Big Pharma (Part 2): PBMs: Sunlight is the Best Disinfectant

I write with more thoughts about prescription drugs.

High Cost of Health Care.   The U.S. spends more than $3 trillion—or about $10,000 per person—on health care.  This is more than twice per capita than the average spent by other developed countries. Health care is almost 18% of our economy [1] but our health outcomes are no better than other developed nations.[2]   

High Cost of Prescription Drugs.  Pharmaceutical costs consume nearly 17% of the health care dollar in the United States.[3]  Prescription drug costs are the fastest growing component of health care expenses.[4]  In 2014, pharmaceutical sales in the United States rose to $374 billion—16 times the cost of living.  In 2015, they increased to $425 billion—17 times the cost of living.  Since 2011, prices for four of the nation’s top 10 drugs increased more than 100%, and six others went up more than 50%.[5]  U.S. prices for the world’s 20 top-selling medicines are on average three times higher than in Britain, a country that negotiates drug prices.[6]  

Litigation is Not the Solution.  During my tenure as Attorney General, we have been very active in filing lawsuits or settlements with approximately 100 pharmaceutical manufacturers, resulting in over $100 million in recoveries.  We have pending price-fixing lawsuits against generic manufacturers of diabetic and antibiotic medications.  We are also in court against manufactures that improperly extend patents to keep out competition.  While these lawsuits and investigations are important, litigation cannot solve the problem with the high cost of prescription drugs.  

Pharmacy Benefit Managers.  This column focuses on one opaque facet of the industry: so-called “pharmacy benefit managers,” or PBMs.  As discussed below, Minnesota needs to join other states in moving the PBM industry forward with transparency.

As seen below, the pharmaceutical market has a very complex structure. 

Manufacturers and Distributors.   Pharmaceutical manufacturers produce the drugs.  Most drugs are then distributed through wholesalers. Three national distributors—Amerisource-Bergen Corporation, Cardinal Health, and McKesson Corporation—control up to 90 percent of the distribution sector.[7]

In the 1970s, the industry was pretty simple.  The distributors negotiated prices and product delivery with pharmacies, which then sold the drugs to patients.  Patients with health insurance could then request reimbursement from their insurer.

The Middle Man.  This simple history is long past.  A new type of company—the pharmacy benefit manager (or PBM)—now plays a central role in pharmaceutical pricing.  Health plans (which include HMOs, insurance companies or self-insured employer-sponsored plans) hire PBMs to negotiate prices with drug manufacturers, wholesalers, and pharmacies.  Today, the United States has three dominant PBMs:  Express Scripts, CVS, and OptumRX.  These PBMs are hugely profitable, generating an estimated $280 billion in revenue in 2014.[8]

PBM Leverage.  PBMs create formularies for health plans.  A formulary is a list of approved drugs.  Drugs that are not on the formulary are not covered by the health plan or are covered under less attractive terms for the patient.  Manufacturers have a large incentive to get their drugs on the formulary so that patients will use them and sales will go up.  The use of formularies in turn gives PBMs big leverage over manufacturers.[9]  The theory is that PBMs will use this leverage to negotiate lower prices for their health plan clients.

Discounts and Rebates.  Do PBMs reduce drugs costs?  Many commentators don’t think so.  They argue that today’s PBMs get paid in part based on the percentage spread by which they can get drug companies to lower their prices.  They argue that, to curry favor with PBMs, the drug companies raise their list prices, the PBMs get a steeper discount, and then get paid more by the health plans.  Meanwhile, prices for drugs spiral upward.  This forces the uninsured and those with high deductibles to pay ever-higher prices for their medications. 

As important, many pharmaceutical manufacturers pay a rebate for total sales of a particular drug through all health plans serviced by the PBM—essentially a bonus commission based on total sales—at periodic intervals, such as annually.  The higher rebate paid by one manufacturer for annual sales of a particular drug is a tremendous inducement for the PBM to ignore the overtures of other manufacturers that may offer a drug that is more cost-efficient or effective.   In many cases, the rebate is undisclosed to the health plans served by the PBM.

Clawbacks.  In some cases, generic drugs cost less than plan deductibles for brand name drugs.  The policyholder doesn’t know this, however, and pays more for the deductible on a formulary drug.   The pharmacist is not permitted to counsel the patient on this, however, when PBMs insert a “clawback” provision in their contracts with pharmacies, which prohibits the pharmacy from advising the consumer of cheaper access to specific medications.  A current lawsuit involves a consumer who paid a $50 co-pay to fill her prescription, even though her pharmacy had contracted to pay only $11.65 for the medication.  According to the allegations, the $38.35 went back to the PBM.[10]

Real Money.  The irony is that health plans hire PBMs to negotiate lower drug prices, but many commentators believe that PBMs actually inflate the cost of drugs to generate higher compensation for themselves.[11] The CEO of Pharma, the trade association representing drug manufacturers, claimed that PBM rebates and discounts have doubled in the last few years.[12] This statement was followed up with an unusual exchange in which the CEO of Mylan, the manufacturer of the Epipen, testified in Congress that one-half the price of an Epipen two-pack, now costing over $600, goes to middleman, including PBMs.  The PBMs responded by labelling the Mylan statement a “scam.”[13]

Good News and Bad News.  The bad news is that neither Congress or Minnesota has addressed these problems.  The good news is that other states are trying to address the issue, and Minnesota can borrow from their experience. According to the National Conference of State Legislatures, more than 230 bills on access to pharmaceuticals were introduced in 2017 in 39 states. 

PBM Disclosure. Several states, including Maryland, North Dakota, South Dakota, Vermont, plus the District of Columbia, mandate that PBMs provide financial data to health plans.  California has been debating a similar provision.[14]  None of the states, however, require PBMs to make such disclosures on a regular basis.[15] Ironically, Minnesota has a law that permits PBMs to audit pharmacies but no law that permits health plans to audit PBMs.[16]

PBM Transparency.  Vermont recently enacted a law to take action on price spikes that exceed 50% of the average wholesale price over the past five years or 15% of the wholesale price over the last year.[17]

Nevada and Insulin Legislation.  A bill signed in June in Nevada applies to insulin manufactures like Novo Nordisk, Sanofi, and Eli Lilly.  It requires them to annually disclose their production costs, administrative and marketing costs, list prices, profits, discounts to insurance companies, and rebates or other fees paid to PBMs.[18]   Manufacturers must explain in detail the reason for any price increases above the Consumer Price Index.

Maryland and Generic Price Legislation. In Maryland, the legislature last spring enacted a law to fine a generic drug manufacturer if a drug costing over $80 hikes its price more than 50% in one year.[19]

Connecticut and Clawbacks.  This summer Connecticut enacted legislation that prohibits the use of clawback provisions that gag pharmacies from disclosing relevant drug price information to consumers.[20]

Regulatory Activity.  Connecticut also requires PBMs to be registered by the state insurance regulator and empowers the regulator to suspend or revoke the registration for unfair or deceptive business practices. Mississippi requires PBMs to be regulated by the Board of Pharmacy.  Georgia, Iowa, and Kansas require PBMs to register as third party administrators. 

Fiduciary Duty Legislation.  Maine and D.C. enacted legislation to impose a fiduciary duty on PBMs, forcing them to disclose their payments.  Unfortunately, the D.C. Circuit struck down the D.C. law as preempted by federal law. Maine then repealed its requirement. In 2013, Mississippi proposed legislation to require PBMs to “act in the best interests of the patient.”  The state dropped the matter after threats of litigation by the PBM trade association.  New York then considered but dropped similar legislation in the face of threatened litigation.  

While states have backtracked from the idea of imposing a fiduciary duty of PBMs, Iowa and Vermont have adopted legislation to impose a “duty of good faith and fair dealing” (although no meaningful results have yet been attained through the courts). 

Conclusion. We regulate the maximum rate for interest on consumer loans, the price of electricity and natural gas, and to a degree the price of auto and health insurance. Not so for the price of pharmaceuticals. 

Real reform of the prescription drug industry must come from Congress.  But we can’t count on that anytime soon.  To the contrary, Congress enacted legislation to prohibit Medicare (which has huge buying power because it represents 40 million beneficiaries) from negotiating drug prices.[21]  Other states aren’t waiting for Congress to act, and neither should Minnesota.  The State should move forward now and do what it can to address this problem.    You can help by letting your state legislators know that you want solutions to this vexing problem.