Meet Pharmacy Benefit Managers – ‘The Most Profitable Corporations You’ve Never Heard Of’

The wild card in all this is Donald Trump.


From Michael Krieger:

When I first started becoming aware of how sleazy, parasitic and corrupt the U.S. economy was, I only had expertise in one industry, financial services. Coming to grips with the blatant criminality of the TBTF Wall Street banks and their enablers at the Federal Reserve and throughout the federal government, I thought this was the main issue that needed to be confronted. What I’ve learned in the years since is pretty much every industry in America is corrupt to the core, more focused on sucking money away from helpless citizens via rent-seeking schemes versus actually producing a product and adding value. Unfortunately, the healthcare industry is no exception.

Today’s post zeros in on a particular slice of that industry. A group of companies known as Pharmacy Benefit Managers, or PBMs. Companies that seem to extract far more from the public than they give back. It’s a convoluted sector that is difficult to get your head around, which is why we should be thankful that David Dayen wrote an excellent piece on the topic recently. What follows are merely excerpts from his lengthy and highly informative piece, The Hidden Monopolies That Raise Drug Prices. I strongly suggest you read the entire thing.

Below are a few highlights from the piece published in The American Prospect:

Like any retail outlet, Frankil purchases inventory from a wholesale distributor and sells it to customers at a small markup. But unlike butchers or hardware store owners, pharmacists have no idea how much money they’ll make on a sale until the moment they sell it. That’s because the customer’s co-pay doesn’t cover the cost of the drug. Instead, a byzantine reimbursement process determines Frankil’s fee.

“I get a prescription, type in the data, click send, and I’m told I’m getting a dollar or two,” Frankil says. The system resembles the pull of a slot machine: Sometimes you win and sometimes you lose. “Pharmacies sell prescriptions at significant losses,” he adds. “So what do I do? Fill the prescription and lose money, or don’t fill it and lose customers? These decisions happen every single day.”

Frankil’s troubles cannot be traced back to insurers or drug companies, the usual suspects that most people deem responsible for raising costs in the health-care system. He blames a collection of powerful corporations known as pharmacy benefit managers, or PBMs. If you have drug coverage as part of your health plan, you are likely to carry a card with the name of a PBM on it. These middlemen manage prescription drug benefits for health plans, contracting with drug manufacturers and pharmacies in a multi-sided market. Over the past 30 years, PBMs have evolved from paper-pushers to significant controllers of the drug pricing system, a black box understood by almost no one. Lack of transparency, unjustifiable fees, and massive market consolidations have made PBMs among the most profitable corporations you’ve never heard about.

Americans pay the highest health-care prices in the world, including the highest for drugs, medical devices, and other health-care services and products. Our fragmented system produces many opportunities for excessive charges. But one lesser-known reason for those high prices is the stranglehold that a few giant intermediaries have secured over distribution. The antitrust laws are supposed to provide protection against just this kind of concentrated economic power. But in one area after another in today’s economy, federal antitrust authorities and the courts have failed to intervene. In this case, PBMs are sucking money out of the health-care system—and our wallets—with hardly any public awareness of what they are doing.

Even some Republicans criticize PBMs for pursuing profit at the public’s expense. “They show no interest in playing fair, no interest in the end user,” says Representative Doug Collins of Georgia, one of the industry’s loudest critics. “They act as monopolistic terrorists on this market.” Collins and a bipartisan group in Congress want to rein in the PBM industry, setting up a titanic battle between competing corporate interests. The question is whether President Donald Trump will join that effort to fulfill his frequent promises to bring down drug prices.

Here’s how it works…

In the case of PBMs, their desire for larger patient networks created incentives for their own consolidation, promoting their market dominance as a means to attract customers. Today’s “big three” PBMs—Express Scripts, CVS Caremark, and OptumRx, a division of large insurer UnitedHealth Group—control between 75 percent and 80 percent of the market, which translates into 180 million prescription drug customers. All three companies are listed in the top 22 of the Fortune 500, and as of 2013, a JPMorgan analyst estimated total PBM revenues at more than $250 billion.

The Pharmaceutical Care Management Association, the industry’s lobbying group, claims that PBMs will save health plans $654 billion over the next decade. But we do know that PBMs haven’t exactly arrested skyrocketing drug prices. According to data from the Centers for Medicare and Medicaid Services, between 1987 and 2014, expenditures on prescription drugs have jumped 1,100 percent. Numerous factors can explain that—increased volume of medications, more usage of brand-name drugs, price-gouging by drug companies. But PBM profit margins have been growing as well. For example, according to one report, Express Scripts’ adjusted profit per prescription has increased 500 percent since 2003, and earnings per adjusted claim for the nation’s largest PBM went from $3.87 in 2012 to $5.16 in 2016. That translates into billions of dollars skimmed into Express Scripts’ coffers, coming not out of the pockets of big drug companies or insurers, but of the remaining independent retail druggists—and consumers.

Why haven’t PBMs fulfilled their promise as a cost inhibitor? The biggest reason experts cite is an information advantage in the complex pharmaceutical supply chain. At a hearing last year about the EpiPen, a simple shot to relieve symptoms of food allergies, Heather Bresch, CEO of EpiPen manufacturer Mylan, released a chart claiming that more than half of the list price for the product ($334 out of the $608 for a two-pack) goes to other participants—insurers, wholesalers, retailers, or the PBM. But when asked by Republican Representative Buddy Carter of Georgia, the only pharmacist in Congress, how much the PBM receives, Bresch replied, “I don’t specifically know the breakdown.” Carter nodded his head and said, “Nor do I and I’m the pharmacist. … That’s the problem, nobody knows.”

The PBM industry is rife with conflicts of interest and kickbacks. For example, PBMs secure rebates from drug companies as a condition of putting their products on the formulary, the list of reimbursable drugs for their network. However, they are under no obligation to disclose those rebates to health plans, or pass them along. Sometimes PBMs call them something other than rebates, using semantics to hold onto the cash. Health plans have no way to obtain drug-by-drug cost information to know if they’re getting the full discount.

Controlling the formulary gives PBMs a crucial point of leverage over the system. Express Scripts and CVS Caremark have used it to exclude hundreds of drugs, while preferring other therapeutic treatments. (This can result in patients getting locked out of their medications without an emergency exemption.) And there are indications that PBMs place drugs on their formularies based on how high a rebate they obtain, rather than the lowest cost or what is most effective for the patient.

Additionally, The Columbus Dispatch explained last October how, in some cases, a consumer’s co-pay costs more than the price of the drug outside the health plan. But the pharmacy is barred from informing the patients because of clauses in their PBM contracts; they can only provide the information when asked. The excess co-pay goes back to the PBM.

Absolutely disgusting and should be criminal.

Game-playing with brand-name drugs pales in comparison to more profitable schemes for generics, which represent the vast majority of filled prescriptions (though they account for only about half of the revenues, since brand-name drugs are so much more expensive). PBMs reimburse pharmacies for generics based on a schedule called the maximum allowable cost (MAC). But the actual number is hidden until the point of sale. “The contracts are written in the form of algorithms,” says Lynn Quincy, director of the Healthcare Value Hub for Consumers Union. “It’s not a list of drugs with a price next to it. Nobody knows what they’re up to.”

The MAC list that goes to the pharmacy does not necessarily match the one for the health plan. By charging the plan sponsor more than they pay the pharmacy in a reimbursement, PBMs can make anywhere from $5 to $200 per prescription, without either player in the chain knowing. While some spread pricing can be expected, the opacity of the profit stream masks the allegedly low costs PBMs tout to health plans to get them to sign up.

PBMs can also charge pharmacies additional fees months after a sale. Direct and indirect remuneration (DIR) fees were originally conceived as a way for Medicare to discover the true net cost of the drugs Medicare beneficiaries purchased through Part D, by forcing disclosure of all rebates from drug manufacturers. But PBMs secured a key loophole keeping their disclosures to the federal government confidential, while arguing that DIRs also legally apply to pharmacies.

The PBMs’ use of these fees also harms patients and taxpayers. Consumers pay co-pays or deductibles for drugs based on the list price, without DIR fees or rebates that would lower them. And retroactive DIR fees are routinely not reported to Medicare, as PBMs call them “network variable rates” or “pharmacy performance payments” and keep them for themselves. Obscuring DIR fees makes the net costs of drugs look higher to Medicare than they actually are. As a result, patients hit the “donut hole” coverage gap in Medicare Part D faster, forcing them to pay the full cost of their drugs. And it accelerates high-usage patients into catastrophic coverage faster as well, where Medicare pays 80 percent of all costs. All of this leaves subscribers and Medicare, i.e. the taxpayers, to pay more out of pocket, as the Center for Medicare and Medicaid Services noted in a January report.

The question begging to be asked is why all the players in the market—plan sponsors, drug companies, and pharmacies—put up with a middleman that extracts profits from all of them? And the answer is the failure of federal antitrust policy.


Three years later, Optum gobbled up Catamaran, creating the current situation where three firms control 80 percent of the market. Brill adds that the Big Three carve up the market geographically, effectively not competing in certain regions of the country. Amid such concentration, plan sponsors have little ability to select the best PBM on price or quality. “I just sat down with [one of the Big Three PBMs], I had half a billion dollars on the table,” says Susan Hayes. “They said, ‘Where are you going to compromise?’ Really? Where else do I bring half a billion and they say where will you compromise?”

With such monopolized control, PBMs offer pharmacies take-it-or-leave-it contracts, with no opportunity to negotiate. These contracts employ punitive terms, including allowing the PBM to audit pharmacies, allegedly to ferret out waste, fraud, and abuse. “Minor technicalities are used to extract money,” says Susan Pilch, vice president of policy and regulatory affairs for the NCPA. “There are examples where you were supposed to initial on the bottom right of prescription, not the bottom left. The PBM recouped all claims on that.”

Gotta love that “free market.”

Other pharmacies have little recourse to fight back. PBM contracts frequently contain gag orders, preventing them from talking to local elected officials or disclosing the terms of the contract. Pharmacists complain of being threatened for mailing or delivering drugs to local patients, which would compete with PBM mail-order operations. The combined toll makes it difficult for independent pharmacies to stay in business. “This takes away a medical provider patients have used for years,” said Representative Buddy Carter. “I’ve had grandparents come to my store in tears and say ‘I can’t come here anymore.’”

Worst of all, PBMs don’t stop at legal money-making schemes. At his site PBM Watch, attorney David Balto compiled 56 pages’ worth of state and federal litigation against PBMs. Just a handful of these cases yielded $370 million in damages for undisclosed rebates, artificial price inflations, kickbacks, steering, and other deceptive practices.

Last year, Anthem sued Express Scripts for $15 billion, claiming the PBM violated their agreement by charging excessive rates for drugs. Federal agents from two states issued subpoenas for Express Scripts last fall, seeking information on the company’s business practices. In January, diabetes patients sued three drug manufacturers for conspiring with PBMs to triple the price of insulin.

PBMs may even have contributed to the worst public health crisis in America—the opioid epidemic. An investigation by Stat News found that Purdue Pharma, makers of OxyContin, paid off PBMs to keep prescriptions flowing for their product, over the howls of a state employee health plan in West Virginia. In exchange for rebates, PBMs kept OxyContin on their formulary with low co-pays, and without requiring prior authorization from the health plan to dispense the drug. Overprescribing of OxyContin laid the groundwork for a crisis that killed more than 20,000 Americans in 2015.

Naturally, this won’t prevent Jeff Sessions from blaming recreational marijuana.

“They were making a profit on people’s addiction, which is fricking criminal,” says consultant Susan Hayes. “Rubbing their hands with glee that people are becoming addicted to opioids. I can’t believe it.”


Another model would empower pharmacies. A 2016 report from the Institute for Local Self-Reliance highlights a quirk of law in North Dakota, which only allows drugstores to operate if owned by pharmacists (similar laws exist in Europe). The law prohibits chain pharmacies from entering the state. Not surprisingly, North Dakota’s independents deliver among the lowest prescription drug prices in the country, along with better health outcomes and more drugstores per capita than any other state. This flies in the face of industry claims that big chains and giant conglomerates save consumers money or improve services.

Why can’t this successful model be replicated elsewhere? “The answer is PBMs,” says Stacy Mitchell, the report’s author. “Because in North Dakota, independents are the only game in town, PBMs have to negotiate with them. In other states, they have no leverage.” Unsurprisingly, PBMs and chains want the North Dakota law overturned rather than adopted in other states.

For a more immediate impact, we must turn to Washington. And there, solutions often emerge when one large industry starts pointing the finger at another. Under fire for their many drug-pricing scandals, from Martin Shkreli to Valeant, the pharmaceutical industry has tried to deflect blame by citing PBMs. GlaxoSmithKline CEO Andrew Witty said in a February conference call that so much of the list price on the company’s drugs went to “non-innovators in a system which thinks it’s paying high prices for innovation,” a veiled reference to PBMs. An industry-funded report in January asserted that manufacturers took only 63 percent of gross drug revenues, attributing the decline to discounts and rebates paid to PBMs. (Of course, this hasn’t stopped pharmaceutical companies from earning higher profit margins than any other industry.)

Doug Collins, a third-term House member, experienced the PBM issue personally, when his mother couldn’t get her regular medications and her plan had no substitute on the formulary. “I am a free-market person, as conservative as they come,” Collins says. “When dealing with this, it’s not a free market.” Buddy Carter, his colleague, has worked in independent pharmacies since 1980, and sees himself as their voice in Congress. I asked him if he had difficulty explaining the PBM market and its problems to his colleagues. “Heck, it’s difficult for me to understand and I’ve worked in the industry over 35 years!” Carter says.

If the FTC determined that the PBM market was anti-competitive, they could sever the relationship between PBMs and pharmacies through sanctions or divestiture demands. They could even break up the entire industry to generate competition. And the FTC has the power to demand the very transparency members of Congress and state legislatures believe is the key to ending profiteering. But this would require a radical shift at the FTC, which has often opposed state legislation to regulate PBMs or increase transparency. “The FTC had argued now for over ten years that lack of transparency is necessary because it can drive prices down,” says Brill, citing recent FTC statements. “Prices have not been driven down, and we need to take a different route.”

The wild card in all this is Donald Trump. At his one and only pre-inauguration press conference, Trump singled out drug companies for “getting away with murder,” vowing to create “new bidding procedures” for Medicare and earning praise from the likes of Bernie Sanders. But when Trump met with pharmaceutical executives two weeks into his presidency, he focused more on speeding up new drug approvals from the FDA and cutting regulations than on reducing industry profits. This lines up with the perspective of a key aide, Silicon Valley billionaire Peter Thiel, who wants to overhaul the FDA process. (In fact, the Republican Congress just overhauled the FDA process in one of the last bills signed by Barack Obama.) Trump doesn’t appear to understand the cost excesses in the supply chain.

Trump did say in his address to a joint session of Congress that he would “bring down the artificially high price of drugs.” And in his confirmation hearing, Health and Human Services Secretary Tom Price, discussing Trump’s idea for competitive bidding in Medicare, said that “right now the PBMs are doing that negotiation. … I think it is important to have a conversation and look at whether there is a better way to do that.”

But where Trump’s team will ultimately land is unknown. “We need to get to a point of clarity about whether the administration is serious,” says the NCPA’s John Norton. Furthermore, any attempt to move forward legislatively on any part of health-care policy will run headlong into the deeply polarized debate over the Affordable Care Act. While a bipartisan alliance appears possible on the PBM issue in isolation, it will be difficult to separate anything health-related from the Obamacare vortex. 

The PBM industry’s leading trade group isn’t sleeping on the possibility of an attack. Days after Trump met with pharma execs, the Pharmaceutical Care Management Association issued an internal memo leaked by Buzzfeed, stressing the need for “building a political firewall” in Congress to stop any legislative action.

Frightened about drug manufacturers highlighting a “bloated supply chain,” PCMA CEO Merritt laid out a six-point strategy that included meetings with White House staff and key members of Congress, a digital ad campaign targeting congressional leaders, partnerships with right-wing think tanks like the American Action Forum, and working groups to shape regulatory changes that make PBMs the savior instead of a villain. “We will continue to show how competition—not government intervention—is the way to manage high drug costs,” Merritt wrote, apparently without irony. Merritt even scheduled a meeting with the main health insurance lobby, AHIP, “to make sure the payer community is aligned and coordinated.”

Only in America can three companies controlling 80% of the market be seen as competition. No wonder our economy is a total neofeudal nightmare.

Read the entire article: The Hidden Monopolies That Raise Drug Prices

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In Liberty,
Michael Krieger

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