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Drug Pricing
March 13, 2020

Examining Pharmaceutical Benefits in the United States—A Framework

Author Affiliations
  • 1Stanford Health Policy, Stanford University, Stanford, California
  • 2Clinical Excellence Research Center, Department of Medicine, Stanford University, Stanford, California
  • 3Graduate School of Business, Stanford University, Stanford, California
JAMA Health Forum. 2020;1(3):e200291. doi:10.1001/jamahealthforum.2020.0291

Pharmacy benefit managers (PBM) are important intermediaries in the pharmaceutical supply chain in the US.1 Under the general umbrella of administering outpatient prescription drug benefits for health plans, PBMs took on a variety of roles, including managing the drug formulary, negotiating with drug manufacturers and retailers, and processing drug claims. PBMs have come under scrutiny as we have learned more about the scale of prescription drug rebates and other payments between manufacturers and intermediaries in the prescription drug market.2 A lingering question is the underlying value of PBMs for payers and for patients.

Intermediaries such as PBMs play an important role in many types of transactions in different parts of the economy. They create value by providing information on the quality and value of products and services and by providing negotiation leverage as they amass scale by aggregating smaller buyers (or sellers).3 Consumers can be sure to share in this value under 3 conditions: when there is competition among intermediaries, when pricing is transparent, and when it is clearly defined who is negotiating on whose behalf (ie, agency). When these conditions are not met, however, we can find that intermediaries can hold a powerful and self-serving position in a market.

In examining the role of PBMs in the prescription market, there are significant concerns about all 3 elements of value for patients. Rather than a market where there is competition among PBMs, consolidation has resulted in a situation in which the 3 largest PBMs have approximately 80% market share.2

Furthermore, there are significant barriers to competition among PBMs. For example, switching PBMs requires a significant investment in a request-for-proposal process, and even constructing a bidding process has challenges, such as assessing the current pattern of prescription drug use. With the consolidation of PBMs and insurers, competition may become even more challenging as pricing of the PBM product becomes embedded into a larger combination health insurance and pharmaceutical product.4

One of the largest criticisms of PBMs is the lack of transparency surrounding the structure and scale of payments from manufacturers to the PBM. The current PBM business model is shrouded in secrecy. Descriptions of PBM audits by payers and employers entail visits to PBM sites and examination of paper records under conditions of confidentiality, usually performed by a set of consultants that specialize in this role.5 Only the PBM knows the actual scope of payments from drug manufacturers to the PBM (for example, rebates and other payments, such as service fees). In 2016, for 13 pharmaceutical companies, payments to PBMs and other intermediaries were $100 billion, or 50% of gross sales.2 Without transparency, a PBM might develop formularies that maximize payments to the PBM rather than maximize value to patients. Anthem sued its PBM for $15 billion in 2016 for overpayments on drug pricing.6

Finally, the issue of who is negotiating on whose behalf in drug markets remains contentious. In other words, the agency of PBMs is not clear. When PBMs depended on service fees from health plans and employers as their main source of revenue, it was clear that they served the payer (ie, the employer or the health plan). Under the rebate model, the role of the PBM has evolved to serving as an agent of both the payer and the manufacturer. In fact, as the prescription drug market has evolved, PBM profits appear to have grown with the growth of rebate dollars and manufacturer payments rather than with the growth of payer fees. It is increasingly hard to disentangle the multiple roles of the PBM and to clarify who PBMs serve as intermediaries.

This framework of competition, transparency, and agency can be used when evaluating ways to intervene in the prescription drug market around PBMs from a policy perspective. Beyond antitrust enforcement, competition among PBMs can be reinvigorated by creating incentives for employers to be more aggressive in seeking competitive bids for PBM contracts or incentives for contracting with emerging firms offering a purely fee-based PBM model.

Transparency has taken a small step forward with 2 new federal laws from 20187 (The Patient Right to Know Drug Prices Act and The Know the Lowest Price Act) outlawing PBM gag clauses wherein pharmacists were not allowed to tell consumers that their price through a PBM was higher than the cash price for the same product. To be most effective, transparency from a payer perspective (including Medicare Part D) must extend beyond a discussion of rebates to include all payments from manufacturers to PBMs.

Agency can be established by forcing payers and PBMs to serve as fiduciaries for health plan beneficiaries (Congress can amend the definition of fiduciaries under the Employee Retirement Income Security Act of 1974 [ERISA] to include PBMs or allow states to bypass ERISA to impose a fiduciary duty on PBMs so they must represent the interests of patients8) and by outlawing or selectively taxing firms that profit from conflicting roles in a market.

In the current environment, this type of positive legislation is increasingly challenging at a national level. State reforms can help develop and shape many of these concepts and provide evidence that could support a more uniform approach across the nation, perhaps starting at the level of the state employee health plan or statewide. Alternatively, we can ensure that the legislative process at the national or state level is not used to further reduce competition, transparency, and agency for PBMs.

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Article Information

Open Access: This is an open access article distributed under the terms of the CC-BY License.

Corresponding Author: Kevin Schulman, MD, Clinical Excellence Research Center, Department of Medicine, John A. and Cynthia Fry Gunn Building, 366 Galvez St, Stanford, CA 94305 (kevin.schulman@stanford.edu)

Funding: Mr Chan was supported by the Gerhard Casper Fellowship from Stanford University. Dr Schulman was supported by Stanford University.

Role of the Funder/Sponsor: The sponsors had no role in the preparation, review, or approval of the manuscript or the decision to submit the manuscript for publication.

Conflict of Interest Disclosures: Dr Chan reported receiving personal fees from UnitedHealth Group outside the submitted work. Dr Schulman reported being a board member and shareholder with Grid Therapeutics; a managing member and shareholder with Faculty Connection LLC; a shareholder and board of advisors member for Prealize; an investor in Altitude Ventures Inc; a consultant for Novartis Inc, Cytokinetics Inc, Health Quest LLC, Business Roundtable, Motley Rice LLC, and Frazier Healthcare Partners; and having nonfinancial relationships with the Business School Alliance for Health Management (president) and Civica RX (advisory board member) outside the submitted work.

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