In their words, PBMs were created to help insurers stem the rise of drug costs. They steer plan members from brand drugs to generic products and from retail stores to less costly mail order warehouses, saving insurers and patients money. Their massive size provides them with extraordinary clout when negotiating discounts from drug makers and drugstores. As a result, most PBMs guarantee health plans with fixed discounts off drug manufacturers’ list prices, estimated to be 15% off the list price of brand name drug prices and 80% reductions in the cost of most generic products.8Sounds awesome. We should be grateful to these gentle giants for their yeoman efforts in cost containment.
But hold on. Each of these tactics provides a hefty profit for the PBM. For example, a drug maker may decide to pay rebates to one of the colossal PBMs to gain market share. How is this done? The PBM agrees to promote their drug and discourage the use of competitor products by raising their price or even deleting them from their formulary. Similarly, PBMs extract deep discounts on generic drugs from manufacturers who want to supply their mail-order business, and from drugstores that want to become part of a preferred retail network.
In other industries, this tactic of pay to play has been outlawed. For PBMs though, this has evolved into a sound and highly profitable business model. The problem is that a PBM may not necessarily pass any of these rebates and discounts through to its health-plan clients. In fact, PBMs typically won’t divulge how much of the discounts they are siphoning. Trade secrets. And this secrecy becomes a problem. Patients, insurers and employers who are responsible for a large share of their workers’ healthcare costs are left wandering in the dark, not knowing whether they are getting a great deal or simply being used by the PBM. One might argue that the business model of PBMs is not unique in the healthcare maze: it merely resembles another impenetrable fortress of obscuration, the medical billing department of most hospitals.
But now PBMs are facing a set of serious threats, notably inquiries from Congress and many state legislatures, whose members have heard countless tales of bloated drug costs and have determined that PBMs may need to be more forthcoming about their practices and their business models. Threatening to regulate an industry is the surest way for that industry to perk up and pay close attention to its public image. Surely, PBMs need some major image rebranding, stat! They have alienated most physicians and their office staff by requiring them to spend countless hours completing mostly senseless paperwork, pro bono. Their policies often lack any factual basis and it is evident that decisions are usually driven by profit motives. And should there be a need to advocate on behalf of your patient about a coverage issue, the experience resembles the terrible customer service you receive from some airlines and most cable television providers. Who really cares about our patients’ health?
Wielding a Big Stick
There are no easy solutions to this pharmaceutical cost crisis. A major overhaul of drug pricing is fraught with considerable challenges in a system that spends north of $300 billion per year on medicines. Some economists have suggested more cost regulation, but this approach lacks strong consensus among the politicians who would be responsible for rewriting the rules. Drug importation from other countries, such as Canada, where charges are lower could temporarily reduce costs, but drug manufacturers could decide to limit their exports so that there are only sufficient supplies for Canadians.