Drug makers earlier in the year said they would start reducing prices as well as the rebates they pay PBMs to appease lawmakers and the Trump administration, saying it would reduce the cost of medicine for patients.

But not long after the announcement, the nation’s largest PBM, United Healthcare, fired off a letter to drug companies telling them that if they planned to reduce prices and rebates they would have to give seven quarters of notice (that’s 21 months if you’re counting) when they intend to lower prices.

The letter, which was confirmed in news reports in the health care trade press, highlights what many critics say is an inherent conflict of interest among some of the large PBMs operating in the country.

Some background

When PBMs first came on the market, the services they offered were processing pharmacy claims and negotiating discounts on medications for the health insurance companies with which they contracted.

Later though, they found a new way to make money: rebates. They would approach two manufacturers that made similar versions of a drug and play them off against each other to elicit the largest rebate they could. Whichever one offered the larger rebate would have their pharmaceutical placed on the drug plan’s formulary.

The problem is that these large PBMs do not pass on the full rebate to their clients, like health insurance companies and health plan enrollees. Instead, they keep most of the rebate for themselves. As a result, PBMs with this business model are not motivated to include the lowest-priced drug on their formulary, but rather the one for which they can receive the largest rebate check.

The latest

United Healthcare sent out the letter to drug makers after pharmaceutical manufacturer Sanofi S.A. said it would cut the price of its cholesterol-lowering drug Praluent by 60%. It did so after its competitor Amgen Inc. reduced the price of its cholesterol drug Repatha by the same amount.

United Healthcare’s demand that drug companies give 21 months’ notice when they plan to reduce prices has caught many drug makers off guard, since many of them have been looking to cut prices as pressure mounts on the industry from Washington.

The dominance of United Healthcare’s PBM OptumRX and its competitor Express Scripts means that group health plan enrollees are often left at their mercy, as many large health insurers have contracts with them.

If a drug company does not give the rebate that a large PBM demands, it could lose access to patients – and patients lose access to that drug. The only way to play the game is to offer a larger rebate and increase prices, which in turn increases the prices that patients have to pay.

Fortunately, there are a number of smaller PBMs in the marketplace that have different business models that take payers’ needs into consideration and aim to reduce the out-of-pocket costs for patients. They contract with employers and insurers directly to make this happen.

The report cited increased use of new medicines, price increases for existing ones, and more spending on generic drugs as the reasons for this growth. Increasingly, though, observers of the health care system point to one player – the pharmacy benefit manager.

PBMs are intermediaries, acting as go-betweens for insurance companies, self-insured employers, drug manufacturers and pharmacies. They can handle prescription claims administration for insurers and employers, facilitate mail-order drug delivery, market drugs to pharmacies, and manage formularies (lists of drugs for which health plans will reimburse patients.)

Express Scripts, which provides network-pharmacy claims processing, drug utilization review, and formulary management among other services, is the best-known PBM. CVS Caremark and UnitedHealth Group’s OptumRx are other major players.

A PBM typically has contracts with both insurers and pharmacies. It charges health plans fees for administering their prescription drug claims, and also negotiates the amounts that plans pay for each of the drugs.

At the same time, it creates the formularies that spell out the prices pharmacies receive for each drug on the lists. Commonly, the price the plan pays for a drug is more than the pharmacy receives for it. The PBM collects the difference between the two prices.

It can do this because the health plan does not know what the PBM’s arrangement is with the pharmacy, and vice versa. Also, a health plan does not know the details of the PBM’s arrangements with its competitors.

A PBM could charge one plan $200 for a month’s supply of an antidepressant, charge another plan $190 for the same drug, and sell it to a pharmacy for $170. None of the three parties knows what the other parties are paying or receiving.

In addition, drug manufacturers, who recognize the influence PBM’s have over the market, offer them rebates off the prices of their products.

Questionable transparency

In theory, the PBMs pass these rebates back to the health plans, who use them to moderate premium increases. However, because these arrangements are also confidential, the extent to which these savings are passed back to health plans is unknown. Many observers believe that PBMs are keeping all or most of the rebates.

To fund the rebates, drug manufacturers may increase their prices. The CEO of drug-maker Mylan testified before Congress in 2016 that more than half the $600 price of an anti-allergy drug used in emergencies went to intermediaries.

The PBMs argue that they help hold down drug prices by promoting the use of generic drugs and by passing on the savings from rebates to health plans and consumers.

They reject the notion that they are somehow taking advantage of health plans and pharmacies, pointing out that they are “sophisticated buyers” of their services. They also argue that revealing the details of their contracts would harm their ability to compete and keep prices low.

Nevertheless, PBMs are now attracting scrutiny from Congress, health plans and employers. At least one major insurer has sued its PBM for allegedly failing to negotiate new pricing concessions in good faith.

In addition, businesses such as Amazon are considering getting into the PBM business. Walmart is already selling vials of insulin at relatively inexpensive prices.

PBMs earn billions of dollars in profits each year. With the increased attention those profits have brought, it is uncertain how long that will continue.

How gag clauses work

Attention is growing regarding the role that rebates play in actually increasing the price of brand-name drugs, which is adding a heavier burden on health plan enrollees. Calls are growing to jettison rebates altogether. The problem is that insurers often get to keep the rebates and not pass them on to their enrollees.

A study by Benfield, a division of benefit consulting firm Gallagher Benefits, found that 69% of employers surveyed would welcome an alternative to rebates, such as discounts or point-of-sale rebates, in which patient payments reflect a post-rebate price.

Employers acknowledged focusing on rebates as a revenue stream rather than focusing their attention on other important factors such as reducing employee coinsurance or deductible payments, or providing access to the most effective medicines.

The issue of rebates even has the attention of the Trump administration.

When Department of Health and Human Services Secretary Alex Azar testified before the Senate Health Education Labor & Pensions Committee in 2018, he said: “We may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts. Such a system’s incentives, detached from these artificial list prices, would likely serve patients far better, as would a system where PBMs receive no compensation from the very pharma companies they’re supposed to be negotiating against.”

How rebates work

Drug rebates are redeemed after the transaction has taken place, but it’s not the end user (the plan enrollee) who is receiving the rebates. Instead, the PBM, the insurer or sometimes the employer receives the rebate.

The big debate is that these rebates do nothing to help the enrollee, who is often having to pay a higher cost-sharing burden for medications.

Under the current system, drug makers set a list price for their products, then negotiate with some PBMs over how much of a discount they will provide off that list price.

The size of the rebate depends on a number of factors, like how many drugs are used by the health plan enrollees, and how much of the medicine cost is covered under the drug formulary.
Companies that offer bigger rebates are often rewarded with better access, like smaller copayments.

What happens if rebates are jettisoned?

Nobody can accurately predict what would happen if rebates were eliminated.

Their elimination could potentially increase expenditures for brand drugs if payers do not find an alternative tool that reduces drug costs (for example, negotiating lower prices to begin with).

A report by Altarum, a not-for-profit health care research and consulting organization, estimated that $89 billion in rebates went to payers in 2016. Altarum found that state Medicaid plans received $32 billion of the total, followed by Medicare Part D plans ($31 billion), commercial health plans ($23 billion), and other payers ($3 billion).

Eliminating rebates will have the most significant effect on patients. Medicare and commercial insurance rebates totaled $54 billion in 2016, according to the Altarum report. The big unknown is exactly how much of that total directly benefited patients and how much flowed to the insurers and the Centers for Medicare & Medicaid Services.

The study, which found that employers would prefer that PBMs are more transparent with their pricing and would like them to focus less on rebates and value-based designs, comes as PBMs are under increased scrutiny for their opaque pricing practices.

The survey of 88 very large employers, “Toward Better Value: Employer Perspectives on What’s Wrong with the Management of Prescription Drug Benefits and How to Fix It,” was conducted by Benfield and commission by the National Pharmaceutical Council.

The findings drive home some of the common complaints about PBMs:

Poor transparency – Employers said that current pharmacy benefit management models lack transparency:

• 30% said they understand the details of their PBM contracts.
• 40% said they fully understand their PBMs’ performance guarantees.
• 63% said PBMs are not transparent about how they make money.

Complex contracts – Nearly three in five employers surveyed said PBM contracts are overly complicated, ambiguously worded, and often benefit the PBM at the expense of the employer. Tops on employer’s wish list: clearer definitions and simpler contracts.

Focusing less on rebates – Seventy percent of employers said they thought PBMs should offer other ways besides rebates to reduce prices.

Employers also said rebates detract their attention from more important factors, like reducing employee coinsurance or deductibles or getting better access to the most effective pharmaceuticals.

Two suggestions they had: Discounts or point-of-sale rebates, in which patient payments reflect a post-rebate price.

Getting value for employees – Employers want to understand the thought process when PBMs create formularies and exclusionary list decisions, such as the clinical, financial and economic impacts.

Employers had these suggestions:

• Using value-based insurance design, where high-value drugs cost patients less than low-value drugs.
• Setting payments based on the effectiveness of a drug.