FTC report on pharmacy benefit managers uncovers a system ‘addicted to higher list prices’
The “big three” pharmacy benefit managers have imposed markups ranging from 100% to more than 7,000% on generic specialty drugs dispensed at their affiliated pharmacies, according to a Federal Trade Commission report released this year.
The markups — at CVS Caremark, Express Scripts, and OptumRx — were seen not only in medications to treat cancer and HIV, but also in the rheumatology space.
“The FTC really let them have it,” Robert W. Levin, MD, past president of the Florida Society of Rheumatology, president of the Alliance for Transparent and Affordable Prescriptions, and associate affiliate professor of medicine at the University of South Florida, told Healio. “The markups on these drugs are disgusting.”
The report, released in January, shined a spotlight on 51 generic specialty drugs, including sildenafil, tadalafil, azathioprine and mycophenolate mofetil (MMF). Among other findings, the FTC uncovered markups ranging from 188% for MMF as dispensed by a pharmacy benefit manager (PBM)-affiliated pharmacy, to 7,736% for tadalafil.
“Remember, these are generic small molecule drugs like an aspirin that do not cost much to make at all,” Madelaine A. Feldman, MD, FACR, vice president of advocacy and government affairs at the Coalition of State Rheumatology Organizations, and founder and past president of the Rheumatology Alliance of Louisiana, said in an interview.
“The significant markups on the generic specialty medications the FTC analyzed generated more than $7.3 billion in income from dispensing drugs in excess of their estimated acquisition costs from 2017 to 2022,” she added. “The acquisition cost of the drugs was based on the NADAC price.”
NADAC refers to the average acquisition cost of the drug for pharmacies, according to Feldman.
“The price that the larger specialty pharmacies — such as those owned by the big three PBMs — pays for these drugs is even lower because of their volume,” she said. “Consequently, the revenue generated is thought to be much higher than $7.3 billion.”
For Levin, the FTC report reflects his own personal experience in the clinic, where he has witnessed patients pay hundreds of dollars for generics drugs.
“We all see it, and it is not just biologics or injectable specialty medications,” he said. “How many times have I seen a patient who for some reason is paying several hundred dollars for a generic NSAID?”
The question now is whether legislators in statehouses across the country, and in Washington, D.C., will begin to pass laws to fundamentally reshape this system. According to Antonio Ciaccia, CEO of 46Brooklyn Research, a nonprofit based in Ohio that aims to make U.S. drug pricing data more accessible, the report has been a “learning experience” for lawmakers.
“Like anything in health care, you diagnose and then you treat,” he told Healio. “This FTC report has been a learning exercise for Congress and the executive branch, in addition to what they have learned in the last few years. Now it comes to how we treat.”
‘Addicted to higher list prices’
As is the case in many clinical assessments, understanding the history is critical to understanding both the dramatic findings in the FTC report and the current efforts to bring greater transparency to drug pricing in the United States.
“In some ways, public policy decisions necessitated the existence of PBMs in their current form,” Ciaccia said. “In the 1990s, the Medicaid drug rebate program was created. It was a well-intended program.”
Medicaid chose not to pay list prices manufacturers set, according to Ciaccia.
“Instead, they asked for a 23% discount on all brand drugs,” he said. “If manufacturers raised prices beyond the rate of inflation, they incurred penalties.”
The result was that hospitals were no longer getting the best prices for medications, which created an expansion of Medicaid best prices to covered entities through the 340B program.
“This philosophical approach of achieving lower brand drug costs through discounting in the public sector — instead of through incentives aimed at drug companies lowering their actual prices — birthed increasingly inflated manufacturer list prices over time,” Ciaccia said. “This, in turn, created a greater emphasis for non-public sector payers to insulate themselves from increasingly inflated brand drug prices.”
Commercial payers — and eventually Medicare plans — turned to PBMs to take on this role of negotiator, according to Ciaccia.
“Initially, the PBMs took a flat fee to facilitate negotiations,” he said. “When they began to turn a profit in the discount and rebate system, it led to the current situation.”
According to Feldman, once the rebate system began, rebates and other post-sale price concessions were exempt from being labeled as “kickbacks” due to a stipulation of the Medicare and Medicaid Patient and Program Protection Act of 1987. This allowed PBMs to construct the rebate system without incurring legal repercussions for receiving these concessions, she said.
“Now, you have manufacturers who have little incentive to shrink the list price,” Ciaccia said. “Public policy set a culture that became addicted to higher list prices and the discounts rolling off the top of them. PBMs started to make money off of those discounts. So, there is no real objective rhyme or reason for why prices are the way they are.”
Educating legislators about this history may be the first step toward finding a remedy. According to Ciaccia, lawmakers should understand that patients in the current marketplace need both insurance and the PBMs to afford their medications, because “there is no way in any sober reality that you can afford these sky-high prices.” This situation has in turn created an over-reliance on the negotiator, giving said negotiators much power, which has led to spread pricing, differential payments and the complicated rebate system that exists today, he said.
“There is now a subjective approach to winners and losers in the marketplace,” Ciaccia added.
‘Fuel to the fire’
“As far as its effect on PBM reform, this report can only add fuel to the fire demonstrating the need to curtail PBM's ability to incentivize higher prices for their formularies — with delinking and rebate pass through legislation — and their ability to use their specialty pharmacies as an ATM,” Feldman said.
In December, a bipartisan group of legislators in Congress introduced the Patients before Monopolies Act, or PBM Act. Introduced by Reps. Diana Harshbarger (R-Tenn.) and Jake Auchincloss (D-Mass.) in the House of Representatives, and Sens. Elizabeth Warren (D-Mass.) and Josh Hawley (R-Mo.) in the Senate, the bill would, among other reforms, prohibit joint ownership of PBMs and pharmacies. However, it failed to gain the necessary traction during the short time before the 118th Congress concluded on Jan. 3.
“It had bicameral and bipartisan sponsors,” Feldman said. “It would mandate that the PBMs and their mother ship divest themselves of all pharmacies. We need it to be introduced again and it would directly address the issues noted by the FTC in this most recent interim report.”
Although the Patients Before Monopolies Act has not yet been scored by the Congressional Budget Office (CBO), another PBM Act — the Patients Before Middlemen Act — has, and boasts one major advantage over other previous reform efforts, according to Levin — it benefits the government.
“The CBO recently scored delinking legislation at a cost savings of about a billion dollars,” he said.
Specifically, the bill would delink the compensation of PBMs from drug price and use. It would also ensure fair treatment of all pharmacies by requiring Medicare Part D plans to contract with any willing pharmacy that meets reasonable terms and conditions. It had previously been introduced in the 118th Congress, and was reintroduced on March 6 by Sens. Marsha Blackburn (R-Tenn.), Maggie Hassan (D-N.H.) and Mark Warner (D-Va.).
“Most of the legislation we advocate for will cost the federal government money, so it puts a damper on the willingness to move forward with it, but this may have a chance because of the savings,” Levin said.
Feldman added that passing this legislation would go a long way to reducing the price of specialty generic drugs, as well as protecting the non-affiliated pharmacies from the issue of patients being “steered” to PBM-owned specialty pharmacies.
“There are ‘anti-steering’ laws but somehow many patients still end up with PBM-owned specialty pharmacies,” Feldman said. “It would also cut down on mandated ‘white bagging,’ which requires providers to receive their provider-administered drug form the insurance company-owned specialty pharmacy.”
Meanwhile, reforming the PBM rebate system may be a different story, according to Levin.
“The CBO has scored rebate pass through legislation as costing the federal government money,” he said.
However, Levin said he still believes that the rebate system should remain a target for future legislation.
“Paying PBMs a flat-fee, fair market value for their service instead of a rebate based on the list price of the drug is critical to bringing down drug prices,” he said.
‘Congress has to ask itself’
With all of the above in mind, zooming out and considering at the big picture may be helpful in guiding legislation through Congress, according to Ciaccia.
“The question Congress has to ask itself is whether public policy should be designed in a way to increase our reliance on insurance companies and PBMs, or do we start changing our approach so we decrease that reliance?” he said. “Or do we try to force manufactures to compete by lowering prices?”
Ciaccia added he understands that this will be a difficult task, but not, he noted, because of any malicious intent on the part of legislators.
“In many instances, the way that Congress has approached PBMs has been underinformed, and not driven by Congresspeople being dumb or lazy or not paying attention,” he said. “It is just a really complicated and opaque marketplace.”
PBMs have also stayed one step ahead of reform efforts by diversifying their revenue streams, according to Levin.
“Specialty pharmacies are now the biggest revenue source for PBMs,” he said. “It used to be the rebate system, but that system came under scrutiny and pressure, so the PBMs changed their approach.”
Other tactics include denying the generic when a name brand is on the formulary, or classifying generics in specialty tiers, Levin added.
“All of this has made drugs really unaffordable for our patients,” he said.
Meanwhile, online pharmacies like Mark Cuban’s Cost Plus Drug Co. and GoodRx are doing what legislation has yet to accomplish — making cheaper generic medications available to patients.
“The ‘Mark Cuban Effect’ and other pharmacies like his are the key to showing everyone how much these generic drugs actually cost and hopefully that will bring down the specialty pharmacy house that PBMs built,” Feldman said.
The PBMs may be taking notice, according to Ciaccia.
“Mark Cuban is eating the lunch of these PBMs because of the over-inflated markups,” he said.
However, the impacts of these competitors may still not be enough, according to Levin.
“I always draw the analogy of what happened at the turn of the 20th century with the trustbusters,” he said. “With vertical and horizontal integration, PBMs control everything in health care.”
To that end, the question of whether President Donald Trump’s administration has the will or power to break up these trusts remains to be seen.
“During the campaign, Trump was touting all the waste involved in the middlemen,” Levin said. “The FTC just lambasted them, so we will see what happens next.”
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