Why Pharmacy Benefit Managers Matter for Drug Costs and Better Care

The debate about drug prices has raised the profile of a traditionally quiet player in health care: the pharmacy benefit manager, or PBM.

Consumers are increasingly frustrated with drug prices, and they’re putting pressure on state and federal governments to do something about it.

Nearly every day the news media shares stories of consumers who feel gouged by their experiences at the pharmacy. Stakeholders are debating the fairness of drug prices and the way we negotiate those prices and pay for drugs in the U.S. health care system.

All of this has raised the profile of a traditionally quiet player in prescription drug benefits: the pharmacy benefit manager, or PBM.

PBMs handle the pharmacy benefit for health insurers and employer groups, helping ensure consumers have access to the drugs prescribed to them by their doctor.

They have entered these contentious conversations about drug prices for two primary reasons.

One is that drug manufacturers and some policy experts blame the largest PBMs for contributing to high drug costs instead of using their purchasing power to save money for insurers and employers (and, ultimately, consumers).

The other reason PBMs are in the news is that health insurers see tighter integration with them as part of the solution to making drugs more affordable and getting better outcomes for their members.

Why care about these middlemen?

PBMs were created in the late 1960s as a way to help health care payers administer the fast-growing volume of claims for prescription drugs.

Fast forward 50 years, the nation’s roughly 60 PBMs managed pharmacy benefits for about 266 million Americans in 2016 (though the three largest PBMs — Express Scripts, CVS Health and OptumRx — control roughly 75 percent of the market).

These intermediaries now fulfill several important functions aimed not only at administering pharmacy benefits efficiently but also helping to lower the cost of and providing access to drugs:

  • Negotiate drug discounts and rebates
  • Create lists of covered drugs
  • Promote the use of high-value drugs
  • Maintain mail-order pharmacies
  • Create pharmacy networks

“The value of a PBM is to ensure appropriate use and maximum discount of drugs, and to make sure transactions are achieved in a way that gives people access to the appropriate therapy 365 days a year,” says Dr. Matthew Fontana, divisional senior vice president and chief medical officer for pharmacy at the Blue Cross and Blue Shield Plans in Illinois, Montana, New Mexico, Oklahoma and Texas.

Through all of those functions, PBMs will help save plan sponsors and consumers roughly $654 billion from 2016 to 2025, according to a 2016 study done by Visante for the Pharmaceutical Care Management Association.

You really need to look at a holistic view of managing care — that includes pharmacy as well.

Prime Therapeutics, a PBM with 20 million members, was able to negotiate more than $1 billion in savings off pharmacy pricing in 2017 for its clients, including the Blues Plans in Illinois, Montana, New Mexico, Oklahoma and Texas.

Then why do some people blame them for high drug costs?

PBMs rely on administrative fees paid by insurers and self-insured employers. Some contracts also compensate PBMs by allowing them to keep a portion of the discounts and rebates. This is the heart of the recent backlash against PBMs.

Some critics say PBMs have a financial incentive to choose more expensive drugs for their drug lists so they can profit from larger rebates and discounts.

The rebates PBMs negotiate have drawn scrutiny because they’re not transparent, but they are “opaque by design,” policy analyst Cole Werble wrote in the journal Health Affairs. PBMs have no incentive to publicize how the rebate process works because “if every [drug] manufacturer knows the rebate … the PBM loses the negotiating power.”

Pharmaceutical Research and Manufacturers of America, the largest trade group for the pharmaceutical industry, says PBMs profit from discounts and rebates instead of passing them along to insurers, employers and consumers.

Who owns PBMs?

The largest PBM, Express Scripts, is a standalone privately held company. CVS Health, mostly known as a retail pharmacy chain, owns the second-largest. Others are owned by health insurers. OptumRx is owned by UnitedHealth Group. Prime Therapeutics is owned by 18 Blue Cross and Blue Shield plans.

However, the landscape appears to be changing quickly. Cigna announced plans to buy Express Scripts, the largest privately held PBM in the nation. Anthem, a for-profit company that provides Blue Cross and Blue Shield Plans in 14 states, plans to partner with CVS Health to create its own PBM. CVS Health, meanwhile, intends to acquire health insurer Aetna.

The benefits of integration

Just because an insurer owns a PBM (or a share of one, like the Blues plans with Prime) doesn’t mean every member is automatically enrolled in that PBM. Employers may choose to “carve out” the pharmacy benefit, picking another PBM to administer drug benefits.

The promise of integration, however, appears to be driving these possible changes in the business landscape.

“Having the medical and pharmacy benefit under one roof begins to align the right incentives,” says Jon Easter, director of the center for medication optimization through practice and policy at the University of North Carolina Eshelman School of Pharmacy. “Controlling medication costs is important, but if the same organization is responsible for the pharmacy spend and medical spend, then the incentives align around the total cost of care for that population. Instead of managing costs in a silo, the hope is that investments in appropriate medication use programs can bring down costs on the medical side.”

Integrating pharmacy and medical benefits may save as much as $330 per member, per year, according to a study by the Blue Cross and Blue Shield Association and Blue Health Intelligence.

Transparency gained through integration has several benefits. For one, it means the insurer has more insight into the PBM’s cost structure and what it does with its rebates.

Prime’s rebate strategy is much clearer to their owner plans than one would expect from a typical PBM. “We have the ability to have a level of transparency into their rebate strategy to ensure Prime is targeting a lowest net cost approach,” says Fontana. “We have confidence in knowing they’re not generating profit for shareholders” but instead they’re using profits to improve their capabilities in the interest of the members.

Integrating medical and pharmacy benefits may also improve member outcomes.

PBMs generally handle the pharmacy benefit — drugs prescribed by a clinician and dispensed at a pharmacy. At the same time, health plans control the medical benefit, which may include drugs administered by clinicians, such as chemotherapy infusions. When the health plan has access to claims data from both, it gets a broader picture of its members’ overall health.

“For the health plan to effectively manage and optimize the health status of its members, you really need to look at a holistic view of managing care — that includes pharmacy as well,” says Kevin Slavik, a pharmacist and divisional vice president of enterprise pharmacy operations with the five Blues Plans.

For instance, a health plan’s care managers may know if a member is filling prescriptions or if a prescribed medication isn’t working at its full potential. “You really need both the medical and pharmacy information to optimize the care and outcomes for members with health conditions,” Slavik says.

Also, health plans with a PBM may use their expertise to influence which medications end up on drug lists and which ones are favored based on effectiveness and cost. That is, the lists typically include tiers, allowing members access to preferred drugs with lower copays. A name-brand drug that’s no more effective than a cheaper generic, for example, may require a higher copay.

“It’s important because it allows us to have more of a voice in determining how those programs are developed and administered,” Slavik says. “So, they’re providing the optimal value to our customers and, also, resulting in the best possible health outcomes.”

PBMs play a key role in how members access prescriptions and what they pay for them. When health plans and PBMs work together, they not only help manage the cost of prescription drugs but also work to improve members’ overall health.

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