Navigating Work With PBMs: Negotiations, Misalignments, and Drug Costs

Contracting With Pharmacy Benefit Managers (PBMs)

A new report¹ by the National Alliance of Healthcare Purchaser Coalitions offers what it calls a “playbook for employers” on the current way many PBMs operate and what employers can do to ensure their contractual relationships with these intermediaries actually reflect their customer needs and wants.

This starts with asking the right questions. “We are asking the wrong questions, or not enough questions,” said Michael Thompson, president & CEO of the National Alliance.¹

Mr Thompson said that it should be a given that PBMs enter negotiations with employers with the goal of balancing the needs of the patient with the needs of the purchaser, and to negotiate drug pricing and appropriate utilization of drugs on an ongoing basis based on their clinical and economic review of the drug landscape.¹

“In reality, that is often the exception,” he said.

In the Addressing Pharmacy Benefit Management Misalignment report,¹ Mr Thompson and the National Alliance walk through the many ways that PBMs can fall short in helping employers fulfill their fiduciary responsibilities. Among the key ways is not passing on payments negotiated with manufacturers but instead directly profiting from those arrangements, often through rebates.¹ While “Rebate Pass Through”, as it is often referred to, is one of the most prominent practices that PBMs are increasingly being called on to provide more transparency, through state and federal legislation efforts for example, it is only one of the main ways that PBMs are failing as employers as fiduciaries.

“There is more wrong than the lack of Rebate Pass Through, emphasized Mr Thompson.¹ “Focusing on discounts totally ignores the broader issues such as drug appropriateness or utilization management.”

Ignoring the appropriate use of drugs is equally harmful when negotiating with PBMs, as it can and does result in the wrong drugs getting on a formulary with the obvious downstream effect on patient care, costs, and outcomes.

The report¹ identifies all the issues and problems with the way many PBMs currently operate, and offers purchasers a way to more consciously and thoughtfully negotiate contracts with PBMs.

Mr Thompson stressed that a new way to evaluate PBMs is needed to help purchasers choose a PBM contract that works for them.¹

“What we are advocating is for you to relook at how you are doing that evaluation, what questions you are asking, and making sure you are taking a broader perspective,” he said.

Deeper Dive: What Is Going on Behind the Curtain?

The report also highlights key areas of concern in how the PBMs operate.¹ Some of these concerns have to do with the way PBMs are structured. For example, despite the proliferation of new PBMs, 3 large PBMs now control most of the prescription drug business in the United States. These PBMs are also vertically integrated with business affiliates that allows for control of the drug supply chain from the initial to final sale—from drug manufacturer to final consumer.

Mr Thompson said the irony is that the big PBMs that everyone knows have become so dominant and vertically integrated, they have found business models that no one understands.¹ He added that the problem is not just the profitability of these business models, but that they are misaligned with the best interest of purchasers and ultimately patients.

Other concerns have to do with how PBMs operate. Among the largest problem is the perverse incentives to promote higher-priced drugs, low-value drugs for formularies because of the larger discounts and rebates on which they can make a profit. Although ostensibly these arrangements are supposed to pass on—or through—to patients or purchasers, in many instances a large percentage ends up in the pockets of PBMs.¹

Robert Levin, MD, a rheumatologist, sees first hand the impacts of drug pricing and availability on his patients, some of whom require the newer high-priced biologics.¹ He put numbers to illustrate the effect on patients when rebates are not passed through to them. Say a drug costs $10,000/month, and a 50% rebate negotiated lowers the drug to $5000/month. The patient still may pay 20% for the drug instead of the full discount being passed on to them at the pharmacy counter.

“The patients on cancer drugs or biologics in rheumatology, they are paying their percentage of copay off the list price, not the rebate price,” Dr Levin said.¹ “Why then is the drug being offered with a 50% discount from the manufacturer?”

“Patients are paying inflated amounts, which makes the drugs unaffordable, which increases noncompliance, and ultimately decreases the health status of our patients,” he said.

As president of the Alliance for Transparent & Affordable Prescriptions, a non-profit group of physician advocates against PBM practices, Dr Levin underscored that instead of negotiating good and fair pricing for patients, PBMs actually drive up the cost of medications that in turn cost plans more and patients more.

A further problem is that the incentives manufacturers give to PBMs to get their drug on preferred formularies. This ultimately also leads to patients often not having access to the drugs they need most, and clinicians not able to prescribe preferred drugs not covered.

“It is increasingly apparent that what is going on behind the curtain could not exist in the light of day,” said Mr Thompson.¹

Back to Basics

To get back on track, Mr Thompson urges purchasers to return to negotiating a balanced score card and to take a fresh look at the contracts with PBMs to ensure interests are aligned.¹

A first step is to evaluate a contract. A typical contract is for 3 to 5 years, with a focus on discounts and rebates based on current utilization with an aggregate rebate guarantee. Prices are indexed off ‘gross price’ based on different measures depending on whether the drug is branded (% of average whole price), generic (maximum allowable cost, variations for mail, specialty).

Additionally, the report details several flaws with these contracts.¹ When selecting and contracting with a PBM, the report offers a number of strategic recommendations (Table).

“Employers must go into health care benefit negotiations with eyes wide open,” said Dr Levin.¹ “It is important for employers to know what they are getting in to when it comes to dealing with PBMs and the negative impacts on patients that include higher drug costs and access.”

One suggestion, he said, is for plans to look for flat-fee PBMs—or PBMs that get paid a fair market value for their services instead of a percentage of the rebate or list price.¹

“You won’t get the rebates, but the price of the drug will be cheaper,” Dr Levin said. “Why not start with a lower list price than you are going to get with a rebate.”

Mr Thompson underscored that realigning the relationship between PBMs and purchasers, and ultimately plans and patients, will require everyone working together to get incentives right to truly provide high value care.

“To get this back on track is going to require all of us leaning into terms and conditions that are more transparent and more aligned,” he said, re-emphasizing that value is not just cost but appropriate use, quality of care, patient experience, and outcomes.¹

Drug Pricing: Broader Issue than Just PBMs

The report¹ briefly touches on another issue driving up the costs of drugs—particularly already high-cost specialty drugs. The report says it is due to administration in the hospital setting.¹

These infusion drugs can see markups of 100% to 600% in some instances if delivered in the hospital setting vs in a doctor’s office, infusion center, or at home. The report suggests that purchasers and plans shift the site of service to the lowest cost setting or cover and promote “brown bagging” and “white bagging” practices.¹ These latter practices mandate acquisition of provider administered drugs from preferred specialty pharmacies contracted with and frequently owned by the PBM and insurer.

Dr Levin strongly advocates for delivering these drugs in the clinician’s office through a direct “buy and bill” arrangement between the clinical practice and manufacturer. “Published studies show that the lowest cost settings are actually our physician offices where we buy the drugs and bill it back to the insurance where the price is the least,” he said.¹

He said that both brown and white bagging incur higher costs, and also carry safety and logistics concerns and inefficiencies that make these nonacceptable as options in his view.¹

“Patient convenience and safety need not be sacrificed so PBMs can make more profit,” he said.

“I have nothing against allowing specialty pharmacies dispensing drugs,” said Dr. Levin.¹ “However, patients and practices should have the right to acquire medications by the ‘buy and bill’ method if we choose to do it that way.”

“From a logistical and cost perspective, the ‘buy and bill’ method makes the most sense,” he added.

Mr Thompson said he would be totally supportive in eliminating both brown and white bagging if providers were precluded from marking up medications and treatments.

“Until that happens, you won’t find support within the purchasing community to eliminate brown and white bagging,” he said.¹ 

Reference:

1. National Alliance of Healthcare Purchaser Coalitions. Addressing Pharmacy Benefit Management Misalignment. June 26, 2023. https://www.nationalalliancehealth.org/wp-content/uploads/NationalAlliance_PBM_PB_2023_A.pdf