Transparency will unlock a sustainable pharmaceutical future
- Aug 23, 2024
- In the News
The launch of Mark Cuban's online pharmacy ignited a much-needed discussion about transparency and affordability in the pharmaceutical industry.
While Cuban's cost-plus model for generic drugs is a positive step in the right direction, it does not fully address the root causes of high drug prices — we also need to look at the lack of transparency and adverse incentives in the traditional pharmacy benefit manager, or PBM, industry.
The problem of rising drug prices and PBM profits has even driven some employees to sue for better coverage. Johnson & Johnson (J&J) employees filed a class action lawsuit alleging the company failed in its fiduciary duty to offer employees reasonable prices for prescription drugs.
This lawsuit underscores the need for greater accountability in the industry — because, today, the majority of PBMs are failing in their mission.
The Federal Trade Commission recently published an interim report on Prescription Drug Middlemen, highlighting the impact PBMs have on the accessibility and affordability of prescription drugs, and we applaud the FTC for shining a spotlight on this issue.
PBMs were created with a responsibility to optimize drug costs and improve patient care. But in general, the industry hasn't been living up to this responsibility due to the opaque way major PBM companies operate. Far too often, the PBM benefits when drug costs go up.
Mark Cuban has called for employers to publish their health care contracts, and this is a major step in transparency, but we need to look beyond the pharmacy to understand how PBMs make money.
To reform the industry and reduce the inefficiencies of a complex pharmaceutical supply chain, we need both a cost-plus pharmacy like Mark Cuban's as well as PBMs that use a similar pass-through model to clearly spell out how much a PBM is paying for drugs, including rebates, so employers can see exactly how much the company and its employees are paying for medications.
How most PBMs operate
PBMs play a crucial role in the U.S. health care system, acting as intermediaries between drug manufacturers, pharmacies and health insurance plans. They negotiate drug prices, develop formularies and process prescription drug claims, and deliver important clinical and safety oversight.
Related: Alternative PBM models: 4 proven strategies to reduce drug spend
The PBM market is highly concentrated, with the three largest PBMs — CVS Caremark, Express Scripts, and Optum Rx — controlling approximately 80% of the market. Unfortunately, the business model used by these companies today does little to help lower overall drug prices.Optum Rx recently announced a "Clear Trend Guarantee" program that aligns guarantees into a single per-member cost for retail, home delivery, specialty drug and rebate components, but rolling up all of these costs into one payment continues to obscure the true cost of drugs.
In 2021, the total U.S. prescription drug expenditure reached $577 billion. In 2023, this reached $722.5 billion, a 13.6% jump compared to 2022. And total drug spend across the industry is expected to jump 10% to 12% more in 2024.
The factors driving this growth include increased utilization, new drugs coming on the market and increases in prices.
Industry studies have shown that a small number of drugs, particularly biologics like Humira (adalimumab), blood clotting drugs like Eliquis (apixaban), and the new GLP-1 agonist medications, such as Ozempic (semaglutide) and Victoza (liraglutide), are the primary drivers of rising costs.
If PBMs aren't able to keep drug prices low, why are we in the business? Just to make large profits at the expense of America's employers? Isn't there a way we can lower prices for everyone?
Spread-based vs. pass-through pricing
The traditional PBM business model is frequently criticized for its opaque practices and potential to drive up drug prices.
PBMs were created to help lower drug prices by bringing volume purchasing and expert negotiators to the table.
That is our mission and reason for existence.
Unfortunately, many PBMs benefit financially when drug prices increase, given spread-based pricing and rebate retention, which allows the PBMs to profit from the difference between what they pay for drugs and how much they charge their clients. This misaligned incentive rewards PBMs for higher drug costs by creating more profit opportunities while keeping drug prices higher than they need to be.
Furthermore, PBMs often charge smaller clients more to provide better discounts to larger groups, creating a situation where smaller employers subsidize the drug costs of larger companies.
None of this would be considered "fair" by most people outside our industry.
In contrast, a pass-through PBM model, championed by organizations like Transparency-RX, charges a fixed administrative fee per member per month. This approach helps align incentives for consumers while providing greater transparency.
Under this model, clients have a clear understanding of what they are paying for the PBM's services and can assess the value being delivered. This transparency also enables clients to make informed formulary and clinical decisions based on the true cost of the medications, rather than looking at the size of discounts or rebates.
Fixed fees and established markups drive transparency
To tackle these challenges, PBMs must adopt a comprehensive approach that extends beyond generic drug pricing.
Implementing a cost-plus model for specialty and brand-name medications, much like what Mark Cuban has done for select generic drugs, could help reduce costs and improve transparency.
By charging a fixed markup on the actual cost of these drugs, the PBMs can ensure that their clients are not paying inflated prices due to hidden fees or spreads.
But a fixed markup on top of a manufacturer's price can still reward increasing drug prices.
To address this, PBMs need to prioritize clinical decision-making in the best interest of clients and their members, rather than making formulary decisions based on financial incentives. This requires a commitment to acting as a fiduciary, making decisions that prioritize patient outcomes and cost-effectiveness over PBM profits.
This is where a pass-through model like the one used by PBMs in Transparency-Rx can really help.
Direct to consumer + transparency
Mark Cuban's direct-to-consumer model is an important step toward raising awareness for affordability and transparency, but it still doesn't address the systemic issues plaguing the majority of the PBM industry.
Making drug prices more transparent is important, but we also need alignment between cost-plus pharmacies and the PBMs using a pass-through model which increases clarity for employers and results in lower prices for consumers.
To drive meaningful change, PBMs must adopt pass-through models, expand acquisition cost-plus pharmacy pricing to specialty and brand-name drugs, and prioritize clinical decision-making that benefits patients and payers alike.
By educating employers and other stakeholders about the importance of pass-through PBM models and the need for comprehensive strategies that address the true drivers of rising drug costs, we can help create a more sustainable and equitable healthcare system.
PBMs have a vital role here, from a clinical and cost management perspective, and the industry hasn't delivered on that promise.
There's a new generation of PBMs operating under the Transparency-RX umbrella that are living up to that promise by separating out their revenue to reduce complexity in pricing — PBMs that don't benefit when drug prices increase.
The path to a more transparent and affordable pharmaceutical industry requires collaboration among all stakeholders, including the PBMs, drug manufacturers, pharmacies, employers and policymakers.
By working together to implement innovative solutions, such as expanding cost-plus models and aligning incentives, we can ensure that patients have access to the medications they need at prices they can afford.
As the conversation around drug pricing and PBM practices continues to evolve, it is essential that we remain committed to driving change and improving the lives of those we serve.