Are Pharmacy Benefit Managers Unfairly Blamed for High Drug Prices?

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A win-win in drug pricing?

Wharton Business Daily: Why is it important to focus on PBMs at this point?

Lawton R. Burns: PBMs are just the latest in a series of intermediaries in the healthcare supply chain. And most people don’t understand what intermediaries do. They get no respect. They are at least misunderstood, at worst vilified, and that is what is happening right now. PBMs are those who buy branded drugs from drug manufacturers. PBMs exist to negotiate discounts on the prices of these brand name drugs, and each of us benefits.

Wharton Business Daily: Could you tell us more about the role of PBMs?

Burns: Drug manufacturers must sell their products through health insurance plans. Health plans engage these intermediaries, PBMs, to act as their agents to establish formularies where consumers, or health plan enrollees, can obtain these drugs at various levels. [of their health plans]. If you want a generic drug, you can get it cheaply. If you want a high-priced brand name drug, you can get it, but you can pay a higher co-pay or co-pay.

PBMs help health plans establish formularies and seek price discounts from drug manufacturers in exchange for selling their drugs to enrollees. They tell the pharmaceutical companies: if you want more privileged access to our formulary, which means lower copayments and cost sharing [for enrollees], then we want an even bigger reduction. You can sell more volume, but we want a lower list price, a lower net price.

Wharton Business Daily: This is part of a larger discussion about drug pricing and health care in general, isn’t it?

Burns: Ok. And it covers commercial/employer-based health insurance, Medicaid, and Medicare Part B (medical services like medical services). Everyone uses PBMs.

‘Seismic shifts’ and compromises in the drug supply chain

Wharton Business Daily: Has this always been PBM’s revenue model? Or are these revenue models being tweaked and adjusted as we go along here?

Burns: They don’t just tweak and tweak. There are seismic shifts going on here. PBMs are relentlessly criticized for getting rebates — or rebates from drugmakers to allow them to get formularies. What does a PBM do with these discounts? Well, they spend almost all of them, sometimes all of them, on health diets.

Because they pass those discounts on to health plans, they’re not as big a part of their revenue model as they used to be. In fact, in Medicare Part D (which covers prescription drug insurance), which is one of the growing markets in healthcare, PBMs retain less than 1% of these rebates/discounts.

What is happening now is that PBM revenue models are shifting more towards specialty pharmacies. More and more of the new drugs approved are specialty drugs, which are high-priced drugs for special conditions, or orphan conditions (drugs to treat medical conditions with small patient populations). There is very little competition in the orphan drug markets. PBMs derive their new revenue from the distribution of these drugs, not from rebates. Few people understand this.

Wharton Business Daily: You talked about trade-offs in the healthcare industry.

Burns: Yes, the whole healthcare ecosystem is a series of trade-offs. I published a textbook two years ago called The US Health Care Ecosystem: Payers, Providers, Producers. Everything in healthcare involves trade-off, which means you can’t have it all, you trade one thing for another.

And so with PBMs – they trade. They give manufacturers more access (volume) to the market, but in exchange for this greater market access and the ability to sell more products, drug manufacturers must lower their prices. Of course, the drug makers aren’t crazy about all this. They would like to sell more drugs at a high price, not more drugs at a low price.

Reassessing the role of PBMs in the pharmaceutical supply chain

Wharton Business Daily: So does the PBM sector or any of its elements need to be reassessed?

Burns: It depends who you talk to. The biggest and most vocal critics of the PBM industry are the manufacturers they outsource to upstream and the pharmacies they outsource to downstream. But interestingly, the customers of PBMs, or the health plans and employers for whom the health plans work, don’t complain that much about PBMs.

So you start to wonder, well, how much should we worry here? The only ones to complain are those who have to contract with PBMs, not those who are their downstream customers. This should make everyone think.

Wharton Business Daily: I should note that the Leonard Davis Institute at the University of Pennsylvania has scheduled a conference on drug pricing in May. Could you elaborate on the importance of these conversations in our healthcare industry?

Burns: The House and Senate are holding hearings on PBMs. I appeared before the Senate Finance Committee last Thursday and then spoke with several members of the Senate Health Education, Labor and Pensions Committee. There are parallel committees elsewhere in the Senate and in the House.

Everyone is railing against what they perceive to be these serious and supposedly evil PBM practices. My view, and I expressed it verbatim before the Senate last Thursday, is that you treat PBMs as your scapegoat. The problems are elsewhere. Everything is misguided and misguided.

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