PBMs have been scrutinized for their role in rising drug costs. Executives say the model is on its way out. Gerenme via Getty Images
LAS VEGAS — Executives from healthcare organizations as varied as Amazon’s online pharmacy, retailer Walgreens, insurer Blue Shield of California and drugmaker lobby PhRMA called for an end to the pharmacy benefit manager model during HLTH 2024, saying the middleman structure misaligns incentives and drives up costs of drugs.
“This business model is a dead man walking,” Paul Markovich, president and CEO of Blue Shield of California, told Healthcare Dive on the sidelines of the conference. “Having something that opaque, where the incentives are so misaligned between the supplier and the customer base — it is just not going to last.”
The executives are the latest to pile criticism onto PBMs, middlemen in the pharmaceutical supply chain that negotiate drug prices with manufacturers on behalf of insurers and employers and reimburse pharmacies for dispensing prescriptions.
PBMs argue they play a necessary role in the healthcare ecosystem and lower drug costs for their clients. However, pharmacists, insurers, lawmakers and researchers have lined up to refute that narrative, arguing the companies contribute to rising drug costs.
The Federal Trade Commission released a scathing report slamming the industry in July and sued the nation’s three largest PBMs — CVS’ Caremark, Cigna’s Express Scripts and UnitedHealth’s Optum Rx — last month for anticompetitive business practices that artificially inflated the price of insulin drugs. The agency accused the PBMs of steering patients to their own pharmacies and favoring more expensive brand-name drugs on their formularies, or list of covered drugs, resulting in higher rebates from drugmakers.
Patients are feeling the impact of such decisions, warned Lori Reilly, COO at PhRMA. PhRMA is the largest trade group representing American pharmaceutical companies and often finds itself at odds with PBMs, since drugmakers set sky-high list prices.
“[Patients] are being asked to pay, oftentimes, a full price for the medicine when the insurance company that has been hired on their behalf has gotten a very large discount on it,” Reilly said during a panel on Monday.
Reilly added that prescription drugs have become a “profit center for different middlemen,” with PBMs taking approximately 40 cents of every dollar spent on brand-made medication — a figure she called “shocking.”
The executive called for a realignment of incentives so that pharmacy benefit managers are not pushing branded medications.
But simply switching from branded to generic medications is a “Band-Aid for the current environment,” said Rick Gates, Walgreens SVP and chief pharmacy officer, during the panel.
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“How we get paid right now in pharmacy was set up 25 to 30 years ago, where we actually aligned incentives around getting people to use generics. Getting that would [have lowered] healthcare costs [then],” Gates said. “But the system doesn’t work the way it was designed … We’ve got to figure out how not to have it where you’re losing money on one to make money on the other.”
Gates and other executives shared ideas to reshape the pharmacy model, ranging from offering more pricing transparency to changing fee structures.
The Walgreens executive applauded efforts from co-panelist Laura Jensen, director of manufacturer and provider business development at Amazon Pharmacy.
“I think we need to take an ecosystem that really hasn’t changed much since I graduated from pharmacy school and disrupt it,” Gates said. “So I’m actually excited when you see the innovation coming — the direct consumer, what Amazon’s doing, it’s actually a good thing.”
Amazon is investing in price transparency solutions that allow consumers to know upfront how much medications will cost when they pay with and without insurance, Jensen said.
The e-commerce giant is interested in leveraging “new technologies like generative AI to drive down costs,” Jensen said, noting there is significant opportunity to further optimize the supply chain.
Amazon is also launching same-day delivery for prescriptions in 20 cities next year. Walmart, one of Amazon’s major competitors, will also roll out same-day pharmacy delivery in 49 states next year, the retailer announced yesterday.
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PhRMA’s Reilly called for an overhaul to how PBMs are paid. She acknowledged PBMs perform a service and should be paid for that service, but how they’re paid — based on a percentage of the list price of drugs on their formularies — creates a perverse incentive.
“Their incentive is to have a high list price because the higher the list price, the more money they make,” Reilly said. “They should be paid for what they do. They provide a value in the system and in the chain, but should be paid based on the value they provide, not on the list price of the medicine.”
For other health plans looking to do away with PBMs, Markovich sees two alternatives to the model.
“One is just a pure, transparent administrative fee structure everyone sees and understands and knows is commensurate with the value that you bring — along the lines of what we do when we do self-funded engagements. It’s a health plan, and the employer decides to be the risk bearer,” Markovich said. “Or, take on the insured risk. You’re not just going to say, ‘I’m going to promise you this price discount.’”
BSCA, one of the largest insurers in California, has been more active than most in shaking up its pharmacy benefits model. The payer replaced Caremark as its sole PBM last year, instead carving up pharmacy functions amid a handful of vendors.
BSCA is also making novel deals directly with drug manufacturers to bring cheaper biosimilars to its members, avoiding PBM middlemen entirely. The insurer expects to save between $10 million to $20 million annually by purchasing a Humira biosimilar through the model, Markovich said.
BSCA plans to roll out the strategy with other drugs, but has had to educate manufacturers about how such a relationship could work — and, in some cases, help them get “over the fear of potential retribution from the Big Three pharmacy benefit managers,” the executive noted.
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