Challenges and Opportunities in Building a Sustainable Specialty Drug Benefit: Conflicting Financial Interests

Challenges and Opportunities in Building a Sustainable Specialty Drug Benefit: Conflicting Financial Interests

Nearly every employer is aware that skyrocketing specialty drug costs, if left unchecked, will threaten the financial viability of the entire health care benefit (1,2). However, most do not know that pharmacy benefit managers (PBMs), the organizations traditionally trusted by employers to make drug benefit decisions on their behalf (3), can be a major part of the problem of rising drug costs (4). In this paper, we summarize one of the three key deficiencies of the traditional employer-PBM business model. We explain why it has become dysfunctional, especially for specialty drug management, and why public attention to the problem has not translated into better service for employers. For this deficiency, we present alternative ideals—best practices to help employers achieve a drug benefit that is sensible, sustainable, and provides specialty drugs for patients who need them.

Traditional Business Model Deficiency: Conflicting Financial Interests

Ideal Business Model: Full Financial Alignment

For years, industry observers and politicians have accused PBMs of mysterious, self-serving business arrangements—concealed, according to one U.S. Senator, “with greater secrecy than HBO is guarding the ending of Game of Thrones (5).” For example:

• “Spread” pricing, in which the PBM charges the employer more than it pays the pharmacy and pockets the difference as profit, has been the target of several state audits (6-8) and a current bipartisan Office of Inspector General investigation (9,10).
• A Florida audit highlighted the common PBM practice of shifting business to PBM-owned specialty pharmacies, which dispensed only 0.4% of Medicaid prescriptions but collected 28% of profit (11). In that study, the only competitive pricing observed outside of the community pharmacy network was in a specialty pharmacy that was unaffiliated with a managed care organization or PBM (11). Audits conducted in other states produced similar findings (6,7).
• Rebates paid by pharmaceutical manufacturers to PBMs in exchange for favorable formulary placement influence their drug benefit decision making (12). Because manufacturers typically offer rebates for high-cost brand drugs in therapy classes where lower-cost options are available, the payments create an incentive for PBMs to favor less cost-effective drugs, often over drugs that would be a “better buy” for employers and their members (13).

Despite investigations of these practices and intense public criticism of PBM business operations (14,15), numerous attempts at federal legislation to mandate business transparency or a passthrough of all discounts obtained by PBMs to its customers, such as the Drug Price Transparency Act, Prescription Drug Rebate Reform Act, Prescription Drug Pricing Reduction Act, and Lower Health Care Costs Act (16-19), have all failed to pass into law (20-23). A handful of states have passed reform measures, including reporting requirements and restrictions on the redirection of business to PBM-owned pharmacies (24), but these have been piecemeal and subject to legal challenge from the Pharmaceutical Care Management Association (PCMA), the national trade association for PBMs (25-26). While the Consolidated Appropriations Act of 2021 takes measures to increase transparency of drug costs, it has yet to be seen if this approach will have a material impact on employer pharmacy benefit spend.

Summary: What Does This Problem Mean for Employers?

• In traditional PBM business models, the financial interests of the PBM and employer are not the same.
• Employers want prescriptions to be filled in the lowest-cost, most clinically appropriate setting. PBMs have a financial interest in directing business to their own pharmacies, even if costs there are higher.
• Employers want their beneficiaries to use the lowest-cost, clinically appropriate drug to treat their medical condition. PBMs have a financial interest in directing business to drugs with the highest rebates.
• Employers want to know how the PBM makes key decisions, like which pharmacy to use or which drugs to prefer on the formulary. PBMs have a business interest in concealing this information so they can design their offering to retain more revenue.
• Claims of “better deals” from traditional PBM business arrangements may or may not be true or may be intentionally designed to steer employers toward nontransparent deals. An employer that cannot see or measure the effects of spread pricing or rebates on decision making has no way to determine whose interests are served by those arrangements—theirs or the PBM’s.
• Intense public scrutiny and legislative actions do not consistently translate into protection of employer interests. When contracting with PBMs, employers must insist on protecting their own rights.

Action: What Should the Ideal PBM Arrangement Include?

1. The PBM should obtain 100% of revenue from fees paid directly by the employer. It only makes sense that the customer paying the bill is the one whose interests the PBM will protect. So, the employer should be the PBM’s only customer.
2. The PBM should not require use of their owned pharmacies or other providers when competitive alternatives are available. Decisions about where the employer directs their business should be based on quality and cost, not on the PBM’s financial interests.

The Bottom Line

Any employer-PBM relationship should be based on a financially aligned foundation. Without it, the PBM will likely actively work against the employer’s interests, and the relationship will never achieve the employer’s goals.

References

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