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Pharmacy benefit managers: a mechanism for containing costs or a contributor to rising drug prices?

While pharmaceutical companies are often the focus of conversations about high drug prices, more recently pharmacy benefit managers (PBMs) have come under increased drug price scrutiny. The American PBM business model, developed in the early 2000s, was designed to identify treatment-eligible patients, reduce health insurer administrative burden, and price negotiate with the pharmaceutical manufacturer. By managing these prescription drug programs on behalf of health plans, PBMs exert wide-reaching influence on drug formularies and rebate negotiations with manufacturers.

A PBM’s revenue comes from upfront and secretly negotiated discounts and rebates following sales for including the pharma company’s medications on their formulary (a powerful leverage for negotiating prices), as well as through charging health plans a higher amount than they reimburse pharmacies. The latter practice is called “pharmacy spread”.

The Pharmaceutical Care Management Association (PCMA), the national trade association representing America’s pharmacy benefit managers, claims that PBMs reduce prescription drug costs for consumers, employers and government programs.1 However, the National Academy for State Health Policy (an independent academy of state health policymakers)  summarizes concerns around the PBM business model, highlighting anti-consumer practices including2:

  • Drug formularies that may benefit PBMs but not patients;
  • Gag clauses that restrict pricing information pharmacists can share with consumers;
  • Restrictions on drugs purchases to PBM-controlled pharmacies; and,
  • Lack of fiduciary transparency in operations.

Are PBMs contributing to high drug prices?

One key question is whether PBMs actually help contain costs for insurers and consumers. Theoretically, their pricing power should benefit insurers, which then pass on savings to their customers through better benefits and lower premiums. In actuality, only a portion of the rebate is passed onto insurers, so the impact at the health plan (and consumer) is diluted.

Moreover, the Medicare Payment Advisory Commission raised concerns that PBMs are not choosing the lowest-cost drugs.3 Since the rebate received by the PBM is based on the drug price, the higher the price of the drug then the higher the rebate. This business model results in conflicts of interest because rebates have the potential to shift incentives towards drugs with the highest rebate rather than the most cost-effective price. DHHS Secretary Alex Azar went further to suggest that PBMs prevent pharmaceutical companies from lowering list prices in order to secure a higher rebate by threatening to remove drugs from their formulary.4

PBMs pushed back, with the PCMA releasing a report that lays the blame for high prices on drug makers, asserting that list prices are rising even when there are no rebates to PBMs.5

The Ohio Department of Medicaid criticized PBMs after an audit found they used the practice of “pharmacy spread” to collect over $208 million from generic prescriptions during a single year by charging Medicaid more than pharmacies were being reimbursed.6 CVS Health and its PBM, CVS Caremark, hit back, claiming that PBMs have saved Ohio taxpayers $145 million annually.7

If PBMs do lower costs, are these savings being passed on to patients? Dan Leonard, President & CEO of the National Pharmaceutical Council (a health policy research organization representing American biopharmaceutical companies), pointed out that while PBMs have been able to keep commercial plan drug spending slow, out-of-pocket spending by consumers was at the highest level in a decade in 2016.8 This suggests that even if PBMs are saving money for insurers, these savings are not being passed on to patients.

Lack of transparency has also been a key point of contention with PBMs. In a September 14, 2017 Health Affairs brief, Cole Werble of the health care policy firm Prevision Policy, LLC called PBM price negotiations, “…opaque by design,” suggesting that PBM leaders believe that full transparency around rebates could prevent future discounts. 9This black box surrounding rebates and net pricing makes it difficult to know what role PBMs have in increasing drug prices and whether they are passing on rebates to consumers and insurers.

The landscape is moving towards increased regulation of PBMs

How is the healthcare ecosystem reacting to criticism of PBMs?

At the federal level, the Senate recently voted to ban ‘gag clauses’, a practice where PBMs prevent pharmacists from telling customers when prescriptions would cost less if purchased outside their plan.10 State legislatures are also pushing for more transparency and fewer anti-consumer practices, with over 80 PBM bills introduced into state legislatures to address concerns ranging from gag clauses to making rebate amounts publicly available. The National Academy for State Health Policy has drawn together these bills to create a model for PBM legislation.2 After its audit controversy, Ohio plans to ban spread pricing, only allowing PBMs to charge small administrative and dispensing fees while requiring rebates to be passed back to the state.11

Some PBMs are responding to criticism with increased cost control measures. CVS Caremark announced in August that it would allow self-funded insurers to exclude any drug launched at a price greater than $100,000 per QALY with the reasoning that this would push pharmaceutical companies to lower launch prices.12

How federal and state legislation will evolve remains to be seen. However, mandating increased transparency promises to clarify the role of PBMs in rising drug prices, making it easier to address any anti-consumer practices. With the pressure to contain costs rising, scrutiny towards all players in healthcare will only increase.

Let us know what you think by commenting on the blog. To stay up on news related to pharma pricing and healthcare value around the globe, subscribe to the HealthEconomics.Com weekly newsletters.


  1. PCMA. Our Mission. (2018). Available at: https://www.pcmanet.org/our-industry/.
  2. 2.  Horvath, J. Pharmacy Benefit Manager Model Legislation: Questions and Answers. (2018). Available at: https://nashp.org/pharmacy-benefit-manager-model-legislation-questions-and-answers/.
  3. MedPAC. Factors increasing Part D spending for catastrophic benefits. MedPAC Blog (2017). Available at: http://www.medpac.gov/-blog-/factors-increasing-part-d-spending-for-catastrophic-benefits/2017/06/08/factors-increasing-part-d-spending-for-catastrophic-benefits.
  4. Sweeney, E. Senators press PBMs to clarify Azar’s ‘extremely disturbing’’ drug pricing allegations’. Fierce Healthcare (2018). Available at: https://www.fiercehealthcare.com/payer/elizabeth-warren-tina-smith-pbm-alex-azar-drug-prices-optumrx-express-scripts.
  5. PCMA. Reconsidering Drug Prices, Rebates, and PBMs. (2018). Available at: https://www.pcmanet.org/wp-content/uploads/2018/08/Reconsidering-Drug-Prices-Rebates-and-PBMs-08-09-18.pdf.
  6. Ohio Auditor of State. Auditor’s Report: Pharmacy Benefit Managers Take Fees of 31% on Generic Drugs Worth $208M in One-Year Period. (2018). Available at: https://ohioauditor.gov/news/pressreleases/Details/5042.
  7. CVS Health. CVS Health Statement on Ohio Auditor of the State’s Report on Pharmacy Benefit Managers. (2018). Available at: https://cvshealth.com/newsroom/press-releases/cvs-health-statement-on-ohio-auditor-of-the-states-report.
  8. Leonard, D. PBM rebates’ impact at the Rx counter. Chain Drug Review (2018). Available at: https://protectaccessandinnovation.org/pbm-rebates-impact-rx-counter/.
  9. Werble, C. Pharmacy Benefit Managers. Health Affairs (2017). Available at: https://www.healthaffairs.org/do/10.1377/hpb20171409.000178/full/.
  10. Firozi, P. The Health 202: Senate passage of ‘gag clause’ ban is just a tiny step to lowering drug prices. Washington Post (2018). Available at: https://www.washingtonpost.com/news/powerpost/paloma/the-health-202/2018/09/18/the-health-202-senate-passage-of-gag-clause-ban-is-just-a-tiny-step-to-lowering-drug-prices/5ba012221b326b47ec9596b8/?utm_term=.6da753bc8a40.
  11. Inserro, A. Ohio Tells Medicaid PBMs That 2019 Will Be a Time for Transparent Contracts. (2018). Available at: https://www.ajmc.com/newsroom/ohio-tells-medicaid-pbms-that-2019-will-be-a-time-for-transparent-contracts.
  12. CVS. Current and New Approaches to Making Drugs More Affordable. (2018). Available at: https://cvshealth.com/sites/default/files/cvs-health-current-and-new-approaches-to-making-drugs-more-affordable.pdf.

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CVS Caremark’s foray into cost-effectiveness analysis raises questions about the future of prescription medicines in America

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Americans spend more on prescription drugs than anyone else in the world. In a move to address this, CVS Caremark announced in August that it would allow self-funded insurers to exclude from their plan any drug launched at a price greater than $100,000 per QALY (quality adjusted life year).1

A bold move in the shift to value-based reimbursement

CVS advertises its program as incentivizing pharmaceutical companies to lower launch prices, pointing to QALYs approaching the $300,000 to $500,000 range, a stark contrast to thresholds on medicine pricing in Europe ranging from $10,000 to $50,000/QALY. The policy will use analyses from the non-profit Institute for Clinical and Economic Review (ICER) but excludes FDA-defined “breakthrough” therapies.1

A controversial announcement

Robert Dubois, MD, PhD, Chief Science Officer of the National Pharmaceutical Council (NPC), criticized the move as being “too much too soon” with the potential to “hamper patients’ access to needed medications”. He points to the many limitations of the QALY and endorses a wider value assessment framework that considers factors like the importance of high cost medicines for inadequately treated illnesses as well as secondary values like increased economic productivity of patients. Some of these are in line with considerations by European organisations like the National Institute for Health and Care Excellence (NICE). He goes further to criticize the threshold of $100,000 per QALY as arbitrary, preferring the approach of tying formulary tiers and co-payments to cost-effectiveness to make a broader set of medicines available.2

CVS executives hit back, pointing out that the steady increase in launch prices has contributed to the rise in cost per QALY.3 By emphasizing their policy’s potential to push pharmaceutical companies to lower prices, they shift the focus from problems with the cost per QALY approach to the pharmaceutical industry’s role in rising prices.

In Bloomberg, Biopharma Opinion Columnist Max Nisen writes that CVS’s plan lets pharmaceutical companies off too easy, citing the fact that the FDA’s breakthrough designation has been applied to over 50 drugs over the past few years, commonly some of the highest priced on the market.4

Even patient groups have gotten involved, with over 90 advocacy groups writing an opposition letter to CVS stating that the new policy “…discriminates against the chronically ill, the elderly and people with disabilities, using algorithms that calculate their lives as ‘worth less’ “.5 QALY’s are often deemed less valuable as a cost-effectiveness tool for the elderly because of their insensitivity to health status improvements and shorter life expectancy compared with non-elderly.

CVS’s policy raises questions about the fundamental meaning of value

In the context of the move towards value-based care in America, perhaps this was a logical next step. But what does it mean for healthcare going forward?

The use of the QALY and ICER’s involvement in the US healthcare system is not going away. ICER’s drug assessments have already been used by the New York Medicaid Program and Veterans Affairs in drug coverage decisions.6 7 Moves such as this have started to formalize ICER’s role in coverage decisions and may have the potential to shift the balance of power from pharma to a pricing arbiter. A key question is whether other pharmacy benefit managers will follow CVS’s lead, putting more pressure on pharmaceutical companies.

From a practical standpoint, are QALYs useful in real-world decision-making to payers in the United States? As healthcare consultancy Milliman points out, an analysis conducted using a list price and the “average” patient may not be applicable for payers that serve specific subpopulations and utilize discounts and rebates.8 However, a 2018 ICON plc survey of over 20 U.S. payers seems to show that payers do consider them useful with more than 75% of respondents saying they would use an ICER threshold as a basis to negotiate a rebate contract. 9

Are QALYs being used to look at the most valuable treatment in a given context or simply as a tool for reducing cost? Do cost-effectiveness thresholds capture what individual patients and providers value or are they a step too far into a one size fits all process, especially in an age of individualised medicine?

If we do accept limitations to the cost per QALY approach and move to a broader framework as suggested by NPC’s Dr. Robert Dubois, how will we calculate and weight aspects of value like societal benefits and inadequately treated illnesses?

These are some of the questions that we now need to ask as cost-effectiveness becomes a staple in conversations around medicine cost. There is no doubt that these issues will be at the forefront of policy and economic conversations about medicines in the coming months.

Let us know what you think by commenting on the blog. To stay up on news related to cost-effectiveness around the globe, subscribe to the HealthEconomics.Com weekly newsletters.


References

  1. CVS. Current and New Approaches to Making Drugs More Affordable. (2018). Available at: https://cvshealth.com/sites/default/files/cvs-health-current-and-new-approaches-to-making-drugs-more-affordable.pdf.
  2. Dubois, R. CVS To Restrict Patient Access Using Cost-Effectiveness: Too Much, Too Soon. Health Affairs (2018). Available at: https://www.healthaffairs.org/do/10.1377/hblog20180913.889578/full/.
  3. Brenna, T. & Surya, S. Why CVS Is Giving Plans A New Tool To Target High Launch Prices. Health Affairs (2018). Available at: https://www.healthaffairs.org/do/10.1377/hblog20180913.862850/full/.
  4. Nisen, M. CVS’s Drug-Price Plan Lets Pharma Off Too Easy. Bloomberg Opinion (2018). Available at: https://www.bloomberg.com/view/articles/2018-08-17/cvs-drug-price-plan-lets-pharma-off-too-easy.
  5. PIPC. Over 90 Advocacy Groups to CVS: Don’t Discriminate on Care. (2018). Available at: http://www.pipcpatients.org/resources/cvs-letter.
  6. Thomas, K. A Drug Costs $272,000 a Year. Not So Fast, Says New York State. New York Times (2018). Available at: https://www.nytimes.com/2018/06/24/health/drug-prices-orkambi-new-york.html.
  7. ICER. The Institute for Clinical and Economic Review to Collaborate With the Department of Veterans Affairs’ Pharmacy Benefits Management Services Office. (2017). Available at: https://icer-review.org/announcements/va-release/.
  8. PhRMA. New whitepaper identifies reasons why ICER’s cost-effectiveness analyses are not useful for payers. (2018). Available at: https://www.phrma.org/index.cfm?objectid=A08C8CE0-BAB6-11E8-AFE70050569A4B6C.
  9. White, N. What ICER Pricing Would Mean for US Drug Spend: A Preliminary Analysis. LinkedIn (2018). Available at: https://www.linkedin.com/pulse/what-icer-pricing-would-mean-us-drug-spend-analysis-nathan-white-cpc/.

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