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Pharmacy Benefit Managers - PBMs
46 Papers Since 2003 on PBMs
by Lawrence W. Abrams, Ph.D. Economist
We outline below a proposal for a Center for Medicaid and Medicare Services (CMS) demonstration project involving a position auction overlay to the existing reimbursement system for Medicare Part B.
What is being auctioned off is a yearly “fail first” position in Medicare Part B. The auction is limited in scope to therapeutic classes where at least one biosimilar has entered the market to compete with the off-patent reference drug. While limited in scope, we present data below indicating that the addressable market for this auction covers 22% of total Part B drug benefit costs in 2017.
We fully expect a minimum of a 50% reduction from current Part B average sales price (ASP) reimbursement formula. It will be a winner-take-all position auction for arguably the largest single physician-administered biologic market in the world.
The purpose of the paper is to show that the binding arbitration proposal championed by Speaker of the House Nancy Pelosi to lower Medicare Part D drug prices is off-target.
We believe that there are three broad categories of drugs where binding arbitration based on some neutral party's estimate of value is more appropriate than mano-e-mano direct government negotiations with heavy-handed bargaining chips sometimes used to reach agreements.
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High PMPY large molecule biologic drugs where patented therapeutic equivalents would be rare.
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High PMPY cell therapy cancer drugs where outcomes are uncertain.
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High PMPY orphan drugs due to costs having to be amortized over patient population in the hundreds.
The problem is we estimate that only 19% of total 2017 Medicare Part D list price drug spend is suitable for Pelosi’s binding arbitration scheme.
We contend that recent insulin drug price inflation is a case of perverse competition rather than a case of illegal racketeering in violation of the RICO Act.
We will present the case that a now consolidated racketeering RICO lawsuit initiated by the law firm Hagens Berman has inverted the hierarchy of the Pharma – PBM enterprise. The lawsuit claims that the bidders — Pharma — “spearheaded” rebate negotiations and that pharmacy benefit managers (PBMs) as rebate-collecting gatekeepers are the followers. This makes no sense and is grounds for a dismissal of the lawsuit.
We concede that there was coordinated list pricing, but these were opening moves in a two-step bidding process driven by a perverse PBM business model rather than initiated by Pharma. We will present charts of formulary choices made by PBMs that are so varied that they could not be the result of collusion.
Rather the varied formulary choices in this case had to be the result of vigorous competition among insulin drug companies vying to be the highest gross rebate bidder that culminated in rational economic decisions by PBMs to award formulary exclusivity to the lowest net price bidder. In other words, there are no antitrust issues in this case.
While 2017 has been bad for new biosimilar competitors, it has been good for competition as prices for incumbent drugs such as Remicade has dropped significantly for the first time. Rather than argue for more legal and legislative protection for biosimilars, we argue for a rethinking of competitive strategy on the part of the entrants.
One of the most profound quotes in antitrust law can be found in a 1962 Supreme Court opinion by Chief Justice Earl Warren regarding Brown Shoe Co. v. United States, 370 U. S. 320. He argued that the U.S. Congress enacted antitrust laws “for the protection of competition, not competitors.”
This idea will being tested to the maximum in the coming years as new biosimilar entrants will have a tough time gaining insurance coverage because of exclusive dealing formulary contracts between incumbents and pharmacy benefit managers (PBMs) and insurance companies
If manufacturers of biosimilars choose to litigate, we believe that the courts will dismiss antitrust lawsuits summarily based on the now widely accepted Chicago School theories that vertical restraints such exclusive dealing formulary contracts are presumptively pro-competitive. (See our recent paper Biosimilars and Exclusive Dealing Antitrust Law: The Case of Pfizer, Inc v Johnson & Johnson et. al.
Following the generally accepted theories of the legal scholar Robert Bork and his Chicago School colleagues, vertical restraints such as exclusive dealing contracts are presumptively procompetitiveandwelfare-enhancingbecauseitwouldbeirrationalfor a buyer to exclude the lowest cost supplier.
On September 20, 2017, the drug manufacturer Pfizer filed a lawsuit Pfizer Inc, v Johnson & Johnson et al (link to the full court filing) claiming that Johnson & Johnson (J&J) violated Section 2 of the Sherman Antitrust Act by monopolizing the market for its incumbent biologic drug Remicade ®.
We will present the case that Pfizer’s antitrust case is weak because it was unlikely that Pfizer was the low cost supplier based on a view of lump sum rebate offers as efficiency-enhancing "signals" of expected consumer demand for a product.
In October 2017, CVS Caremark (CVS) finally decided to exclude from its 2018 drug formulary the new-to-market Hepatitis C Virus (HCV) drug Mavyret despite it being list priced aggressively by its manufacturer AbbVie at an estimated 72% below the list price of Gilead Sciences’ incumbent HCV drug Harvoni.
We estimate that Gilead Sciences had to offer CVS a minimum of a 83% rebate percentage in order for Harvoni to have a net price below Mavyret’s list price. The 83% figure would represent an outlier in reported gross rebate percentages today that generally fall in the 40% to 60% range.
Had the rebate percentage been less, it sets up an anti-competitive and antitrust case that Mavyret was excluded because of lack of PBM rebate retention despite being the low cost drug in the HCV therapeutic class.
We call on CVS Caremark to issue a public statement confirming that its choice to exclude Mavyret was in the best interest of clients because Harvoni was the lower cost drug after rebates.
AbbVie’s aggressive list pricing for its new Hepatitis C Virus (HCV) drug Mavyret is disruptive to the current PBM business model. It essentially asks PBMs to align with client interests by adding a cost-effective drug to their national formularies despite little to no possibility for retained rebates.
On September 15, 2017 Express Scripts (ESRX) chose to align with client interests by opening up the HCV therapeutic class to include Mavyret as well as other HCV drugs previously excluded.
CVS Caremark has yet to announce its final choices for the HVC class despite promising that it would do so by mid-September 2017. If CVS chooses not to add Mavyret, it will be a sign that CVS is so desperate for rebate income that it is willing incur a very public case of misaligned interests.
In October 2017, CVS Caremark (CVS) finally decided to exclude from its 2018 drug formulary the new-to-market Hepatitis C Virus (HCV) drug Mavyret despite it being list priced aggressively by its manufacturer AbbVie at an estimated 72% below the list price of Gilead Sciences’ incumbent HCV drug Harvoni.
We estimate that Gilead Sciences had to offer CVS a minimum of a 83% rebate percentage in order for Harvoni to have a net price below Mavyret’s list price. The 83% figure would represent an outlier in reported gross rebate percentages today that generally fall in the 40% to 60% range.
Had the rebate percentage been less, it sets up an anti-competitive and antitrust case that Mavyret was excluded because of lack of PBM rebate retention despite being the low cost drug in the HCV therapeutic class.
We call on CVS Caremark to issue a public statement confirming that its choice to exclude Mavyret was in the best interest of clients because Harvoni was the lower cost drug after rebates.
Medicare e-prescribing, like consumer directed healthcare, presents an opportunity to break-up the Big 3 PBMs’ stranglehold on generic drug pricing. They key is to make drug prices transparent and give consumers the opportunity to make choices based on market prices rather than artificial co-payment differentials set by PBMs.
One solution is to allow co-payments to be a % of “any willing provider” offer prices as long as such co-payments are below standard fixed dollar co-payments set by PBMs
AbbVie’s aggressive list pricing for its new Hepatitis C Virus (HCV) drug Mavyret is disruptive to the current PBM business model. It essentially asks PBMs to align with client interests by adding a cost-effective drug to their national formularies despite little to no possibility for retained rebates.
Pharmacy benefit managers (PBMs) say that they earn more from mail order generics than brands and that their interests are aligned with clients’ interests. Wall Street and the Federal Trade Commission (FTC) concur.
The analysis of both Wall Street and the FTC is flawed. The failure in the analysis can be traced to the use of broad averages of rebate rates in estimates of the relative profitability of drug types.
Both Wall Street and the FTC fail to realize that potential misalignment of interests is limited to situations involving “rebatable” brands and that rebate averages across all brands are significantly less that rebate averages across rebatable brands.
They also failed to realize that business segment profitability is due as much to transaction volume as average unit margin. It turns out that mail order generics are a relatively high average margin, but relatively low volume business for PBMs.
When these failures are corrected, the result is that PBMs earn more per rebatable transaction and in the aggregate from brand name drugs than mail order generics.
A statistical comparison of the business models of Express Scripts and Medco is presented. While both have similar rebates retention rates, Medco extracts significantly higher rebates per prescription. The source of the difference is due to different approaches to formulary compliance, rather than formulary design.
We present the case that Medco appears to abstain more from discretionary brand to generic therapeutic interchange than Express Scripts. If any PBM is committing “sins of omission”, it is Medco.
On September 6, 2005, the Federal Trade Commission (FTC) released a long awaited study of potential conflicts of interest by independent pharmacy benefit managers (PBMs). (Available at http://www.ftc.gov/os/2005/09/index.htm# ) Like any good study of alleged wrongdoing, the FTC examined both motive and performance.
The FTC’s analysis indicated that it is in PBMs’ own interest to favor mail order generics over brands. This analysis failed on two counts.
The FTC failed to realize that potential wrongdoing is limited to situations involving “rebatable” brands and that rebate averages across all brands are significantly less that rebate averages across rebatable brands. They also failed to realize that business segment profitability is due as much to transaction volume as average unit margin. It turns out that mail order generics are a relatively high average margin, but relatively low volume business for PBMs. When these failures are corrected, the result is that PBMs earn more per rebatable transaction and in the aggregate from brand name drugs than mail order generics.
The FTC concluded that there was strong evidence that PBMs “did not disadvantage” their clients. This conclusion was based on flawed tests based on comparisons of generic substitution and generic dispensing rates by fulfillment channel and mail order business model.
The FTC failed to understand that it is the corporate structure of PBMs – independent or captive of insurance companies – that affects business model bias and performance rather than the corporate structure of mail order operations. They also failed to understand what decisions truly are at the discretion of PBMs. Finally, the FTC failed to consider that rebates are paid to PBMs as much for what they don’t do, as what they do.
What could have been the definitive study of the effect of corporate structure on PBM performance has become just another failed test for PBM ‘sins of omission’.
Despite early skepticism about the degree of corporate interest in sponsoring Medicare Part D prescription drug plans, it now appears that competition for sponsorship will be lively.
The purpose of this note is to present the case that another provision in Medicare Part D has contributed significantly to the interest in sponsorship. This provision allows for the creation of preferred provider retail pharmacy networks with highly differentiated co-payments.
PBMs of large drugstore chains are in the best position to take advantage of this provision. Battered by discriminatory practices used by independent PBMs to swing business away from retail pharmacies to their captive mail order operations, the
It seems that proponents of full-disclosure laws are using the rhetoric of efficiency to mask concerns about equity. It is far easier to build the case against PBMs by claiming that they are not acting responsibly than to claim that they are doing their best for clients but are just getting paid too much.
There may be some value in limited disclosure laws, especially for resolving issues of equity. Unfortunately, the full-disclosure laws being drafted today are both too broad and too narrow at the same time
Practical Issues With PBM Full Disclosure Laws Originally Published in FDLI Update Magazine, Issue 4, 2004.
Pharmacy benefit managers (PBMs) engage in exclusionary practices favoring their own captive mail order pharmacies. They justify this practice by pointing to mail order’s price superiority to retail pharmacy outlets.
We will present evidence from two sources indicating that the second largest independent PBM, Medco Health Solutions, has been pricing brand drugs dispensed from its mail order pharmacy at, or near, acquisition costs. While these prices are significantly below retail levels, they cannot be said to be competitive until the possibility of recoupment elsewhere is investigated.
The true value of captive mail order to PBMs is not as a source of dispensing and procurement efficiencies, but as source of cost containment achieved by through retrospective therapeutic interchange and enhanced power to extract rebates from brand name drug manufacturers.
By recasting Medco’s margins by revenue “driver” rather than by revenue source, we demonstrate that mail order gross profit margins are in the competitive range of 7% -- neither too high nor too low. This means that Medco is within the “rule of reason” of anti-trust law.
Still, market forces are at work to counter Medco’s pricing strategy. Customers are demanding a more transparent business model with 100% pass-through of rebates. This will require Medco to raise mail order prices to compensate for these losses, thus undermining the justification for exclusionary practices such as mandatory mail order and mail order only 90-day prescriptions.
Furthermore, the trend toward transparency will provide new opportunities for independent mail order pharmacies that heretofore have been relegated to niche markets.
About the author:
I have a B.A. in Economics from Amherst College
and a Ph.D. in Economics from Washington University in St. Louis.
I am retired and post often on twitter @larrywabrams on isslues relating
to PBMs, biosimilars, biotech and high tech stocks in my portfolio
and issues relating to North Monterey County, California where I reside.
My writings are at the intersection of economics, accounting, financial
fanalysis, and high tech. I have received no remuneration for these articles
and have no financial relation with any company written about in these articles.
In 2002, I started looking at the 10-Qs and 10-Ks of the drug store chains and pharmacy benefit managers
after an "aha moment" in a Mountain View CA. Longs Drug store (later bought out by CVS).
I had gone there to to pick-up my renewal Rx of Type 2 diabetes drug Glucophage.
Several things happened that night piqued my interest in PBMs and big drug store chains.
First, I found out my Rx for Glucophage was now an Rx for Metformin without my prior knowledge.
I asked the pharmacist what was going on. He mentioned that my Rx now had a cheaper generic available
and my drug benefit plan manager made the switch automatically.
That night I was also struck by the fact that here was a 12,000 square feet store and all the customers were lined up
at the pharmacy counter in the back. I asked myself, "Could it be that hole in the wall in the back generated
all the profits while the front store was just a relic of the bygone days of lunch counters and shopping on Main Street?
The question of relative source of pre-tax profits -- pharmacy vs front store -- piqued my interest all the more
as I compared the pathetic merchandising I saw in this big drug store chain versus the amazing health product
merchandising I saw a week earlier at the first Whole Foods store on the West Coast in downtown Palo Alto, CA.
