AWP or “Ain’t What’s Paid?” Understanding PBMs’ Role In Rising Drug Prices
JAABILI GOSUKONDA –
In the pharmaceutical world, Pharmacy Benefit Managers, or PBMs, act as middlemen between their clients -insurance companies and employers -and drug manufacturers and pharmacies, to negotiate drug prices. Initially created in the 1960s, as insurance companies began to incorporate prescription drug coverage, PBMs were intended to streamline claims processing and increase access to affordable prescription drugs. However, since then, their role has significantly evolved. Today, PBMs are often criticized for their obscure rebate practices, which can ultimately increase drug costs and lower patient access.
This is how PBMs operate:
PBMs vs. Drug Manufacturing Companies
A PBM will create formularies, or lists of drugs covered by their insurance company client, and determine the tier of copayment they will have – a copay is an employee’s fixed out-of-pocket cost. Generally, the tiers are structured with the price of copayments increasing with each tier, like this:
Tier 1 (Generic): Generic, lowest rebate. Typically used common, short-term issues or by individuals with labor intensive jobs.
Ex: Ibuprofen (NSAID–reduces pain and inflammation)
Tier 2 (Preferred Brand-Name Drugs): Brand-name drugs for which a PBM has negotiated a favorable rebate. Often used to manage moderate chronic conditions (e.g. asthma, mild autoimmune disorders).
Ex: Prednisone (steroid – decreases inflammation and suppresses the immune system)
Tier 3 (Non-preferred Brand-Name Drugs): Brand-name drugs with a less favorable rebate for the PBM, likely due to a higher cost. Typically used by individuals requiring specific, alternative medications.
Ex: Lorazepam – generic Ativan (anti-anxiety medication)
Tier 4 (Specialty Pharmacy Drugs): Expensive, complex drugs used to treat chronic or rare illnesses.
Ex: self-administered injections like Humira (immunotherapy–immunosuppressant, biologic–used to treat Rheumatoid Arthritis and Crohn’s Disease).
Based on the drug’s list price, or the price set by the manufacturer, the PBM will negotiate a rebate to lower the cost of the drug for the insurance company, which would ideally decrease costs for an employee who has that insurance.
However, lack of transparency is a significant issue that can prevent those discounts from benefiting employees. For example, even with a large rebate, an expensive drug could still be placed on a higher tier, making it unaffordable for an average employee.
PBMs vs. Pharmaceutical Companies
Essentially, PBMs play a key role in determining patient/employee access to prescriptions. Working on behalf of their insurance company clients, PBMs negotiate reimbursement rates, or the amounts pharmacists are paid for drugs dispensed to patients with various insurance plans, ultimately aiming to lower costs.
Similarly to their interactions with drug manufacturers, however, much of the information regarding the details of negotiations is unclear, often allowing PBMs to use inflated values like the average wholesale price, or “list price” given to pharmacies, as a benchmark in contracts with insurance companies while offering a lower reimbursement rate to pharmacies. The National Community Pharmacists Association describes this practice as spread pricing, charging insurance companies like Medicare and Medicaid a higher price for a drug than they pay the pharmacy that dispenses it to employees, allowing the PBM to pocket the “spread” or difference as profit.
Lack of transparency from PBMs through pocketing savings from rebate negotiations and spread pricing are two main drivers of spiked drug prices. As stated above, when insurance companies are charged an inflated price by the PBMs, employees often face higher premiums (periodic payment to insurer) contributing to decreased access to necessary medication. Especially alarming is the fact that currently, the three PBMs Express Scripts, CVS Caremark, and OptumRx make up about 80% of all prescriptions filled; this domination of the market allows for increased influence over associated pharmaceutical companies and can push smaller and independent pharmacies out.
Still, it is important to note that PBMs are not the only influencers of high drug prices; Big Pharma, for instance, which includes the largest global pharmaceutical companies, practice “evergreening,” a tactic used to extend the exclusivity period to manufacture and sell new drugs by citing minor modifications to prolong patents, often affecting extremely widely distributed medications like insulin and opioids. High launch prices are also used to justify research and development costs, even though a recent study published in JAMA Network found no correlation between research and development costs and list prices. With these companies generating billions of dollars annually, an entire reworking of the system is needed.
Current Legislation and Proposals
- The Inflation Reduction Cost of 2022 – Out-of-pocket costs for Insulin products covered by Medicare are capped at $35 per month per prescription; the Secretary of the Department of Health and Human Services is able to negotiate a Maximum Fair Price for certain high-cost drugs covered by Medicare; and access to recommended adult vaccines is free under Medicare.
- Improving Generic Drug Quality – Making up 90% of all prescriptions used in the United States and having saved $2.2 trillion from 2009-2019, investing in high-quality drug manufacturing processes and increasing transparency with customers regarding quality would greatly improve access to necessary medication.
- Increase Transparency in Drug Pricing – Currently, 14 states (VT, CA, CT, ME, MN, NV, NH, ND, OR, TX, UT, VA, WA, and WV) have passed transparency laws focused on requiring drug manufacturers to report deviations from the current AWP or a new drug’s high launch price. Considering that PBMs have access to significant patient data, however, it would be beneficial for that data to be shared throughout the supply chain to maintain fair pricing.
Conclusion
In today’s tumultuous climate, while rising drug prices pose a threat to the entire healthcare system, they disproportionately affect millions of Americans who require costly medication to manage chronic or life-threatening diseases. PBMs, Big Pharma, and insurance companies all operate as cogs, within a larger machine, working to maximize profit margins. Oftentimes, this is done through passing on costs to employees, resulting in higher, more unaffordable premiums. In order to address this issue, it is necessary to fully understand the depth of the effects of key actors and work holistically to make legislative change from the community level.
Copy Editor: Sameeka Prabath
Photography Source: https://biotechconnectionbay.org/viewpoint/drug-pricing-in-the-us/