Rx Power Struggle: How Pharma can Flip the PBM Script

Steve Stefano, Managing Director, ReprizioRX

Bill Leonard, Managing Partner, ReprizioRX

Eva Mitchell, VP, Business Development, Diligent Health Solutions

In the US, it is almost indisputable that pharmacy benefit managers (PBMs) are the single-most influential force controlling access to prescription medicines. PBMs are intermediaries that manage control of prescription drugs through drug formularies and other mechanisms, includingvariable copay designs, “step-edits” (which require patients to try drugs in a particular order) and electronic prior authorizations. These mechanisms are placed between the healthcare professional and the patient.

The PBMs’ business model is uncomplicated. They simply negotiate with pharmaceutical companies by restricting access to their medicines unless the company agrees to relinquish a substantial rebate (sometimes as high as 70% of the manufacturer’s list price). The manufacturer must also agree to other costly provisions, including administrative service fees, portal access fees, and price escalation ceilings. These enrich PBMs, reduce the margins of pharma companies and—most importantly—interfere with patient access to needed medications.

The 1988 Medicare Catastrophic Bill (repealed within a year) had the primary purpose of providing the elderly with a prescription drug benefit. It mandated that participating US pharmacies computerize their adjudication and reporting capabilities. This led to a growth in the number of claims processing companies, such as PCS Health Systems. Subsequently, these companies incorporated electronic prescription drug formularies in order to control access to medicines and to negotiate rebates from pharma organizations. These entities eventually morphed into today’s PBMs.

Although the drug formularies were initially fairly benign, major pharma firms began to engage with emerging PBMs, such as Medco, Diversified Pharmacy Service (DPS), and PCS Health Systems, in order to ensure access to their branded medicines.

From 1993 through 1995, three acquisitions took place, which strengthened the ability of PBMs to influence access to prescription drugs: Merck acquired Medco, SmithKline acquired DPS, and Eli Lilly acquired PCS Health Systems. All of these deals proved to be ill-timed and short-lived, with divestitures occurring within three years. This led to the consolidation of PBMs into the “Big 3” we know today: UnitedHealth Group’s OptumRx, Cigna’s Express Scripts, and CVS Health’s CVS Caremark.

Concurrent with the growth of PBMs was the acceptance by plan sponsors (i.e., employers and healthcare plans) of restrictive multi-tier pharmacy benefit designs. This resulted in significant patient copay differences for generic medicines, preferred branded drugs, and non-preferred branded treatments.

The acceptance of benefit design changes by plan sponsors enabled PBMs to introduce an even more restrictive measure: formulary exclusions, which can limit choice and may prevent a patient from accessing a particular medicine unless they pay the total cost out of pocket.

Today, the prescription market is highly controlled, with the Big 3 PBMs accounting for approximately 80% of prescriptions. Not since the domination of the US auto industry by a few domestic manufacturers have so few companies exerted such significant control over a specific market.

Given the power and, often argued, one-sided negotiation tactics of the Big 3, what can pharma manufacturers do to level the playing field? Here are several suggestions:

• Use the consulting services of a third-party US payer market access firm to challenge current PBM contracting strategies.
• Change contracting strategies from access to value/risk-based contracts for appropriate products.
• Challenge all service fees (e.g., portal fees, data fees, enterprise fees) to ensure equitable and fair market value.
• Support the growth and impact of “disruptor” organizations that can accelerate early access to newly launched medicines.
• Lobby the Federal Trade Commission to investigate the oligopolistic practices of the three largest PBMs.
• Strongly support all legislation challenging any PBM practice or policy that limits patient access to Rx.

Although pharma continues to discover medicines for life-threatening diseases, access to those therapies is too often controlled by PBM committees. For drug R&D to continue at its current successful pace, the playing field for pharma and PBMs needs to be leveled. It remains to be seen if government legislation and/or legal challenges occur that could reduce this friction. If so, those changes will need to be driven by the actions of drug manufacturers.

Pharma’s fate is in its own hands. It is time for the industry to change the score.

Steve Stefano is Managing Director, ReprizioRX; Bill Leonard is Managing Partner, ReprizioRX; and Eva Mitchell is VP, Business Development, Diligent Health Solutions