancing in lockstep with pharmacy benefit managers. Greater visibility for buyers will make solving the drug pricing problem more tractable.
5 steps drug purchasers can take today
What can purchasers do to help the pharmacy benefit manager model go the way of the travel agent? Fight with your wallet.
- Let all of your pharmacy benefit managers and health insurers know you want them to disentangle the price of their services from the cost of the drug and end all conflicts of interest, like being both an intermediary and a supplier.
- Ask your legislators why they haven’t rigorously supported HHS efforts to remove the safe harbor for rebates. And while you are at it, ask them to stop taking campaign contributions from health care industry lobbies.
- Take responsibility. If your signature appears on the dotted line, you can’t put the all the blame on the pharmacy benefit manager. None of these companies has ever forced an employer to sign its contract.
- Mandate transparency. Do what’s best for both you and America and just say no to all parties that opaquely drive up health care costs. Insist that your drug management company prove it is fully transparent by giving you line-item detail on all drug purchases and show the underlying vendor contracts necessary for transacting your business.
- Create direct purchasing models. Nothing is stopping you from doing that other than the perception that you can’t and the pharmaceutical industry is motivated to help you get there.
Sally Welborn is the former senior vice president for global benefits at Walmart, a board member for Truveris and The Leapfrog Group, and a consultant or advisor to numerous companies. Pramod John is CEO of Vivio Health.