Lowering drug pricing: Is cutting the “middlemen” the right strategy?

Washington has taken some new steps to lower prescription drug prices. In Spring 2018, President Trump unveiled his administration’s plan and promised that the new policies would bring ‘sweeping’ changes across the pharmaceutical industry. At the time, the president proposed multiple changes as a remedy for the problem, one of which, focused on cutting out the “middlemen” from the current healthcare ecosystem.

President Trump is referring to Pharmacy Benefit Managers (PBM) as the middlemen. PBMs act as intermediaries between prescription drug manufacturers and payers. Private and public (Medicare, Medicaid, Tricare) payers work with PBMs to offer their consumers prescription drugs at affordable rates. Due to their sheer size and large customer contact, drug manufacturers (owners) leverage PBMs to reach a broader market by offering their drugs at discounted rates. Additionally, PBMs partner with retail pharmacies to build a network of pharmacies to distribute drugs efficiently.

In 2017, the top four PBMs in the country – Express Scripts, CVS Caremark, Optum, and Prime Therapeutics – adjudicated over 80% of drug claims in the US. According to 2016 CMS data, the cost of prescription drugs was 326 billion dollars, 10% of the total healthcare expenditure of that year.

It’s difficult to argue the president’s stance on drug pricing. Drug prices have been on the rise for decades, and the idea of middlemen as the culpable party of the price surge phenomenon is easily digestible. However, to simply paint the PBMs as the headliners of the “drug price hike one-man show” is misleading. The healthcare system is very complex, often fragmented yet highly correlated. With many of the players (payers, pharmaceutical companies, legislators, consumers, medical systems) that exist today in the healthcare industry, any decision or move made by one would, directly and indirectly, impact others.

The traditional role of PBMs

Defenders of the model where PBMs thrive, point to their role as strong price negotiators with the drug manufacturers. Because of the scale of their economies, PBMs are better positioned to argue for lower drug prices for their clients, the payers, the consumers of prescription drugs, and all of us.

More importantly, many argue that PBMs do not merely rely on the sheer number of members they represent to enter these negotiations, they also bring to the table a few other “carrots”. Their toolkit includes drug formulary management (a.k.a. preferred drug lists) on behalf of payers, their ever-increasing role in educating the members on proper medication consumption and handling, and new innovative and efficient medication dispensing channels such as mail deliveries, home infusions, and improved access through lateral mergers such as CVS pharmacies and Caremark.

Those defenders argue that removing the middlemen will leave patients much weaker in the quest for lower drug prices and this is especially true for rare diseases which tend to be very expensive to treat. For example, the average cost of treating a patient diagnosed with Hemophilia is around $270,000 annually, and without PBMs, the cost of treating this rare disease can be much higher.

PBMs have come under fire from the day they begin operating in our healthcare ecosystem. Price transparency comes at the top of arguments against PBMs. Opponents argue that since PBMs are businesses and have to make money, they sell drugs to patients at the higher price what they paid for and pocket the rebates offered by manufacturers as an incentive to place their drug on the preferred drug list rather than passing them along directly to patients.

Another charge leveled against PBMs centers around the control they exert over what goes on the formularies or preferred drug lists and on their clients rendering some drugs inaccessible or costlier to the patients. This is the position that the Trump administration is founding its attack on PBMs.

Changing business models reveal increased value of keeping PBM's in play

Looking at their business models, PBMs do indeed wield a lot of power in the drug pricing game but painting them with a negative brush without looking at all the aspects of their operations is dangerous.

For one, over the past decade, additional regulations and client leverage in contract negotiations have limited the PBM’s ability to keep much of the rebates they received from drug manufacturers in favor of the newly favored rebate pass-through model by the payers. These rebates were once considered one of the primary sources of revenues for PBMs and the source of major criticism. Historically, the manufacturer’s drug rebate value was a closely held secret. This level of secrecy changed with additional state and federal regulation as well as some pushback from the payers to share some of those perks. The PBMs ultimately complied and began looking for innovative and new sources of revenues to stay afloat and relevant. These new revenue sources came in the form of fee-based services as well as strategic acquisitions to bolster offerings.

l shift relied heavily on data analytics and investments in technology to drive robust insights on patient demographics and behavior. For example, a 50-year old patient filling a script of maintenance medication at a pharmacy these days will most likely be spending a few minutes of their time listening to their pharmacist discuss the importance of taking their medication on time and what to do if he/she missed a dose or two. Today, this is officially known as Pharmacy Advising and is not just a courtesy but rather a strategic fee-based offering of a PBM.

How does Pharmacy Advising work? The PBM will incentivize a pharmacist for discussing the importance of taking one’s medication regularly and improving one’s adherence rate. In return, the PBM will charge the payer a per-member fee for providing this service. In turn, the payer is happily buying into this service because data shows that it is a money saver on the long-haul.

Discussing medication utilization and handling dramatically improve adherence of maintenance drugs (used to control diabetes, blood pressure, cardiovascular diseases amongst others), lowering other risk factors for more serious conditions over time and the cost of future treatments for payers.

The example above is one of many currently on the menu of PBMs. Others include network restrictions, utilization management services in the form of substitution of more expensive branded drugs with generics, prior authorizations, and step-therapies (filling a cheaper prescription before moving to the more expensive). They also provide services such as in-home infusions (saving costs associated with a hospital trip for an infused drug), mail deliveries, and 90 days supplies in lieu of 30 days as another measure to improve adherence. Most recently, they have leveraged digital platforms to communicate with patients and simplify the process of filling and refilling of medication.

Looking at these trends, the argument of PBMs making money from rebates weakens even more. If anything, today, PBMs would rather dispense generics when available than branded medications, eliminating any rebates revenue they may have received from the manufacturer.

With this new operating model, PBMs need to rely heavily on utilization data to remain profitable. For example, PBMs can leverage data to follow patients over time and measure their drug adherence as well as develop solutions based on those derived insights to reduce non-drug adherence waste and improve patient outcome. Reliable and robust analytics becomes the heart and brain of a successful PBM as they answer fundamental questions like: who is taking this treatment, for what condition, how often, and who is paying. The ability to build those capabilities could be the driving force behind the disparity between the top PBMs in the U.S. and the wading breed of smaller ones.

No longer 'just' the middlemen

The administration’s description of PBM as unnecessary middlemen contributing to increasing drug prices is not wholly accurate. PBMs are middlemen, indeed, but their role is expanding from being simply middlemen and wholesalers to being business intelligence powerhouses and effective negotiators on behalf of their clients. Those clients are becoming more and more demanding for lower prices depressing any profit cushions that PBMs enjoyed in the past.

The Trump’s administration policy statement of “eliminating the middlemen” may be easily actionable on paper, but it may not be the most effective policy to drive down drug costs. Instead, the administration’s goal of reducing drug prices may be better served by enacting policies for improved price transparency in the marketplace, incentivizing PBMs, payers, and pharmacies to improve their digital and IT infrastructure. Through enhanced digitization and robust infrastructure, PBMs can make better business decisions and customize products and services to better serve their client pools especially with respect to their disease state.

We only need to look at the Chase-Amazon-Berkshire Hathaway initiative to understand the power of innovation and where we are heading when it comes to treating Americans. Following this trend of innovation in the healthcare industry, PBMs have an opportunity to promote the delivery of high-value care, improve access to healthcare, and offer affordable drug prices. This could entail leveraging big data to follow patient drug adherence outcome, integrating systems with a health plan to gain more clinical intelligence and monitor drug therapies, developing high volume prescription fillers to optimize drug distribution, and implementing ancillary services that will inform clients (patients, providers, health plans) about price transparency.

The U.S. Healthcare system is complicated. Improving access to healthcare will require an intricate multi-faceted, innovative, 21st-century approach as opposed to simply “eliminating middlemen.”