How PBMs Impact the Specialty Drug Market

It is no secret that pharmacy benefit managers (PBMs) are not the most popular part of the health care neighborhood. The question is, does health care benefit from PBMs—by keeping drug price increases in check, or driving them down—or do they simply benefit themselves—by adding unnecessary administrative costs?

“PBMs are disliked by almost everybody,” said Norm Smith, president of Viewpoint Consulting, Inc, which surveys managed markets decision-makers for the pharmaceutical industry. “By manufacturers, because they get beat up no matter how they price a product; by physicians, because prior authorization causes unreimbursed time; by retail drug stores, because PBMs lower their dispensing fees; and by employers, because they feel the PBM is not transparent with net prices. It’s a tough way to go through life!”

And it is looking as if things might get tougher. Consumers are demanding that the government take action on what they perceive as runaway prescription drug prices. Up until now, the focus has been primarily on pharmaceutical manufacturers, but many believe it is only a matter of time before the spotlight shines equally—or perhaps even more harshly—on PBMs. 

In January, CMS released a report showing payments PBMs receive in the form of rebates from manufacturers and concessions paid by pharmacies increased by 22% per year between 2010 and 2015, whereas Part D drug costs increased just 12% annually. The report shows that rebates/concessions reported to CMS hovered in the range of $26 to $28 billion annually in the early part of this decade, but escalated more recently, to $50 billion in 2015. 

Additionally, some are crying foul, saying that they are being squeezed out as PBMs throw their weight around. Independent specialty pharmacies are the latest to make this claim, as PBMs have begun to enforce agreements more aggressively, and throw out the so-called “bad apples,” for what might be perceived as small technical glitches. PBMs say they are just doing their jobs, but others contend that more is at play, since the PBMs themselves have specialty pharmacies that can fill these prescriptions. 

“A Lot More Surveillance”

Express Scripts, the leading PBM, acknowledges that it increased its scrutiny of its specialty pharmacy partners after learning last fall that one of them, Philidor Rx Services, had ties to Valeant Pharmaceuticals International, and it chief executive was charged with violating antikickback laws. 

“You can trace it back to Philidor,” said Brian Henry, a spokesman for Express Scripts. “PBMs are certainly doing a lot more surveillance to make sure pharmacies are doing what they say they are doing. If they claim to be a retail pharmacy, but 100% of the prescriptions are mail-order, that’s a problem that needs to be addressed. If they are sending prescriptions to states in which they are not licensed to practice pharmacy, that is an issue.” 

Mr Henry was quick to point out that the offenders make up a small fraction of Express Scripts’ specialty pharmacy partners. 

“We have over 70,000 pharmacies in our network,” he said. 

He also said estimates that less than one-half of 1% of all pharmacies in its network are flagged each year, and all are given a chance to come back in, and some do after making necessary changes. 

Additionally, while Express Scripts owns a specialty pharmacy, Accredo, Mr Henry insists that patients are not steered there at the expense of another pharmacy in the network. 

“Even in very narrow networks there are still tens of thousands of [specialty] pharmacies,” he said. “Patients have a choice to go to any [type of] pharmacy they want to.” 

Accredo does get a fair share of business (an estimated $15 billion in 2015), but Mr Henry said this is attributable to the work Accredo does to help patients and payers get the most value from their spend on specialty drugs, not because Express Scripts drives customers there.  

He also acknowledged that payers may still benefit from having smaller pharmacy networks.

“When payers ask, ‘Can I get a better rate if I didn’t have as many [pharmacies] in the network,’ the answer to that is ‘Yes.’” He further noted that this is no different than insurers offering a narrower provider network. “It’s the same kind of concept, and it has been going on for many years. It’s what our clients expect us to do.” 

More In-House Distribution?

A former PBM executive who agreed to speak with First Report Managed Care anonymously agreed with Mr Henry, but added that it is naïve to think that PBMs do not benefit in the process.

“Like other plans and intermediaries, PBMs are being squeezed between lower rates of payment increase from employers/plans, higher costs for drugs, and higher utilization,” he said. “Specialty drugs are the highest growing cost factor in pharmaceuticals. Every effort must be made to keep consumer and employer/plan costs down. This includes utilizing market power for purchasing, efficient distribution channels, narrower networks, and, perhaps, more in-house distribution.” 

He added that even though the specialty cost share is large, “profits are not necessarily commensurate,” making it more important than ever to maximize that profit. 

Charles Karnack, PharmD, BCNSP, assistant professor of clinical pharmacy at Duquesne University, said he understands that “PBMs are not charities,” and that genetic drug research is costly for manufacturers. And while he said he wishes more of the profit would be directed back into research, business realities dictate that PBMs will become bigger in order to better “negotiate with expanding health networks and insurance companies.” 

Mr Smith pointed to several reasons PBMs are taking a tougher stance these days. They are reacting to aggressive price increases from manufacturers. Additionally, they have not seen the deep discounts they were expecting from biosimilars. Finally, they were not prepared for increased utilization and its impact on their budgets. For instance, with hepatitis C, “their pipeline people did not anticipate the number of members—especially baby boomers—infected.” 

Gary Owens, MD, president of Gary Owens Associates, concurred, noting that the sheer size of larger PBMs provides leverage opportunities that help manage drug costs. 

“PBMs are being pressured by their health plan clients to manage drug trends [even] more aggressively,” he said “They are being hit with more and more high cost specialty agents, and that sector is rapidly approaching 40% of the pharmacy budget for less than 2% of the patients.  That leaves 60% of the budget to cover the needs of the remaining 98% of covered lives. Plus, generic prices are rising. There are fewer places to find cost offsets, so they must be more aggressive.” 

Some suggest that PBMs are transitioning on the fly, much like any type of business would have to do in a fast-evolving segment such as health care. In the process, they “direct more revenue to themselves from a variety of revenue sources as they lose their current value proposition,” F. Randy Vogenberg, PhD, RPh, principal at the Institute for Integrated Healthcare, explained. “Specialty [pharma] is the future, [which is] very different from traditional pills and creams.” 

 “Managing the pharmacy benefit is about managing specialty drugs” added Dr Owens. “PBMs must be in [this space] if they intend to have a future.” 

The Hepatitis C Market

It is reasonable to wonder if PBMs actually lower costs, or at least keep price increases in check. Because PBMs do not disclose the rebates they negotiate with drugmakers, nor how much of that rebate they keep, it is difficult to know for sure. But Mr Henry, of Express Scripts, pointed to the hepatitis C drugs as evidence that PBMs save money. 

He noted that Express Scripts was instrumental in getting the price of treatment lowered from $84,000 by using its size and the entry of competing therapies to bring cost “to a level below that which we see in Western Europe, which is typically the benchmark of how low one can go. It’s a great example of our ability to combine the high quality, high touch care you get at Accredo with our ability to drive change to formulary management.” 

Some wonder if market competition alone would have driven the price down, and those critical of PBMs believe the cost could have gone even lower if they were not in the middle taking a piece of the pie. If that was true, said Mr Henry, Express Scripts would be losing business, but he noted that its client retention is high—between 97% to 98% the past two years. “That is a great endorsement of the work we do on their behalf.” 

Most (but not all) of the experts we spoke with agreed—some grudgingly—that PBMs have a useful purpose. 

“I hate to admit it, but I do think PBMs manage costs better due to their sheer size,” Dr Karnack conceded. 

“All of the big PBMs now have formularies with excluded products,” added Dr Owens. “Manufacturers who don’t work with them could find themselves locked out of access to tens of millions of lives. This drives their ability to manage cost.” 

Arthur Shinn, PharmD, president of managed pharmacy consultants, measures PBM performance for his clients. While he could not share proprietary data, he noted that for the most part “PBMs bring savings that would [otherwise] not be there.” The exceptions, he added, are typically not the PBMs’ fault, but usually due to dynamics at play on the employer side, such as when a labor union is involved. 

“Diseconomies of Scale”

Mr Smith said that there is no doubt that PBMs manage costs well, but “sometimes it comes at the cost of optimal patient outcomes.” Moreover, as the larger PBMs have become bigger, he said he believes it is fair to ask if their size is causing “diseconomies of scale,” which occurs when businesses grow so large that unit costs increase. 

The former PBM executive who requested anonymity said he does not think PBMs are at this point—yet. Still, he said that “one can argue that if PBMs [get] too big, they can throttle alternative distribution channels and develop greater monopoly power. I don’t see this yet.” 

For now, he explained, PBMs have better purchasing leverage, the ability to allocate fixed costs across more lives, and expertise in areas such as disease management and avoiding fraud. 

Dr Vogenberg is not convinced. “Costs are not necessarily managed any better by a PBM than other administrator options” such as third-party administrators, jointly-administered plans, and direct contracting.

“While a lot of the PBM focus is on drug cost management and purchasing power, there remains little evidence from year-over-year claims paid that this makes a significant difference in cost of care savings for a plan sponsor,” he added. When looking at money flow through the drug supply channel or PBM/middleman as a percent of drug-related dollars… there can be greater savings from a value perspective as a plan sponsor in other options—even in just the pharmacy benefit.” 

As for the small specialty pharmacies, our experts believe that their fate is no different than smaller practices and payers that are being increasingly marginalized in an era of consolidation. 

One-Stop Shopping 

“In a world where price is king, it’s easier to contract for one-stop shopping,” said Dr Owens. “For that reason, I think smaller specialty pharmacies will sell to PBM specialty pharmacies over time. It remains to be seen if such consolidation is good or bad.” 

Dr Karnack said he thinks a bad outcome of consolidation is red tape. 

“The advantage of these small independent specialty pharmacies is access,” he said. “Have you ever tried to work through a problem with A large PBM? I have and it is like dealing with a large bureaucracy. Delayed care awaiting PBM approval can cause the window of opportunity to treat to close.”  

Meanwhile, Mr Henry said Express Scripts stands ready to answer to increased scrutiny. 

“Drug pricing has become a major issue over the last couple of years,” he said. “It stands to reason that there would be a closer look at pharmaceutical companies, pharmacies, and PBMs. We are part of the same supply chain ecosystem.”  

According to the PBM executive who requested anonymity, the fault lies less in the PBMs and more in the design of the US health care system. 

“The challenges of specialty pharmacy markets and pricing really reflect the broader tragedy inherent in a health care system,” he said. “It is a problem that cannot be ascribed to any particular political party or philosophy, but rather to a health care system that is not a system at all.”