I am building a platform that would allow the U.S. to transition from volume-based prescription drug pricing to value-based pricing.
Power of Pharmacy Benefit Managers & Rebates
The recent Senate hearings on prescription drug prices has given attention to Pharmaceutical executives and Pharmacy Benefit Managers (PBMs) in particular. Pharmaceutical executives have blamed Pharmacy Benefit Managers for their rising drug list price. PBMs are labelled as the middleman between the pharmaceutical companies and Health Insurance companies, providing price negotiations and creating formularies for insurance companies1. PBMs’ main role is to provide health insurance companies with the best drug prices and provide a spot for a drug to be represented on a formulary.
As a result, pharmaceutical companies heavily rely on PBMs to get their drugs on a formulary, in other words PBMs are the gatekeepers that decide whether a pharmaceutical company will be able to get their drugs on the market. Their business model revolves around making money off of something called a rebate. A rebate is money that pharmaceutical companies give to PBMs to put their drugs on a higher tier on the health insurance’s formulary, resulting in a greater representation of that drug.
The problem with PBMs is that three PBMs dominate the majority of the market: Express Scripts, Caremark, and OptumRx. Being the giants that they are, they are able to have more leveraging power over the pharmaceutical companies and are able to make more money off of rebates due to this power. Added onto this complexity, these top 3 PBMs are merged with the biggest health insurance companies in the US: Caremark being under Aetna, Express Scripts being under Cigna, and OptumRx under UnitedHealth. This leads to a lack of transparency and a high cost for drug list price because if PBMs were to share how much they pocket, they would lose their business model and revenue2.
Lack of Transparency
The lack of transparency is frequently used by many from politicians to even pharmaceutical companies to explain the reason for rising drug list prices within the U.S. The lack of transparency of rebates between pharmaceutical companies and Pharmacy Benefit Managers (PBMs) has been a controversial issue and has been blamed for primarily causing the increasing drug list prices. This lack of transparency is due to the fact that rebates are considered proprietary information, meaning that PBMs are legally protected to not release this information3. As a result, they are able to keep the negotiated prices with the pharmaceutical companies out of the public eye so patients and physicians base their decisions on misleading prices. The fact that Pharmacy Benefit Managers have rebates that are based on a percentage of the drug’s list price means that they will typically choose the drug that has a higher list price rather than a drug that is cost-effective or shows greater clinical value4. This not only harms patients but also harms the industry that is contracting and supporting them, health insurance companies. This is because health insurance companies have to pay for these drugs and are forced to increase premiums because of these high drug prices as well as the diminished clinical value of these drugs in some cases.
Pharmacy Benefit Manager Market Share
How the Big 3 Pharmacy Benefit Managers affect Patients and Pharma?
As mentioned before, the 3 largest PBMs: Express Scripts, Caremark, and OptumRx make up 76% of the Pharmacy Benefit Manager market5. Additionally, these 3 PBMs are also merged or acquired by large health insurance companies, giving them great leverage over pharmaceutical companies. As a result, pharmaceutical companies are forced to pay rebates to just get their drugs onto a formulary. This in turn affects the profits of the pharmaceutical companies, which could lead to a lower investment in research and development for the creation of new life saving drugs. As a result, they are forced to increase their drug list prices to not only gain more representation on the formularies but also to compensate for the lost in profits. The power of these 3 PBMs not only affect pharmaceutical companies but also employers where they are not able to make the best decisions for their employees due to this lack of transparency within rebates. They are so affected that 3 in 4 employers do not believe that the rebate system lowers the cost of prescription drugs6 . The fact that employers also have to hire third party consulting firms to decide which formulary is best for their employees really does show a reason why US drug prices keep increasing, especially when the consulting firms have a hard time calculating the value of the formularies because of the lack of transparency7.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.