Many of my friends in the pharma world
feel that the evolution of pharmacy benefit managers (PBMs) in the US has led
to their operations and impact becoming increasingly mysterious. While we
understand in broad strokes the role they play, their business model has
broadened to the extent it has become fuzzy—as if by design. We all harbor
general skepticism towards middlemen, and question what actual value they add
to the healthcare system. When it comes to PBMs, views on this question even
among friends vary wildly. Concerns include the lack of transparency in the
proportion of savings the PBMs choose to share; bundled contracting that may
perpetuate the use of expensive branded products at the expense of generics;
and the misuse of the unique middleman position to disadvantage stakeholders on
both sides, perfecting the art of moral dilemma to primarily focus on
shareholder value, rather than value for all stakeholders.

At the same time, the PBM segment itself
faces increasing uncertainty, with a particular threat represented by the
inroads being made by newcomers deploying the tools of technology, promising to
offer benefits ranging from increased transparency to larger sharing of
savings. Potentially disruptive entry in biopharma distribution by the likes of
Amazon has contributed to valuation collapse of PBM companies, with the leading
pure PBM, Express Scripts, having lost a third of its value since 2015.

We invite you to share your views as we
begin the dialog to put this important yet opaque biopharma segment in a
balanced context. A brief history of PBMs may help set the stage, and explain
how they have become so prominent over the last couple of decades. Your
feedback will guide our next column on the subject.

Once Upon A Time

The first PBM started in 1968, just three
years after the enactment of Medicaid and Medicare, and a year after the United
Auto Workers and Ford reached an agreement to include drug coverage as part of
the auto workers’ benefit package. PBMs stepped into a world where prescription
drug benefits were becoming an integral part of health insurance coverage, just
as managing a high volume of paper based prescription claims before the
computer-age was overwhelming insurers’ back office. PBMs initially processed and
paid these paper claims. However, it did not take long for them to realize the
value of claims data they were accumulating, as they began to develop
clinically meaningful insights. At the same time, their growing scale enabled
them to extract discounts from pharmaceutical manufacturers on one side, and
pharmacies on the other, in return for access to their members to grow market
share. During the 1990s there was a move by pharma companies to bring PBMs in
house, exemplified by Merck & Co’s acquisition of Medco and Lilly’s
acquisition of PCS. But such diversification proved to be short-lived amidst
antitrust concerns, conflicts of interest, and other factors.

The Triumvirate

Today the industry is dominated by three
players: Express Scripts, the largest pure play PBM with around 80 million
members (though it is about to lose a quarter of this roster that belongs to
Anthem with the recent announcement that Anthem plans to set up its own PBM,
coming full circle after having divested its PBM to create Express Scripts just
a decade ago); CVS Caremark also with around 80 million members and owned by
one of the largest pharmacy chains; and United Health’s OptumRx, with
approximately 60 million members. Together, these three companies process over
two-thirds of all prescriptions dispensed in the US. The implications of the
rumored CVS merger with Aetna, a leading US healthcare insurer, as well as CVS
servicing Anthem PBM members prescriptions will be a part of our next column.

Despite the continuing market concentration,
the FTC in their review of Express Scripts’ merger with Medco in 2012 found
that in the PBM market “competition for accounts is intense, has driven down
prices, and has resulted in declining PBM profit margins.”

Sharing Nicely?

Not surprisingly, other three key
stakeholders in this game, insurers, pharmacists, and the pharmaceutical
industry do not see the PBM role the same way as the FTC, noting the divergence
in invoice price growth for branded drugs vs. the estimated net price growth
and implying that a large portion of the rebate benefits accrue directly to the
PBM and do not trickle down to the insurer or the patient. However, in one of
the settlement litigations, an expert economist estimated that about 90% of the
savings that a PBM may choose to share (without specifying what portion the
PBMs choose to share) accrue to their third party payers and pharmacists. It is
also noteworthy that insurers and pharmacists are mum as to what portion of
their profits come from their share of the pharma company rebates to the PBMs.
With only about 10% of the savings going to the uninsured consumers, in the
end, it is the consumer who seems to get left out of this party, while each of
the big boys—the PBMs, pharma companies, third parties including insurers, and pharmacies—believe
the other three are getting more than their fair share at their individual
expense.

The core of the moral dilemma that the
PBMs face is how to be transparent and share the details of their financial
transactions without compromising their negotiating power. The question of just
who is right in this matter is surprisingly difficult to answer, as the first
two Congressional hearings on drug pricing, rebates, and the role of various
stakeholders have underscored.

Enforced Opacity

PBM contracts are opaque by design and
all parties are prohibited from discussing terms. On the one hand, this lack of
transparency on pricing makes the value question difficult to satisfy
empirically, but on the other hand lack of transparency could make the system
more competitive, since forced disclosure of pricing terms in a consolidated
industry makes collusion easier, and has been shown in other industries to at
least lower pricing variability and could lead to higher prices overall.
Generally, all parties in the pharmaceutical product chain, from manufacturers
to PBMs to insurers to pharmacies, have repeatedly argued and generally won the
right to variable pricing, as well as lack of transparency, in proportion to
their market power over captive consumers, but PBMs have carved out the
ultimate middleman role with substantial clout, seemingly able to retain a
large share of the savings they are able to negotiate with both the drug makers
at one end and the pharmacies at the other. The third-party payers in the
middle are increasingly dependent on the so-called PBM consultants, whose role
and objectivity are even less well understood.

PBMs also use their size to influence
clinical practice and seem to enable the use of higher priced brands via
negotiated bundling and other incentives long after their patents have expired.
In the end, these primarily benefit the PBM and the manufacturers.

It is clear that PBMs do fulfill their
role of helping lower drug costs by extracting ever larger rebates from the
biopharma companies, now about a third of the retail prices posted by the
biopharma companies. Who do these rebates benefit—that is where the debate
becomes heated.

Data Trove

Another positive resource of course is
the treasure trove of PBM data and potential intelligence their analytics can
yield. This intelligence has great promise to promote evidence based
prescribing not only to save the system money, but also to improve health
outcomes. All the PBMs have increasingly active ‘research labs’ working towards
these objectives and publish some of their findings, and are starting to push
for outcomes-based agreements that link reimbursement to successful patient
outcomes.

Initial benefits so far, it seems have
focuses on maximizing cashflow, even if it means continuing use of expensive
branded though now off-patent product use.   Let us hope that
convincing and objective studies from the PBM intelligence about the overall
value contribution to the society—both about the savings benefiting the
society, and better patient care with improved outcomes—would begin to
demonstrate the merits of this important industry segment.This
column originally appeared on Scrip Biopharma Intelligence, November 8th, 2017