Over half of Americans have skipped filling a prescription because of costs.
Large pharmaceutical companies and the inflated prices and portion of the market that some hold for a particular drug beyond a reasonable patent period is a scenario familiar to most Americans and must be addressed. Lesser known but at the root of the problem of monopoly power and high prices in the pharmaceutical world are companies that don’t innovate and don’t manufacture, namely pharmacy benefit managers or PBMs.
The public’s awareness of these drug intermediaries or middlemen and their effect on prescription drug pricing has grown exponentially over the past decade. This awareness has increased the will of state and federal lawmakers to do something about the lack of transparency and competition enjoyed by PBMs.
Another middleman contributes to inefficiencies and increased costs, and you’ve probably never heard of them. As we built awareness of the issues related to PBMs, we must now do the same for Group Purchasing Organizations (GPOs). GPOs are lesser-known corporate middlemen who control the healthcare supply chain in hospitals and other medical institutions, driving up overall health care costs. This section will discuss the respective roles of PBMs, GPOs, and pharmaceutical companies in increasing costs and decreasing access in the healthcare space. Much like the last section, Free2Care will focus on increasing transparency, unwinding perverse incentives, and creating changes that lead to more competition.
PBMs were created to help insurers contain drug spending for prescription medicines. They control formularies, utilization tools, and administer drug claims. They do this for Medicaid-managed care, Medicare part D, commercial payers, and large employers. Historically, they achieved this purpose and provided the value that was intended. However, since the PBM’s received the benefit of safe harbor from the Anti-Kickback statute in 2003, drug costs have soared year over year.
The PBM market has consolidated with the six largest PBM controlling 95% of prescriptions.
Consolidation, coupled with complexity and opacity, has allowed large PBMs to pocket substantial revenue. Using questionable practices, they have driven companies that own (typically insurers) PBM’s to the top of the Fortune 500 top 20. This growth comes at the expense of all Americans, especially those who most need affordable medications: Those with chronic diseases.
Significant and questionable revenue streams and business practices of PBM include the following.
Spread pricing is how PBM retains a portion of the money paid to them by the third-party payer meant for the pharmacy. In Ohio’s Medicaid program alone, the state found two of the nation’s largest PBMs to have helped themselves to $224 million per year. These PBM were charging the state six times the going rate for their services.
Multiple other states have followed Ohio’s lead in uncovering this practice in the Medicaid space. The spread phenomena are not limited to the Medicaid space but spills into government-led entities such as counties, schools, and employers.
Direct and Indirect Remuneration (DIR) fees result from a loophole in Medicare regulations. DIR fees are charged to pharmacies as a clawback based on the PBM’s unpredictable and inconsistent quality metrics. Clawbacks can happen months after a patient receives their medication, leaving pharmacies at the mercy of PBM.
Some PBMs have close ties to or even own a large pharmacy chain. There is no transparency in what these PBMs pay their big-box pharmacies vs. independent pharmacies for meds, what they retain via the spread, or how much they charge for DIR fees. It is a perverse incentive to overpay their associated pharmacy chain entities and underpay independent pharmacies. Some are doing this.
This practice can destroy the over 20,000 small businesses and independent pharmacies that are highly trusted by the patients who use them because of the PBM practices above.
Specialty and Mail Order Pharmacies In addition to the other vertical integration mentioned, PBMs’ have their own specialty and mail-order pharmacies. Specialty pharmacies are created to deliver drugs to patients that must remain in certain environmental conditions. “lock up” huge chunks of market share by contractual arrangements with the government’s Medicare and Medicaid programs, or their contractual arrangements with, ownership of, or ownership by insurers, and even with the 340-B program participating hospitals, as detailed in section A. With exclusive access to such large shares of the market, price manipulation and other shenanigans become not only irresistible, but essential to conceal. Hence the resistance to investigation.
Worse yet, the 3 big PBM Express Scripts, CVS Caremark, and OptumRx took in over 70 percent of mail order prescription revenue in 2019, to the tune of $113 billion and yet often sent medications that were unviable, resulting in declining health conditions. Sometimes, meds were sent late or damaged to cancer or insulin dependent patients.
The vertical integration harms patients directly while increasing the monopoly power of those PBMs associated with large pharmacies and, in turn, compounds the conflicts of interest that potentially harm patients.
We echo Senator Wyden’s call for the FTC to investigate how DIR fees are an anti-competitive tool. We also support the CMS proposed rule to allow DIR fees to pass through to medicare beneficiaries in the Part D space.
Utilization tools such as prior authorization, step therapy, and non-medical switching are administered by PBM and prevent patients from medications that have stabilized their disease. These tools often create health problems for patients and time-consuming tasks for physicians. These tools form a revenue stream as delays in needed care equate to PBM retaining capital.
Kickbacks An astounding portion of the money flow going to PBM has no transparency, as demonstrated below. This is especially true of “rebates,” also known as kickbacks.
The PBMs were granted an exemption from anti-kickback statutes by HHS in 2003. PBMs were allowed to accept monetary remuneration from pharmaceutical companies from that point. Their role as formulary makers poses an enormous conflict of interest. This erodes trust in our medical system. The making of the formularies is shrouded in secrecy. PBM euphemistically calls these kickbacks rebates.
The legalized kickback system creates “rebate walls.” Pharmaceutical companies outbid one to become sole or near sole suppliers of many medications. Note that BIG pharmaceutical companies would be more likely to afford kickbacks that have been increasing. This effectively makes competition for smaller manufacturers more difficult.
Insulin and List vs Net Price
Choosing just one high-profile essential medication, insulin, The Senate Finance Committee, working in a bipartisan manner in 2021, uncovered a portion of the tangle for the unprecedented rise in the cost of insulin.
The tangle could be summarized in a simplified chart for a particular essential medication: Insulin.
Net price is what the pharmaceutical company collects. List price, what the patient and or third party pays, is the net price plus all the opaque kickbacks and fees collected by the mediators in the market. The lion’s share of insulin cost tripling comes from the PBM middlemen and insurers themselves. However, we must point out that manufacturers are willing to play in this broken marketplace and, as a result, they profit from the kickbacks that drive monopolies in production. As seen in the senate finance report, it seems as though the three companies that make the bulk of insulin set their prices based on one another. And it is not necessarily the price that companies need to make profits. It should be evident that the drugs are chosen to be ‘covered’ by insurance (i.e., those on the formulary, maybe (and likely are) covered because a sizable pharmaceutical company paid the kickback to get them there. It should also be evident that this can occur for every drug for which there could be competition. The growth in the list price is feeding corporations that do no research or manufacturing.
The horizontal and vertical integration that has occurred between large pharmaceutical chains, insurance companies, PBM, and specialty pharmacies, allow these companies to have the revenue streams mentioned above to consolidate further, knock competition from smaller PBMs, smaller manufacturers, independent pharmacies, and others out of the market, and allow increased monopolization by large pharmaceutical firms themselves.
It is not just PBM that can collect kickbacks in the healthcare space, but also Group Purchasing Organizations (GPO). GPOs write the contracts that facilitate the movement of all supplies—masks, medical devices, sterile solutions, and medications —into hospitals, hospital-owned clinics, and nursing homes. This represents a staggering source of revenue, given that supplies can account for up to 40% of a hospital’s overhead, second only to payroll. Estimates are 300 billion per year. In 1972, Congress had passed anti-kickback legislation in the healthcare arena to protect patients. In 1987, the GPO was given a “safe harbor” exemption from the anti-kickback statute. In 2003, the HHS extended this to PBMs. Rules placed oversight on the kickbacks: They were to have been limited to 3% or less of the purchase price of the products. The HHS OIG has never exercised its responsibility for ensuring the kickbacks remained at or below 3%.
Even if rules enforced the 3%, they still perversely incentivize PBM and GPO. They select a more expensive product for their contracts and formularies. GPOs, like PBMs, have become consolidated: A GAO report found that in 2012, six companies (now consolidated into four) controlled 90% of this segment of the supply chain.
The cost burden of kickbacks has tended to reduce the number of manufacturers for supplies and medicines. The wealthiest manufacturers can afford the kickbacks. Smaller competitors have tended to disappear or never enter the market in the first place. The effect of single or few suppliers for many products is a brittle supply chain that has led to over 700 products in shortage. Hundreds of drugs and solutions —chemotherapies, antibiotics, and anesthetics—have been on the list of known deficiencies for years, decades, in some cases. Most are familiar; with generic medications, which should be plentiful and inexpensive due to great competition. The fact that shortages for generics exist is a red flag that the root cause is a distortive factor, like kickbacks.
In a recent Zoom meeting with legislators from the state of Maryland the representative for the PBMs said that if a particular law regulating PBMs was passed, they would only pass the expense back on to the employer. They will do whatever they can to not lose revenue, even as patients are harmed.
Telling that with pressure on for PBM and more aware of the kickbacks, PBM have started to diversify again horizontally into the GPO space.
This gives the FTC even more justification to fully investigate the mergers and acquisitions in the PBM space.
Marion Mass, M.D.
Co founder Practicing Physicians of America
Philadelphia area pediatrician