Vertical integration secures PBMs as ‘arsonists and firefighters’ of drug prices
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In the last 4 years, the three biggest pharmacy benefit managers have consolidated influence in the U.S. health care marketplace through vertical integration with insurance carriers.
These transactions have contributed as much, if not more, to skyrocketing prescription drug costs as the pharmaceutical industry itself, according to experts.
“At the end of 2018, we saw the final vertical integration of a large insurance company and a PBM, with the purchase of Aetna by CVS Caremark,” Madelaine A. Feldman, MD, FACR, president of the Coalition of State Rheumatology Organizations, founder and past president of the Rheumatology Alliance of Louisiana and a chair of the Alliance for Safe Biologic Medicines, told Healio Rheumatology. “Cigna purchasing Express Scripts had gone through, and of course we know United Healthcare has already owned OptumRx.”
Vertical integration, simply put, is when a company owns its own supply chain. The classic example is Andrew Carnegie and the Carnegie Steel Company. Founded in 1892, the company controlled not only the steel mills, but also the mines that supplied the necessary iron ore and coal, as well as the ships and railroads that transported them.
Shifting this strategy to prescription drugs, the three largest PBMs — UnitedHealth Group’s OptumRx, CVS Health Corp’s CVS Caremark and Cigna’s Express Scripts — now process nearly 80% of all prescription claims in the United States.
Like many experts, Feldman acknowledges that PBMs were useful in their original roles: Managing prescription drug benefits and serving as an intermediary for health insurers, Medicare Part D drug plans, large employers and other payers.
“Vertical integration has complicated that,” Antonio Ciaccia, CEO of 46Brooklyn Research, a nonprofit based in Ohio that aims to make U.S. drug pricing data more accessible, said in an interview. “At this point, PBMs are insurance companies. PBMs are mail-order pharmacies. PBMs are specialty pharmacies. PBMs are retail chain pharmacies.”
Harry L. Gewanter, MD, director for CSRO, medical director of Medical Home Plus, and clinical associate professor of pediatrics at Children’s Hospital of Richmond at Virginia Commonwealth University, was more pointed.
“PBMs are like a weed that has infiltrated the entire soil of our health care system,” he said. “They keep coming up with new ways to make it harder to track where the money for drugs is going.”
Advocates and whistleblowers are trying to track that money. But it is a lot of money, and with money comes not only influence, but the ability and impetus to protect that influence.
Consequently, regulatory efforts at the federal and state levels have been met with significant resistance. Whether they will succeed in curbing the influence of PBMs, returning them to some semblance of their original role and controlling drug costs, remains to be seen.
‘Profiteering’ 101
Through 2020, then-president Donald Trump’s attempts to reduce prescription drug costs largely focused on the prices set by drugmakers, yielding mixed or nonexistent results. The current administration under President Joseph Biden continues to focus on pharmaceutical companies rather than PBMs and has fared not much better.
The failure of the executive branch to rein in drug prices has given rise to organizations like 46Brooklyn and the Alliance for Transparent & Affordable Prescriptions (ATAP), which aim to shorten the reach of PBMs in the health care marketplace by petitioning Congress and state legislatures.
Source: Madelaine A. Feldman, MD, FACR.
Their efforts began with simply educating lawmakers and other policymakers as to what PBMs are and how they have used their leverage as middlemen to profit from both sides.
In one example, Ciaccia and his colleagues at 46Brooklyn Research reviewed publicly available data showing every price for every drug dispensed by Medicaid in Ohio in 2018. They then combined that with data showing the actual prices from the manufacturers, and presented their findings to the state.
“When we slapped those two data files together, we found a growing gap that, at the time, we estimated to be more than $200 million between what pharmacies were paid and what PBMs were charging,” Ciaccia said.
That led the state to conduct their own audit, which confirmed the group’s suspicions and a total gap of $244 million, according to Ciaccia.
“The state had no idea that there was even the existence of a gap between what they were being charged and what pharmacies were being paid for the drugs,” he said. “To their knowledge, at that time, spread pricing was not even a thing. They thought it was zero dollars.”
In that instance, the PBM had been charged with the simple task of using its purchasing power to negotiate rebates and discounts from drug manufacturers and pass them on to CMS, taking some profit in the transaction.
What really happened was something different, according to Gewanter: “Profiteering.”
Profit margins like these have become commonplace for PBMs. At the moment, when PBMs add a drug to any given formulary, they are paid based on the price of the drug from the manufacturer. This means that it benefits them more to add a drug with a $1,000 list price to the formulary, rather than a $250 drug.
Feldman offered a simple solution to this particular issue.
“The goal should be that they make their money with a flat fixed market service fee regardless of the cost of the drug,” she said. “If PBMs were not being paid on the percentage of the list price of the drug they put on the formulary, that, in itself, would probably take care of the problem.”
Michael C. Schweitz, MD, secretary/treasurer of ATAP, explained another benefit of a flat fee system.
“If the fee is uniform, that could create space for more independent and smaller PBMs to get into it,” he said. “At the moment, you have to play the game with the big three. There is nowhere else to go.”
In his role at ATAP, Schweitz understood that policymakers at all levels had no idea that such gaps as the one in Ohio existed, or that the system was structured as Feldman and Ciaccia described.
“We came together, originally, as an educational organization to shine a spotlight on PBMs, and these types of activities,” he said.
As the spotlight intensified, PBMs took notice, according to Feldman, who likened efforts to contain PBMs to the whack-a-mole arcade game. “As soon as we found out that rebates were the way that they were making money and started to crack down, they started reclassifying rebates as fees,” she said.
As a result, rebates are stabilizing, and even decreasing, in some cases, according to Feldman. However, PBMs have continued to profit, often using creative ways to hide the money.
“The big three have begun to use off-shore rebate aggregators that collect rebates from various manufacturers,” Feldman said.
Located in Dublin and Zurich, among other places, these aggregators are far from the reach of U.S. legislation.
However, efforts to minimize the profiteering and control costs are underway, as lawmakers increasingly begin to understand the realities of the situation.
‘There’s a lot of Mystery’
When ATAP was founded in 2017, very few pieces of legislation targeting PBMs were being introduced, according to Robert Levin, MD, president of ATAP and immediate past president of the Florida Society of Rheumatology.
“Now, there are hundreds being introduced every year,” he said. “It has been a snowball effect; people are becoming much more aware of the impact of PBMs on prescription drug prices.”
The main goal is clear: Transparency.
In service of this goal, Schweitz and Levin, representing ATAP, have reported to Capitol Hill this year to champion two transparency bills.
One of these pieces of legislation is the Prescription Pricing for the People Act of 2021, which was introduced by Sens. Chuck Grassley, R-Iowa, and Maria Cantwell, D-Wash.
“This is a Federal Trade Commission study and provides recommendations pertaining to the pharma supply chain, merger activity and the effect consolidation has on competition,” Levin said. “It gets at the heart of working toward the goal of transparency.”
The second bill is the PBM Accountability Study Act, which was proposed by Sen. Marsha Blackburn, R-Tenn. According to Levin, it requires the Government Accountability Office to study and provide recommendations to Congress, including a per-drug breakdown of specialty drugs and the way they actually get on a formulary.
“When you really look at it, it is very simple,” Schweitz said. “These guys have inserted themselves in between the manufacturer and the patient, extracting dollars from the whole supply chain without performing their original purpose.
“Then they said to the manufacturers, ‘If you increase your prices more and pay us more, we will put your drugs at the front of the formulary,’” he added.
According to Levin, the issue comes down to how much manufacturers can “pay to play.” He added that the legislation targets the fact that payments from companies to PBMs have historically been given a safe harbor from anti-kickback laws.
“The bottom line here is that the money supposedly passes through the insurer to reduce premiums and should be passed through to payments as copayments or deductible payments,” Levin said. “But the whole system is totally opaque. These are confidential contracts; it is unclear what goes on is the terms of rebates.”
Ciaccia summed the situation up in his own testimony at the Capitol.
“With mystery there’s margin,” he said. “And there’s a lot of mystery.”
Given the gridlock in Washington, D.C., many experts believe that even with the profiteering of PBMs laid bare and sensible legislation on the table, it is uncertain whether Congress will come together and act. It is for this reason that efforts at the state level are also underway — and have begun to bear fruit.
Success at the State Level
According to Schweitz, one reason why a state-centric approach is more likely to work is because “access to state legislatures, and state legislators, is easier.”
“I think we will be much more successful at that level,” he said.
The first big win came in Arkansas in the 2020 Supreme Court case of Rutledge v. Pharmaceutical Care Management Association (PCMA). In an 8-0 ruling, the Court found that the Employee Retirement Income Security Act (ERISA) did not preempt Arkansas’s law regulating PBMs.
This, in turn, led to other states passing similar legislation to increase PBM oversight. More than 100 bills in a dozen states were introduced in 2021 alone, including a law that passed in West Virginia that stipulated that 100% of PBM rebates should be passed on to patients.
“We need to build on these successes,” Levin said.
Meanwhile, the state attorney general in Ohio currently has three lawsuits against PBMs for over charging, Ciaccia said.
In July of 2021, attorneys general from 33 states and Washington, D.C., along with advocacy organizations including the American College of Rheumatology, filed an amicus brief in support of a North Dakota law that would impose state oversight and require PBMs to disclose some financial information.
“So far, when we have seen cases go to the appeals level in state courts, they are siding with patients and pharmacists against these behemoths,” Levin said. “The courts look like a place where this could unravel somewhat for the PBMs.”
Despite the progress being made in statehouses and at the bench, if there is a concern with the legislative process, it pertains to the partisan divide between Democrats and Republicans. Currently at the federal level, Republicans have targeted PBMs as the culprits of high drug costs, while Democrats have continued to focus their attention on pharmaceutical companies.
The complications do not stop there. In many states, these roles are reversed, with Democrats, rather than Republicans, targeting PBMs.
“For example, in Florida, Republican leadership is reluctant to touch private business in the quote ‘free market’ unquote,” Levin said. “But this is not a free market, this is an abusive market, and abusive markets need to be regulated.”
It is hard to predict if or when legislators from the two parties will align in limiting the influence of PBMs. In the meantime, it is important to consider the impact the battles between these Goliaths — PBMs, pharma, insurance companies and lawmakers — are having on individual patients.
Savings for Whom?
When discussing PBMs, it is easy to get lost in the dollars and bureaucracy and forget the point of medications altogether: To treat patients. In addition, it is easy to lose sight of just how much money patients end up paying for their medications because of this system.
It was with this in mind that Levin highlighted one other bill: The Drug Price Transparency Act of 2021, which was introduced by Sen. Michael Braun, R-Ind.
“It calls for insurers and PBMs to pass through price concessions directly to beneficiaries and commercial health plans,” he said. “Our patients pay copays based on list price, but huge amounts of price concessions or discounts are collected by the PBMs.”
Every rheumatologist knows what happens when patients are unable to afford drugs, or even copays — they simply stop taking their medications.
Like many who have been steeped in these issues, Gewanter hopes to educate anyone who is willing to listen about what this means for the U.S. health care system.
“Let us take the example of patients with lupus, who are twice as likely as many other patients not to take their medications as prescribed because of monetary issues,” he said. “The cost of non-adherence for patients with lupus is significant.”
Downstream effects of untreated lupus include end-stage kidney disease, which requires dialysis or, ultimately, transplantation.
“But PBMs do not care about that because these are medical costs and not prescription drug costs,” Gewanter said. “‘And since these medical costs are not in my silo, it doesn’t affect the PBM’s business or bottom line.’”
In her own testimony on Capitol Hill in November, Feldman outlined some patient-centered solutions to the problem of PBMs.
“Patients should pay coinsurance on the post-kickback cost of the drug, not the list price,” she said. “Stable patients’ medications would continue to be covered regardless of changes in health plan formularies. These reforms would bring us closer to a system that centers the patient as the ultimate consumer to be served.”
The message of the how PBMs have structured their enterprise needs to be stressed, according to Feldman.
“Once you grasp this system, you will begin to notice the careful wording from PBMs when they talk about the savings they create,” she told legislators. “If a PBM can achieve 50% of savings off a medication with a list price of $8,000 per month, that might lead them to prefer that medication over an equivalent that has a list price of $4,000 per month, because that 50% of savings accrues to the PBM. However, if the patients’ 20% coinsurances are assessed against the list price, then how do the patients benefit from the savings?”
Schweitz, meanwhile, offered a call to action.
“Getting our patients to scream louder would help,” he said. “But, at the moment, most patients have no clear understanding of how they are being affected by this.”
As patients and advocacy groups gain an understanding of the situation, it raises the question: Should attempts be made to eliminate PBMs altogether?
‘Not a Simple Case of Good vs. Evil’
Experts like Gewanter are doubtful regarding the possibility of completely eliminating PBMs.
“Can we get rid of them? No,” he said. “They are at the center of the current supply chain, and there is not an alternative supply chain at the moment.”
Ciaccia, for his part, said he does not think PBMs need to be “brought down.” Like many of his colleagues, Ciaccia believes that restoring PBMs to their original role of administrators of the bureaucracy, at a small profit, would be beneficial to everyone involved.
However, even this would be a difficult task, for all the aforementioned reasons, and one more: Other entities in the health care system are complicit.
“Pharma companies are in a synchronous relationship with PBMs,” Ciaccia said. “The whole drug channel does better with high drug prices. This is not a simple case of good versus evil. This is the whole channel making money.”
In fact, making money is not strictly the problem, either, according to Ciaccia.
“Pharma at least adds value by producing drugs, so we want the drug companies to have some profit incentive to bring new products to market,” he said. “The problem is that drug makers are given license to charge what they want, and they sell to wholesalers who also charge what they want, and sell to pharmacies that do the same.”
When PBMs developed a financial interest in regulating this chain, it threw the self-regulatory aspect of it “out of whack,” according to Ciaccia.
“What you want for them is to have incentives that achieve the goal of an equilibrium point to say what a fair price for any given drug is,” he added. “Instead, PBMs are the arsonists and the firefighters of prescription drug prices.”
Offering incentives to re-establish this equilibrium is just one potential solution, but there are others, said Gewanter. He suggested that employers may ultimately have a role in mitigating the power of PBMs.
“As businesses begin to understand that the exorbitant amounts they are paying for health care for their employees largely come from these unnecessary administrative costs, they may be motivated to change the system by, for example, only using them only as administrators, or at least look beyond the big three to a smaller PBM,” he said.
Legislating Medicare’s use of PBMs at the federal level may have an impact, as may formal audits of Medicaid plans at the state level, according to Gewanter.
“But all of this has to come out as public data, so people learn about their oversized role in drug pricing and be able to appropriately talk about it,” he said.
To that point, Schweitz stressed that education and legislation efforts have been successful.
“We are so much farther along than we were a few years ago,” he said. “We have to keep the momentum going.”
- For more information:
- Antonio Ciaccia can be reached at 175 S. Third St., Suite 200, Columbus, OH, 43215; email: antonio@3axisadvisors.com.
- Madelaine A. Feldman, MD, FACR, can be reached at 2633 Napoleon Ave. Suite 530, New Orleans, LA 70115; email: madelainefeldman@gmail.com.
- Harry L. Gewanter, MD, can be reached at 1504 Santa Rosa Rd., Suite 210, Richmond, VA 23229; email: hgewanter@icloud.com.
- Robert Levin, MD, can be reached at 1831 North Belcher Rd., Clearwater, FL 33765; email: daniel.rene@kglobal.com.
- Michael C. Schweitz, MD, can be reached at 1411 N Flagler Dr. #5600, West Palm Beach, FL 33401; email: mschweitz@gmail.com.
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