In Pharma value chain, PBMs manage to benefit

As 2020 Democratic presidential aspirants lean into their game of one-upsmanship on policies that would slow medical progress and undermine the U.S. biopharmaceutical industry, it’s a relief to see the Senate convene a hearing Tuesday on the self-dealing middlemen in the drug delivery system whose profits are largest when a drug’s list price is highest.

Pharmacy benefit managers (PBM) help determine which medications get placed on insurance formularies and how much patients pay out of pocket for drugs they often can’t live without. However, PBMs are not primarily concerned with negotiating lower drug prices on behalf of patients, no matter what their press releases say. Their allegiance is to their shareholders and the health insurers who hire or own them.

{mosads}PBMs were originally conceived to help employers and insurers negotiate the best prices on prescription drugs, a fine idea in a market-based health care system like ours. But massive industry consolidation has fundamentally changed the way they do business. In private, PBMs ask biopharma companies to preserve high list prices and write them larger rebate checks in exchange for prime formulary placement. In public, these middlemen castigate drug companies for high prices while laughing all the way to the bank.

Today, the three biggest PBMs — CVS Health, Express Scripts and United Health-owned Optum Rx — are Fortune 25 companies, a status no pharmaceutical company enjoys. Because these mega-PBMs control 76 percent of the market, they have massive leverage: If the manufacturer’s rebate isn’t big enough, they can drop its medicine from their formulary or move it to a disfavored tier where it’s harder and more expensive for patients to access.

PBMs’ status as all-powerful gatekeepers of the American medicine cabinet has allowed them to game the pharmaceutical rebate system for years. They are under no legal obligation to use a manufacturers’ rebate to lower patients’ out-of-pocket drug costs. Middlemen can keep that money as profit. Most insurers say they use the rebate money to lower overall premiums instead of drug bills, perpetuating a morally dubious financing system where the sick subsidize the well. Meanwhile, patients’ out-of-pocket costs are typically calculated off the list prices that PBMs work to keep artificially high.

This January, the Trump administration proposed eliminating these perverse incentives. HHS is working on a rule that would require all manufacturers’ rebates to be passed on directly to beneficiaries under Medicare Part D and Medicaid managed care. The Pharmaceutical Care Management Association – the trade association for the PBM industry – responded with an analysis raising “significant concerns as to whether there are any viable alternatives to rebates.” To PBMs, the current structure looks rosy; they derived more than half of their retained revenue from drug rebates in 2014.

My group, the Biotechnology Innovation Organization, represents hundreds of smaller and emerging biopharma companies seeking their first FDA approval. BIO immediately embraced the rebate rule’s goal to lower patient costs. Our entrepreneurs believe breakthroughs should get prime formulary placement because they work.

If properly implemented, the rebate rule can start to close the confusing gap between a drug’s net and list price. List price increases have long been weaponized by industry critics in the media to suggest biopharma companies are greedy profiteers, when it is PBMs that insist innovators preserve high list prices and high rebate checks, or else.

A study published last week found that the chasm between pharmaceutical list and net price reached a record $166 billion last year. This figure — higher than annual R&D for the entire global biopharmaceutical industry — has doubled in the last six years and powerfully quantifies the pharmaceutical value chain’s opacity.

Politicians are pulling the wrong policy levers for constituents struggling with high pharmacy bills. Many lawmakers have not yet fully grasped how, and how often, middlemen use their leverage to keep prices high so they can receive large cash payments calculated as a percentage of that high price. This is starkly at odds with the PBMs’ ostensible responsibility to negotiate lower drug prices in the pharma value chain.

If the rebate rule is implemented, PBMs will adjust with new strategies to hit their margins. They could demand higher rebates in the commercial market to compensate for fewer rebate checks in Medicare and Medicaid. Or insurers could double down on higher deductibles and co-insurance, a practice that drove exasperated health care voters to the polls in 2018 and may again in 2020. 

But no matter what happens next, at least we’re now achieving overdue transparency within the pharmaceutical value chain. As the sunlight pours in, policy makers will see how PBMs drive up list prices to squeeze out profit, since like any Fortune 25 company, the benefits they manage most skillfully are their own. 

Jim Greenwood is president and CEO of the Biotechnology Innovation Organization. He represented Pennsylvania’s 8th Congressional District in the U.S. House of Representatives from 1993 to 2005.