The pharmacy benefit management (PBM) industry has been plagued by misalignment, opacity, and consolidation for decades.
Three PBMs control more than 80% of the market, leading the Federal Trade Commission (FTC) and Congress to investigate the industry over concerns a lack of meaningful competition. Worse, each of these corporations are part of massive vertically integrated companies, which also operate their own retail, mail-order, and specialty pharmacies, health insurance products, and physician practices. The primary customers of PBMs – employers and purchasers – are rightly concerned about self-dealing, conflicts of interest, and the confiscation of economic benefits that would otherwise go to the organizations, its employees and families. With the “Big Three” often controlling the providers writing prescriptions, the PBM administering the claims, and the pharmacy dispensing the drugs, the “fox is truly guarding the henhouse.” To address these issues, a comprehensive approach involving market reforms and policy changes is essential.
Market conditions and challenges
Born of vertical and horizontal consolidation, the big PBMs have engaged in biased practices in the request for proposal (RFP) processes, where large PBMs pay referral fees to healthcare brokers and consultants, which steer plan sponsors toward specific PBMs that may not serve their best interests. Indeed, the largest brokerages now operate their own “prescription drug coalitions,” in which they negotiate with PBMs for pricing and take a share of savings, creating yet another conflict-of-interest.
The industry is also plagued by a lack of transparency as many PBMs employ misleading contract definitions that obscure their business practices, making it difficult for plan sponsors to fully understand their agreements.
Addressing industry misalignment
The PBM industry and employers and other purchasers should consider strategies to address misalignment including:
- Enhance transparency: Plan sponsors should demand clear and transparent contracts from PBMs. This includes explicit definitions of rebates, fees, and the pass-through of savings, and which drugs are deemed “generic” and “specialty.”
- Evaluate consultant independence: When engaging pharmacy benefit brokers and consultants, plan sponsors must assess their independence and potential conflicts of interest, ensuring that they do not receive payments from PBMs that could bias their recommendations.
- Promote value-based care: Implementing value-based formulary designs that prioritize patient outcomes over PBM profits can help realign incentives within the industry.
Policy reforms
The current environment presents a unique opportunity for reform in the PBM industry. With ongoing FTC investigations and congressional hearings addressing potential reforms, stakeholders can push for significant changes that enhance the credibility and alignment of the industry, including:
- Pricing legislation: Policymakers should implement regulations that promote competition, transparency, and accountability within the PBM industry. Policymakers should seek to curtail further vertical integration that lead to self-dealing, ban “spread pricing,” and require all rebates and discounts are passed onto plan sponsors. The latter two policies are embedded in federal legislation that could be included in end-of-year funding bills.
- Enhanced oversight: Establishing regulatory frameworks to oversee PBM practices, ensuring they operate in the best interests of patients and purchasers.
- Increased competition: Supporting the emergence of innovative competitors in the PBM space that prioritize transparency and patient outcomes over profits.
Unintended impact of 340B
In addition to the above noted reforms, it’s also critical that there be greater oversight and policy changes to rein in the unconstrained growth of the 340B drug pricing program which is placing enormous strain on commercial purchasers.
The 340B Drug Pricing Program is a federal program that requires drug manufacturers to provide deeply discounted outpatient drugs to qualifying hospitals and clinics that treat low-income and uninsured patients. The program was designed to improve access to these patients but instead enriches intermediaries across the supply chain, including PBMs and their affiliated pharmacies, adding costs for purchasers and patients. To cite just one example, 340B hospitals charged commercial insurers and uninsured patients nearly five times what they paid to acquire oncology medicines.
The unprecedented growth (and flagrant abuse) of a well-intentioned program is harming healthcare purchasers and working families. AND the most significant victims of this abuse are employers and workers – not the pharmaceutical industry, which is the program’s most vocal critic.
At its core, the 340B drug pricing program represents a government-regulated price arbitrage program in which certain healthcare providers can purchase prescription drugs at a steep statutory discount and sell those drugs at the prevailing market rate.
Drug makers have concerns about a program that requires them to provide very large discounts (often exceeding 50%) on a significant portion of their products. But despite the rapid growth in 340B, drug makers remain highly profitable. Indeed, there is evidence cited in recent testimony to Congress that manufacturers are effectively “pricing in” the 340B hit to them by raising their prices on commercial payers. In fact, it would be shocking if drug makers didn’t consider 340B – the second largest drug purchasing program in the country, after Medicare Part D – in their pricing calculations.
But there are three other ways that employers, purchasers, and consumers are paying more for drugs and other medical care, uniquely because of 340B.
Supercharged consolidation: It is an unambiguous fact that hospital system consolidation has significantly increased healthcare prices over the past 20 years. 340B is a substantial driver of that consolidation. Independent practices cannot participate in 340B. But more than 50% of hospitals can and do. And they can reap huge profits by buying physician practices, converting them to outpatient clinics and watching the arbitrage dollars roll in.
Distorted prescribing and pricing patterns. 340B clinics are demonstrably more likely to prescribe higher cost drugs than non-340B clinics. This allows them to can maximize arbitrage on the differential.
Lost discounts. The National Alliance is a vocal critic of PBMs, but at least SOME rebates get passed back to employers. Not in 340B. There are no PBM rebates, only the big statutory one for hospitals. Every time a prescription is filled in the 340B channel, employers lose the discount.
The 340B program is the poster child of a well-intended program that has completely lost its way and is in desperate need of significant new oversight and reform. The National Alliance has called on Congress to enact significant reforms to 340B. But even in absence of policy action, purchasers can seek to mitigate the harmful impact of unconstrained 340B growth. Strategies may include:
- Require that drugs purchased through 340B pricing are identified and treated separately.
- Request separate contract terms (with deeper discounts) on all 340B claims or insist that such drugs be passed through on a cost-plus basis.
- Influence policymakers to ban markups of 340B prices to prohibit intermediaries from marking up 340B prices, ensuring that savings are passed directly to patients and purchasers.
As we move forward, the PBM industry is at a crossroads and the need for disruption and reform has never been more critical. By demanding transparency, evaluating the independence of consultants, and supporting policy reforms, plan sponsors can help create a more aligned and trustworthy PBM industry. This is essential not only for the sustainability of healthcare costs but also for ensuring that patients receive the care and medications they need without undue financial burden.
