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Pharmacy Benefit Managers
46 Papers Since 2003 on PBMs
by Lawrence W. Abrams, Ph.D. Economist
CVS's Negligent Handling of Its 2019 Formulary Change in Coverage for Diabetes Test Strips January 2019
Around the first week in August for the past four year, CVS has made an official announcement of its next year’s formulary changes. It posts these changes on its own websites.
But that changed in 2018. During an August 8th 3Q2018 Earning Conference Call, CVS said that 2019 formulary details would be available around October 1, 2018.
But, CVS waited until November 26, 2018 to post details on its own website. We believe that there has been a willful intent by CVS to minimize attention to upcoming formulary changes fearing bad publicity would delay government approval of their merger with the insurance company Aetna. The review included the Department of Justice, state attorney generals and Judge Richard Leon of the U.S. District Court of the District of Columbia and other state authorities.
In particular, CVS has been negligent in giving ample warning to diabetes patients of an upcoming switch in blood glucose test stips from LifeScan’s OneTouch brand to Roche’s Accu-Chek brand. We estimate that this change is going to affect up to 7.2% of CVS’s 94 Million covered lives, or 6.8 Million people who have Type I or Type II diabetes, as they require constant blood glucose monitoring via a glucometer and test strips.
We conclude with the question of the impact CVS’s negligent handling of this formulary switch on state “frozen formulary laws”.
AbbVie’s pricing for its new Hep C Virus drug Mavyret is disruptive to the current PBM business model because it forces the Big 3 PBMs to consider a drug for inclusion in their national formularies that is aligned with their clients interests -- more cost-effective that Harvoni -- but not aligned with their own interest -- needing to to squeeze out all the rebates they can from the specialty drug therapeutic classes.
At the very least, will Express Scripts and CVS Health open their Hep C Virus therapeutic class and add Marvyet alongside Harvoni? Or, will they expose themselves to claims of misalignment by excluding Marvyet?
Pharmacy benefits present the best opportunity for consumer-directed healthcare (CDHC) to outperform traditional managed care. This is due to the fact that drugs are commodity purchases with little quality issues. Also, drug price transparency does not require any government intervention because there is a group of “outsider” pharmacies like Costco showing a willingness to compete on price.
Pharmacy benefits also present the best entry point for new healthcare intermediaries. The role of new intermediaries will be to link user-created “scrapbooks” of health data to rankings of treatment options based on the “wisdom of crowds” and, in turn, to price competitive pharmacies.
We conclude with the question of the impact CVS’s negligent handling of this formulary switch on state “frozen formulary laws”.
Recently, Express Scripts, Inc. (ESI) published a study entitled “What Happens to Prescription Drug Use after Consumer Directed Health Plan Enrollment?” What happened was that there was no significant move by enrollees to replace costly brands with cheaper generic drugs and no significant move to switch from retail to cheaper mail order delivery.
Significant cost-saving was achieved, but it was via of lower overall drug usage and higher member out-of-pocket costs, both problematic results. The problem with this study is not in its design, the results, or conclusion that “…enrollees do not appear to be taking advantage of all the savings opportunities available to them”.
The problem is that it is impossible to evaluate the conclusion unless the ESI researchers give us detail on just information was presented to enrollees. There is little doubt that enrollees are presented with information about generic substitution. But, to what extent were they presented with information about therapeutic interchange – the choice to use of a generic drug that is a therapeutic, but not bioequivalent, to a more costly brand drug? omeprazole for Nexium? simvastatin for Lipitor? ibuprofen for Lipitor?
Pharmacy Benefit Managers as Bargaining Agents --Paper presented at the Western Economic Association
International, 8th Annual Conference, July 2005
The largest expansion of entitlement programs in the United States in decades – Medicare Part D --is set to commence on January 1 st of 2006. On that day, retirees will be eligible for subsidized insurance covering outpatient drug prescriptions. The plan will be managed by private sector entities called pharmacy benefit mangers (PBMs)
This paper attempts to reverse misconceptions about PBMs that can be traced to price theory. Proposed is an alternative view based on bargaining theory. There are several fundamental insights gained by looking at PBMs through bargaining theory. First, rebates are not received in consideration for “moving markets” but for refraining from discretionary switching of one brand prescription for another. Second, rebates are not linear price reductions designed to increase demand, but the fixed component of a two-part tariff designed to shift rent to the buy side in a bilateral oligopoly.
Finally, bargaining theory emphasizes that there are two sides to rebate deals. While the Federal government gets more from drug manufacturers, it also gives up more. Comparisons of the relative performance of the Federal government and the private sector should not be based on rebate rates alone, but on the overall performance as measured by drug spending.
CVS, one of the two largest drugstore chains in the United States, announced on November 1, 2006 that it was merging with Caremark Rx, one of the three largest pharmacy benefit managers (PBMs) in the United States.
The proposed merger cannot be easily classified as vertical or horizontal because Caremark is both a buyer of CVS prescriptions and a competitor of CVS via its captive mail order operations.
We believe that this merger is pro-competitive. It is a sign that CVS is accepting a future of price competition, but working to make it more elastic by motivating Caremark to steer traffic its way in return for reduced prescription prices.
On December 16, 2006, Express Scripts, the third largest PBM, announced a competing bid for Caremark. This horizontal merger of two of the Big 3 PBMs would be competitive if the combined company acted as a “countervailing power” as envisioned by economist John Kenneth Galbraith.
PBM countervailing power can be used in the negotiation of rebates with brand name drug manufacturers (Pharma) and in the negotiation of reimbursements with retail pharmacies. While it is possible that large resellers can be countervailing and pro-competitive, we believe that this particular merger would be anti-competitive.
The economist George Stigler was skeptical of Galbraith’s optimism that an intermediate market countervailing power would behave asymmetrically – a powerful buy-side opponent to up-steam oligopolists, but a benevolent agent of down-stream consumers. Our analysis of the evolution and current behavior of large independent PBMs confirms Stigler’s skepticism.
The roll out of the new Medicare drug benefit program has renewed the debate about who is best at negotiating drug rebates with pharmaceutical manufacturers (“Pharma”). Those who favor the Federal government point to statistics showing that Medicaid gets significantly better rebates than private sector entities called pharmacy benefit managers (“PBMs”).
The purpose of this paper is to provide new insights into this question by viewing pharmaceutical rebates through bargaining theory. The first insight is that rebates are paid selectively so that averages of rebate rates across all brands are a poor measure of negotiating power. PBMs’ ability to extract rebates from Pharma is much greater than previously realized when rebate averages are disaggregated.
The second insight derived from bargaining theory is that the rebate transaction is much more complex than the price theory conceptualization of rebates as volume discounts. Drug rebates are tariffs, or entrance fees, paid by Pharma to gatekeepers who promise access to markets with reduced competition.
Medicaid gets more than PBMs, but gives up more in terms of rights to impose co-payments, “prior authorization” restrictions and rights to switch onpatent brand prescriptions to lower cost therapeutic equivalents. PBMs receive less than Medicaid, but they give up less. Based on the overall goal of cost containment, there is evidence that private sector PBMs do a better job at rebate negotiation than Medicaid.
The Effect of Corporate Structure on Formulary Design: The Case of Large Insurance Companies Poster Presentation, ISPOR 10th Annual Meeting, Washington DC, May 2005
OBJECTIVE: To test the hypothesis that the corporate structure of large health insurance companies affects formulary design. By choosing what is solely at the discretion of pharmacy benefit managers (PBMs), their national formularies, as the dependent variable, rather than the generic utilization rate, the need to factor out extraneous demand factors was minimized.
RESULTS: There was no significant difference in the number of “Tier 2” brand name drugs in the selected therapeutic classes of formularies of the large insurance companies with differing corporate structures. However, there was significant drop off in the number of brands included in the national formularies of the three large, independent PBMs and the number of brands in the “Tier 2” of final plan formularies chosen by their clients.
CONCLUSION: Large insurance companies relying on independent PBMs for formulary management take an active role in the design process and neutralize the effect that corporate structure has on the starting point of the design process
TThe purpose of this paper is to raise the transparency issue with regard to a major institution in the pharmaceutical supply chain – Walgreens – the dominant retail chain drugstore in the country.
The key result is that in 2003, there was considerable disparity between the net profitability of Walgreens front store operations – 1.4 % -- and the net profitability of its pharmacy operations – 8.3%. The front store drives a disproportionate share of Walgreens labor and occupancy operating expenses – 61.5% -- versus 38.5% for the pharmacy operation. Even though the front store enjoys a higher gross profit margin than the pharmacy – 36.1% versus 21.6% -- it incurs an even greater operating expense margin – 34.6% versus 13.3%. This disparity may be interpreted as a cross-subsidy and that this may become an issue as Medicare is extended to cover outpatient prescriptions of the elderly.
he roll out of the new Medicare drug benefit program has renewed the debate about who is best at negotiating drug rebates with pharmaceutical manufacturers (“Pharma”). Those who favor the Federal government point to statistics showing that Medicaid gets significantly better rebates than private sector entities called pharmacy benefit managers (“PBMs”).
This paper presents a descriptive model that highlights the essence of what pharmacy benefit managers (PBMs) do in managing certain formulary choices made by their clients. These choices are affected by market share rebates offered by drug manufacturers. We have found that a model based on simple game theory provides key insights into the behavior of PBMs. Formalizing exactly how PBMs behave may be useful in examining complex legal and accounting questions that turn on characterizations of behavior.
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.
Feel free to contact me at firstname.lastname@example.org