If Employers Are So Unhappy with Their PBMs, Why Can’t They Change the Model?
The National Pharmaceutical Council (NPC) recently released Toward Better Value, a fascinating survey of employers’ views about their pharmacy benefit managers (PBMs). (free download)
According to the results, employers are unhappy with PBMs’ performance on crucial services. (The PBMs were not identified by the survey.) Employers apparently also want to reform the rebate system at the heart of our complex distribution and reimbursement system.
These results imply a significant but as-yet-unexplained market failure—one that that somehow prevents employers from negotiating better deals and writing more effective contracts. Below, I review the NPC results and speculate on what they mean for the PBM industry and possible disruption of the PBM model.
HOLY BENEFIT MANAGEMENT, BATMAN!
Pharmacy benefit managers (PBMs) administer prescription-drug plans for people with third-party insurance through a self-insured employer, health insurance plan, labor union, or government plan. We refer to a PBM’s clients as “plan sponsors” or “payers.” Plan sponsors contract with PBMs to process and pay prescription drug claims, to secure discounts and rebates from prescription drug manufacturers, and to manage networks including retail, mail, long-term care, and specialty pharmacies.
A third-party payer chooses the overall prescription drug benefit that it will offer to members or employees. The options could include, among other things, the number of pharmacies available to plan members, which drugs are covered, different levels of cost sharing, and the particular incentives for using certain network pharmacies. The third-party payer does this while making tradeoffs among plan costs, quality, and access. The practice of pharmacy benefit management then implements these choices for the plan sponsors.
The various functions of pharmacy benefit management can be performed by different entities within the drug channel system: an employer, a health plan, the government, and an independent PBM company. In general, employers are most likely to outsource pharmacy benefit management services to external PBMs, which can provide advice and guidance as pharmacy benefit experts. Few employers have sophisticated in-house capabilities for analyzing pharmacy benefits, especially when controlled by the human resources/benefit function.
For more on the PBM industry, see Chapter 5 in our 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.
A DARK NIGHT FOR EMPLOYERS?
The National Pharmaceutical Council (NPC) hired an outside firm to survey U.S. employers with 5,000 or more employees. The firm received 88 responses and then conducted a series of follow-up interviews with eight survey respondents.
Employers generally believe that pharmacy benefit management services are valuable. Eighty percent of respondents rated the following two services as the most important ones:
- Rebate activities (“negotiate with pharmaceutical manufacturers to achieve cost savings”)
- Utilization management (“implement tactics that help control costs by assuring use of the most cost-effective treatments”)
See Figures 1 and 2 in the NPC report for other services.
However, employers appear to be dissatisfied with how their PBMs perform these and other services. Consider these findings:
- Employers are unhappy with their PBM relationships. Only one-third of employers rated their PBM as “very trustworthy.” Half of employers do not believe that PBMs provide transparency into formularies and exclusion lists.Figure 4 (reproduced below) in the report is striking. For the two most important PBM services listed above, a minority of employers rated PBMs’ performance as “very good.” Only 41% of employers believe that PBMs rate “very good” performance on rebate negotiations, and only 24% believe that PBMs provide very good utilization management.
- Employers are highly skeptical about rebates. Seven out of ten employers would “welcome an alternative to a rebate-driven approach to managing costs.” Less than one in five employers believe that rebates are effective for driving down net price. See Figure 5 (reproduced below). Yikes!
RIDDLE ME THIS
The NPC findings raise at least three key questions about the apparent market failure that permits large buyers of PBM services to remain so unhappy.
1) Why don’t employers restructure their PBM contracts?
There is a small army of pharmacy benefit consultants that analyze PBM relationships, advise on contracting, and assist with negotiations. It seems that employers should be able to make better decisions—if they put in the effort. Caveat emptor!
Some employers can and do restructure their PBM relationships. Consider Health Transformation Alliance (HTA), whose members chose to evolve their PBM relationships. (See The New Health Transformation Alliance Deal: Mostly Good for PBMs, but Bad for Express Scripts.) The employers within the HTA still want PBMs to operate drug plans and negotiate with pharmaceutical manufacturers and pharmacies. These employers chose not to remove PBM intermediaries.
Smaller employers have external resources, too. The Midwest Business Group on Health published Drawing a Line in the Sand: Employers Must Rethink Pharmacy Benefit Strategies. This white paper provides a list of tips on how employers can structure better contracts with PBMs. Think of it as a “PBM Contracting for Dummies” handbook.
2) Do employers have the right incentives to fix perceived problems?
As I see it, plan sponsors have baked ever-growing rebate dollars into their benefit economics. See my speculation in Will CVS Health’s Point-of-Sale Rebates Deflate the Gross-to-Net Bubble—and Disrupt the PBM Business?.
The $100 billion in rebates flows back to plan sponsors may dissuade them from sharing these savings, per the data in Employer Pharmacy Benefits in 2017: More Cost-Shifting to Patients As Tiers and Coinsurance Expand.
3) If PBMs don’t provide sufficient value, why do employers keep hiring them?
PBMs may not be perfect, but perhaps employers believe they are better than any alternative models for our current system.
Consider the approach suggested by Scott Gottlieb, commissioner of the Food and Drug Administration (FDA). Prior to heading the FDA, Dr. Gottlieb suggested migrating brand-name pricing from today’s formulary rebates to up-front discounts. Such a change would be a black swan event for U.S. drug channels, per Scott Gottlieb’s Radical Idea for Disrupting U.S. Drug Channels: Implications for PBMs, Wholesalers, and Pharmacies.
It’s a radical and disruptive solution to the gross-to-net bubble—the growing spread between a manufacturer’s list price for a drug and the net price to a third-party payer after rebates. But are employers ready to embrace it? Maybe not.
WHY SO SERIOUS?
Other surveys of PBMs’ customers raise similar riddles.
Consider the PBM satisfaction results that I discussed last year in Plan Sponsors Like More Transparent PBMs—Yet Not All Choose Transparency. I observed:
“Plan sponsors are big boys and girls. They can make their own choices—wise or not. If a plan sponsor wants a transparent and presumably more satisfying PBM relationship, the marketplace will oblige. But as the second chart shows, many relationships are not completely transparent…So, here’s the real question: Why don’t more plan sponsors demand transparent relationships?”
Both the NPC and PBMI survey results provide context for the hype around Amazon. While I remain somewhat skeptical of Amazon’s ability and desire to fundamentally alter the drug channel , the NPC survey demonstrates payers’ obvious desire for someone to change how our system works.
Last week I participated in the Federal Trade Commission workshop Understanding Competition in Prescription Drug Markets: Entry and Supply Chain Dynamics. Unfortunately, the PBM panel didn’t have time to delve too far into these issues.
SOURCE FOR THIS ARTICLE:
Brian Klepper, PhD