The drug pricing middlemen driving up drug costs
Healthcare continues to be front and center in the national discourse, particularly in the midst of the pandemic. As Congress works on policy solutions to lower healthcare costs for consumers, we face an unfair disadvantage when it comes to what we’re paying at the pharmacy counter. Many consumers don’t know that this is largely due to middlemen companies called pharmacy benefit managers (PBMs).
Antonio Ciaccia, President of 3Axis Advisors and Chief Executive Officer of 46brooklyn Research, joins NCL’s Executive Director Sally Greenberg to talk about the role PBMs play in our drug pricing system and how they impact what consumers pay out-of-pocket for their medicines.
*Due to COVID-19 safety protocols, this episode was recorded remotely. Audio quality may not be consistent throughout.*
Transcript: The drug pricing middlemen driving up drug costs
Intro: You’re listening to We Can Do This! a podcast by the National Consumers League. We talk through the issues of today with the figures who have paved the way for social and economic reforms and those carrying on the fight for an equitable tomorrow. Leading today’s conversation is Sally Greenberg of the National Consumers League.
Healthcare continues to be front and center in the national discourse, particularly in the midst of the pandemic. As Congress works on policy solutions to lower healthcare costs for consumers, we face an unfair disadvantage when it comes to what we’re paying at the pharmacy counter. Many consumers don’t know that this is largely due to middleman companies called pharmacy benefit managers or PBMs.
Sally: As listeners of our podcast know one of our bedrock principles as consumer advocates is to make sure consumers get a good deal no matter the marketplace. We’ve recently launched our own public awareness campaign to help consumers begin to understand the role of these mysterious PBMs. And we’re finding that many people are completely surprised to learn about this player in our very complicated prescription drug pricing system. I encourage you to check out ncl.org/PBMs to learn more about our work on this issue and I’ll remind you of that URL later in this broadcast. But to learn more about this, we’re going to be speaking to Antonio Ciaccia, President of 3Axis Advisors and Chief Executive Officer of 46brooklyn Research. For our listeners who don’t know about these middlemen Antonio, can you explain to us in the simplest terms, what a pharmacy benefit manager is?
Antonio: Absolutely. It is great to be with you. When I think of PBMs, I think of in very simple terms that a patient might be able to understand, is to think of them as the insurance company for your prescription drugs. The PBM started in the sixties to essentially act as a facilitator of the claims transaction to the pharmacy counter. So if you were a patient you were walking in and you had prescription drug coverage, the PBM would communicate with the pharmacy and determine what you had to pay, what the pharmacy would be compensated for their reimbursement, and what copay, if anything, you as a patient would pay out of pocket. But over time as our reliance on coverage for prescription drugs grew and the number of medications grew as well, PBMs found themselves in the middle of a growing number of transactions to the point that they actually facilitated nearly 90% of all the prescription drug transactions today.
And with that positioning, they have a lot of opportunities to influence that transaction. And so from a patient perspective, when you think of PBM, think of the entity that it is controlling, what you as a consumer pay out of pocket, which drugs will be covered, which ones will not, which pharmacies you can use, and which ones you cannot. The PBMs have really become the central component of the prescription drug transaction. And relative to the degree with which they’re known are really kind of invisible despite having an outside impact on what we all pay as consumers.
Sally: So, you’re really steeped in the pharmacy business. I understand that your father was a pharmacist and your sister is currently a pharmacist. Tell us how did you first came to learn about the role that PBMs play? Tell us about how you got interested in this whole topic of how complicated pharmacy is and how difficult it is for consumers to navigate?
Antonio: Well, dad’s still counting down the days until retirement, he’s close, but he’s been in hospital pharmacy for about 40 years and my sister is a Walmart pharmacist. Both of them are up in Northeast Ohio. I worked as a pharmacy technician for about three years for a small grocery pharmacy up in Northeast, Ohio growing up. And I was pretty enamored with what my dad got to do for a living. I thought it was really cool that he got to interact with hundreds of patients on a daily basis and help walk them through very complicated drug therapy regimens that the patient really had little understanding of how to spell or pronounce let alone what it did to the body and interact with their chronic disease to make them better. And so I went to Ohio State to actually become a pharmacist like my dad, until I hit organic chemistry and said, this is not my cup of tea.
And so I actually switched over to journalism and political science. And upon graduation, one of my first jobs was working on trade magazines for nonprofit and professional associations, and eventually took a job with the Ohio Pharmacist Association, where I really started to get a better idea of how prescription drugs were priced and how pharmacists felt about PBMs.
Fast forward the tape, pharmacies, and PBMs are very much Hatfields and McCoys, and pharmacies, whether they’re right or wrong, think that they should be paid more by PBMs for the services they provide. And then on the other end, PBMs say, well, no, we think that we should pay you less for the services you provide. Therein lies a huge part of the friction, but over time, PBMs actually started opening their own mail-order pharmacies and specialty pharmacies, and in the case of a large PBM like CVS Caremark, their own retail and chain pharmacies. And so that divisiveness within the drug channel only grew more significantly over time. And so my introduction to PBMs was really not much more than a source of a growing number of complaints and the pharmacy providers who had to interact with them in order to access the patients.
Sally: So it was organic chemistry who did you in? You’re not the first and you’re not the last and it’s probably the reason I didn’t go to medical school. My father was a doctor and it would’ve been fun to interact with patients, but yes, it’s [inaudible06:32bare] for sure, but let’s do this, let’s dig a little bit deeper. I really appreciate your research and efforts to shine a spotlight on PBMs and NCL has really launched a campaign to question their value-added in the marketplace and how they’ve kind of become a means to an end as an industry.
And they really started out with all the best intentions, I think, and to discipline the costs and to play a really important role as middlemen in setting prices for drugs. But then they became a business unto themselves and profit center and siphoning off, what we regard is siphoning off a lot of billions of dollars, 400 billion is the number that we’re using from the pharmaceutical system out of patients pockets and into the pockets of the PBM. So in terms of really shining a light on how they drive up costs, I’ve kind of highlighted how it works but have not gotten into the details. Can you tell a little bit about the ways in which PBMs operate so that so much of the cost of prescription drugs is controlled by them and ends up in the pockets of PBMs?
Antonio: Absolutely. So let’s start with some fundamental framing, PBMs were hired to make the prescription drug transaction more efficient, and today they will tell you and their freight association will tell you that PBMs are the only entities in the prescription drug supply chain working to lower costs. And so let’s use that as the starting point, PBMs were architected to make sure, to make the claims transaction more efficient, but then to work and negotiate with drug makers, to achieve certain concessions off the list prices of the medications. You know, as we know, prescription drug prices, at least the list prices go up every year. So PBMs work to negotiate with drug makers to say, hey, we don’t want to pay that price or, hey, drug maker, A, if we feel that your price is too expensive, we’ll go to drug maker B and go to them and see if they’ll be willing to offer a better price drop relative to value.
And so all that on paper sounds really, really good, right? PBMs, essentially working on behalf of plan sponsors and the patient lives that they represent to lower the prices. And then on the other side, they work to negotiate with pharmacies to say, okay, regardless of what the pharmacy wants to choose for a particular medication, we, the PBM, are not necessarily going to say that we’re going to pay exactly what the pharmacy wants to charge. And so you’re supposed to have essentially some balance there. And that’s how it really started except over time that got worse and worse and worse.
Sally: As you pointed out, PBM started out with good intentions and they were originally intended to negotiate better prescription drug prices. Over time, I think as we’ve noted, they’ve really lost sight of that role and they ultimately use consumer fees and rebates to increase their profits. So the question is, is there direct evidence of that? How do we know they aren’t, in fact, sharing these savings with us and why aren’t PBMs allowing consumers to save more on prescriptions as they were designed and as they’ve really promised the marketplace they’re going to do?
Antonio: And therein lies the rub, right? On paper, they were there to negotiate these balanced discounts to help facilitate a more efficient transaction, but let’s simplify even further. They were hired to control pharmacy and drug maker costs but look no further than the fortune 500 lists or any sort of earnings calls and you will find that the largest PBMs, the big three, make up over 75% of their industry. And in fact, if you look at some of the competitor PBMs who are, you know, competitors to the big three, many of them white-label or rent certain services from the big three, so you have an actually over consolidated market even more so than what appears on paper. Those three PBMs have become fortune 15 companies. They are larger than the pharmacies and the drug makers that they were hired to control in the first place.
Antonio: And so when we talk about prescription drug costs, it’s impossible to divorce it from the concept that the drug lives within an overall supply chain, and within that chain PBMs have grown to the largest members of it. And so the question then is how are they making their money? Well, in the process of negotiating discounts with drug makers, drug makers don’t compete to lower their prices, they actually compete to increase their discounts, lowering the net price of the medication, not necessarily the list. And so PBMs at their core, let’s just say, are leverage, and the bigger leverage and the more patient lives that they represent, the more ability they have to negotiate bigger and bigger concessions from the drug makers themselves.
Sally: So let me slow you down there so we can make this really simple. Let’s take a number, let’s say the list price is a hundred dollars for a drug. Work with us on how that breaks down and when you say the drug companies are required to pay more and more money to the PBMs to get their drugs onto their formularies, can you sort of break that down for us and talk about how that works?
Antonio: So, PBMs ultimately represent plan sponsors, but in the end, they represent patients and consumers. You know, plan sponsors, whether it’s employers, Medicaid programs, you name it, are ultimately a collection of multiple individuals that are receiving benefits through the organization. And so PBMs consolidate all of their clients, their plan sponsors and each individual patient ultimately represents a droplet of water in the PBMs overall bucket of leverage when it comes to negotiating discounts and concessions with pharmacies and our drug makers. So what happens is, is let’s take a drug like Lantus. It’s a very popular insulin product. Lantus has a list price of $284. So this was actually reported on, on Axios a couple of months ago. And so Axios reported that despite having a $284 list price at the end, after you, tabulate all the discounts and all the rebates that a drug maker in this case, Sanofi, who makes Lantus, factors in and flows through the system to PBMs and government entities, Sanofi is actually only taking in $37 per vial of insulin.
So you have a $284 list price product and the actual cost of that, at least what the drug maker takes in, is around 37. And so at that point, it begs the question of, well, what do consumers pay and what do employers pay? And our research and research that lives outside of our bubble as well, shows that the degree with which those discounts are passed through are widely differential from person to person and plan to plan, which means that we have a system of price discrimination. What we see routinely is that despite the PBM receiving that drug for essentially $40 a vial, we see them then turn around to patients and tell them to pay copays that are northwards of $200. So it begs the question of what type of benefit are they actually providing when they use the patient and all the patients, they represent to shake down drug makers for hundreds of dollars per vial of insulin, but then not passing along that benefit to the patients who ultimately necessitated that benefit in the first place.
Sally: That’s a shocking number and a shocking percentage that doesn’t go into patient’s pockets, which is, our whole point is to try to get patient’s relief on a drug that’s $284 so that their costs are coming down, but it looks like costs are being siphoned off into places that patients don’t understand. Now don’t plans have the ability to work to reduce those costs and what could plans do to get themselves some leverage in this marketplace with PBMs?
Antonio: So, unfortunately right now and this is a topic that we talk a lot about just philosophically about healthcare, and that is we as consumers understand that there are likely discounts to be obtained when you’re purchasing something in bulk. If I ran a hardware store and I was selling lumber to somebody coming in to purchase it or if somebody came in and wanted to buy, you know, 500 2x4s, it’s very efficient for me to take care of that all in one fell swoop. And so we as consumers understand that there’s an understandable discount that can be rendered when that type of purchase occurs. However, in the drug industry or in healthcare more broadly, it feels a little bit more unfair, right? Because we don’t care about the volume-based purchases in healthcare. What we care about is quality purchases of healthcare services.
And so in healthcare, what we have right now is an arms race to get bigger and bigger and bigger as a means to elicit more and more concessions. And we see this in the hospital space, on the other side, hospitals are growing significantly and consolidating as a means to garner more and more leverage, to make sure that they can get paid more by insurance companies. Whether it’s a chicken and egg thing, the insurers are also growing in tandem to make sure they can stay ahead of that increased consolidation. Regardless of all of it, it’s creating a marketplace where big nets you bigger revenue, if you’re on the receiving end or bigger discounts if you’re on the buying end. And it’s crowding out smaller players and limiting the number of choices for consumers in the marketplace.
What that also means is that if you were a small player and let’s say, you wanted to inject significant competition into either end of the healthcare spectrum, you have to overcome the unfortunate reality that we doll out prices in a discriminatory fashion, that if you’re not big, you’re not getting better pricing. And so because of that, the same logos that were big a few years ago are the same logos that are even bigger today. And so we have to grapple with this fact that our healthcare industry is becoming increasingly hard to penetrate, especially when you add to the fact that a lot of these discounts and concessions are passed through. And a lot of these discounts and essentially net prices are totally proprietary and unknown to the end payer.
Sally: Which is a transparency problem, right? So we don’t know how much we could save, even if we had the leverage to do it. So the question is, back to how do PBMs get away with it? We understand some State attorneys general, some State legislatures, and also the federal trade commission has been looking at the leverage that these very large and powerful PBMs have on drug pricing. Can you fill us in on what’s going in those law enforcement spaces?
Antonio: Absolutely. So it is a good way to add a little bit more of my personal journey into it, not that anybody’s interested in my life, but when I was at the Ohio Pharmacist Association, pharmacists were complaining about significant underpayments in our Medicaid managed care program where independent pharmacies that were serving the most underserved communities in our State were complaining that all of a sudden in the summer of 2016, that their gross margins, what they do to pay the bills, all right, got cut 60 to 80% within our Medicaid managed care program where PBMs were administering the benefit on behalf of large insurers. I went back to State officials and said, oh my goodness, did I miss something here? What policy change resulted in these massive cuts that were resulting in pharmacy closures across the State? And they looked at me like I had worms crawling out of my eyes because they said, we’ve never been paying more for prescription drugs than we are today.
And so, while I wasn’t a genius on drugs at the time and still I’m arguably not today, that disconnect between how can the individual that’s distributing the product to the patient, see such massive cuts and then the payer on the other end of the check is not seeing the benefits or savings from those cuts. It was at that point that we started to get very interested in data analytics because while everybody was complaining about the cost of prescription drugs, nobody was actually paying attention to how the sausage was being made. And what we found was a growing disconnect between what our State Medicaid program was getting charged versus what pharmacies were getting paid. We ended up working with local journalists at the Columbus Dispatch who, fast forward the tape, won national awards for the reporting on their investigation into PBMs nut Ohio found that PBMs were in fact, underpaying pharmacies and billing the State high.
And when quantifying all of that over a single year of our Medicaid managed care program, PBMs pocketed 244 million out of a little-known practice known as [inaudible19:39Fred] pricing, where they pay low, bill high pocket to Delta. Our State fired the PBMs and is in the process of moving to a single PBM system where instead of allowing PBMs to subjectively determine the rates of the pharmacy marketplace, which is, we’ve established, they own their own pharmacies and have a conflict of interest in doing so. The State pulled the plug on that saying, we are going to demand you to be fully transparent, we’re going to demand that you cannot in a hidden fashion mark up the prescription drugs within our program and eventually we’re going to divorce you from setting prices altogether. Those are just some of the reforms that the Ohio Department of Medicaid has done, but a number of Medicaid programs across the State have been moving in similar directions.
Simultaneously, state attorneys generals have started looking at this from a fraud, waste and abuse perspective. And in fact, again, in my home state of Ohio, our state auditor that opened in the books of the PBMs in our Medicaid program also did so in our Vera Workers Compensation program and our state highway patrol fund, where he found different PBMs in totally different agencies and contracts, overcharging the State to tens and hundreds of millions of dollars and has filed lawsuits in many of these cases to seek unsanctioned or disallowed funds from our state program.
Sally: Wow! Unjust enrichment, that’s the word that comes to mind, a little legal word. That’s really shocking what happened in Cleveland and what was uncovered by the Columbus Dispatch. Well, good for the newspaper and good for you working with them on that. So it’s that that really led to these reforms in Ohio. What kind of savings are we looking at there and will consumers and the plans and the Medicaid program, will they enjoy those savings?
Antonio: So now, I’m really going to throw you for a loop here because the $244 million that the State of Ohio found in hidden PBM spread pricing was but one line item in how PBMs can make money off of these programs. Mind you that we’ve already established that PBMs make money off of rebates from drug makers. They make money downstream when patients are required or incented to get their prescriptions filled at a PBM-owned mail-order facility. They also make money off of the dispensing of specialty medications, and they also make money off of a litany of growing amounts and types of fees. And so that $244 million was, but one line item in the PBMs revenue portfolio. So when our State of Ohio decided to fire the PBMs, they did so based upon just uncovering one book of business within that portfolio.
They have moved to a more transparent model and in their redesign, they are anticipating that while PBMs were making $244 million on spread pricing alone, that’s not to mention all the other tens, if not hundreds of millions of dollars they were making off the program that they did not uncover, but in the new model that they’ve created, they’ve moved to a single State-controlled pharmacy benefits administrator that they will be paying 21 million per year. And then they’ve hired an outside to act as essentially an oversight accountability mechanism with which they will pay 1.5 million. And they anticipate making a few hires within the State Department of Medicaid to oversee the program that wasn’t overseeing it before at maybe another around million or a million and a half dollars. So to give this perspective, while PBMs were making $244 million off one line of business of the Medicaid program, our State Department of Medicaid’s redesign and cleansing of the system is expected to yield over $220 million in savings on an annual basis.
Sally: Wow! And is this a model, do you think for other States?
Antonio: I do. Structurally, there are a lot of different ways that this could be accomplished. The State of Ohio chose to move to a single State contracted PBM, but I’ll concede that that’s not the only way that you can do it. I think it’s a better way to have accountability. It’s easier to keep your eyes on one vendor than many, but to me, what Ohio did that was really significant was that they divorced the PBMs from setting prices in a marketplace where they make money off the transaction. Think of it this way, Sally, imagine if the State Department of Medicaid in Ohio or any plan sponsor, let’s say, small employer or large employer; let’s say that their contract to obtain prescription drugs was with Walgreens or Rite Aid or insert whatever pharmacy name you want and imagine that the contract said, we’re going to let you charge us whatever you want for prescription drugs and we will pay the bill.
Well, PBMs were hired to control that exact phenomenon but now that PBMs make money off of the very transaction that they were hired to control in the first place, it really is no different because if the PBM could go out in the marketplace and buy drugs from pharmacies, however, they want, and then set whatever types of markups they want over top of that, without necessarily passing them through, what you’re really doing is you’re allowing the cookie monster complete access to the jar of cookies. And so what Ohio did from a fundamentals perspective is recognize the inherent conflicts of interest and opacity within the prescription drug supply chain and say, anybody that makes money off the dispensing of medications would not be able to set the prices on the dispensing of medications. That fundamental is learning, I think for everybody in this marketplace that looks, it’s not to say PBM shouldn’t exist, but we need to restore them back to their base function, which is acting with the sole incentive of providing access to medications in an efficient manner.
Sally: Okay. So let me probe a little bit more about something that affects consumers directly. I’ve read that the three largest PBMs excluded 846 drugs from their formularies in 2020 compared to 109 in 2014. So, patients who rely on specialty tier drug drugs are likely getting hit the hardest. We also know because we work with various women’s healthcare organizations on contraceptives that not all FDA-approved contraceptives are allowed on various formularies because PBMs won’t allow them unless they’re getting sufficient rebates back into their pockets. So they don’t include very contraceptive options for women and as a result, women can’t get access to contraceptive medications that they actually need or are a better fit for them. So can you talk Antonio, about the medications that stand out when it comes to PBMs, driving up cost, as far as specialty drugs and how they cut out certain options for patients who would like to have a drug but it’s not approved on their health plans formulary?
Antonio: So it’s a great question, Sally. We tend to look at health insurance as I’ll equate it to car insurance. I have car insurance not to take care of my oil changes and to fill up my gas tank. I have car insurance in case I get into [inaudible26:52rap], all right. When I have a problem with my automobile, that’s when I look for my car insurance to step up and help me. We used to look at health insurance the same way. If I get sick, which is a rare occasion, just like an automobile accident. That’s when my health insurance steps in to help facilitate paying for those services. It’s helping me through an unexpected cost in my life. If you look at health insurance through that traditional lens, then any medication and any therapy that a patient is prescribed and medically necessary, should, in fact, be covered by an insurance company or a PBM in the context of drugs.
Let’s be fair here, insurance has evolved into a more managed care model rather than just say, we’re going to pay the bill, they work in an efficient way working with than a premium to try and prioritize what things should be bought and at what price. And I think that that in general is a good thing if I’m leaving out all the inherent conflicts of interest that now exist with vertical integration of insurers and PBMs, but let’s just walk down that road for a little bit. I will say that there are many drugs in the market that we are aware of that are very, very expensive relative to their added-value proposition, relative to other medications that are available in the marketplace. We see a lot of drugs that are essentially combinations of two cheap generic drugs that can cost a plan sponsor or a consumer thousands of dollars out of pocket for something that you could literally just put in two different pills for less than a dollar.
From an insurance and PBM perspective, I don’t think that covering those medications makes a tremendous amount of sense. And so from a worst-case scenario perspective, let’s just stay for the sake of this conversation that not every medication is necessarily deserving of coverage from an insurance company and PBM. Here’s where all of that becomes incredibly complicated. Sometimes patients need those products, sometimes a patient, whether it’s because they have problems with complying with their medication treatment regimens, let’s say they interact with one product in a very, very negative way relative to another. Well at that point, then a patient does need some of these products that I might say in an aggregate sense has a very low-value proposition.
Every drug ultimately has a patient who needs it. I very much believe that even for the ones that I think are of low value; at which point it then begs the question, well, what do we have health insurance for and how is our health insurance helping us obtain these medications? I want to go back to this perverse dynamic that we have with brand-name drugs and competitive classes that end up being the ones that end up on formulary exclusion lists more so than ones that are not in competitive classes. What we see in the drug industry is that competition pushes list prices higher as a means to make way for bigger rebates and discounts that the PBM receives from the drug maker in exchange for coverage.
Well, part of the way that a PBM is able to pit the drug maker against other drug makers is because again, they are representing all those patient lives and from a drug maker’s perspective, a lot of market share. And so if I’m a large drug maker, I want the big PBMs to cover my medications and better yet. I want them to cover my medications and not necessarily the medications that are made by competing drug makers. PBMs benefit from that dynamic by pitting them against one another and shaking them down for more and more concessions. And at the end of it, deciding which one is the winner and the loser then is on a lower tier on the formulary or not included on the formulary at all. The problem is that the losing drug maker is still selling their products to a different PBM and playing the exact same game.
So we as consumers, regardless of which plan we have, all of the prices of our medications are not priced like a gallon of milk is at a grocery store. Meaning it’s meant for us to pull off the shelf and pay with our own visa or MasterCard. They are priced for kickback, meaning that they are all artificially inflated relative to the net cost that the drug maker takes in, which means, let’s say we are that patient who needs that drug that I think might be of low-value proposition to the overall marketplace. Let’s say my doctor or me and my pharmacist have decided that look, whether it’s because I have bad interactions, bad side effects, or it’s just the right drug for me, no matter what, now I can’t afford that medication out in the open market without insurance, because all the prices have been artificially inflated so that insurance companies can buy it, but not cash-paying consumers. And so from that vantage point, your PBM is an arsonist and a firefighter. They influenced the prices higher and you need them in order to access them. So if you’re a patient who needs one of those drugs, that’s excluded on a formulary, you are put in the unenviable position of paying way overinflated amounts because of this broken dynamic that there’s between the drug maker and the PBM.
Sally: Will the situation in Ohio, the resolution of the Ohio issues that you guys uncovered and have now been addressed by the Ohio legislature, will that address this particular problem?
Antonio: It does not actually. In fact, the Ohio story really dealt with the broken dynamics that live between a PBM and a pharmacy, but there’s a whole another transaction that exists and that is the transaction that occurs between the drug maker and the PBM. The dynamic that I just talked about is the dynamic between the drug maker and the PBM. The Ohio story is solving the PBM to the pharmacy West Virginia though is the first State in the country to pass legislation that requires all of those discounts that drug makers pay to PBMs to be passed through to the end consumer and the plan sponsor. So that actually has just passed. It hasn’t even been implemented into law yet, but to me, that’s where I think one of the biggest sources of industry disruption are going to come from are these new programs that are requiring the savings to be passed on to the consumers. Now be clear that the broken rebating system and the artificial inflation of prescription drugs still exist in that model. But at least there’s some requirement that the discounts be passed along to the end payer.
Sally: Would that put PBMs out of business theoretically or are there other lines of work and profit that they will shift to because the West Virginia model really says to them, you can’t keep any of those inflated prices, you’ve got to pass those along. And I think that’s very good news for consumers, if it, in fact happens, we hope it will. But how about that? Will this put them out of business or will they shift to another line of profit center?
Antonio: In my experience, PBMs are very adept at working around legislative and commercial attempts at scrutiny and accountability. It has always been a whack-a-mole, which is, if I go back to the Ohio story, I think that’s one of the lessons that the Ohio Medicaid program took into account when they made their pivot to a single PBM model. They said, look, we’re done trusting this industry because we’ve seen that we can ban spread pricing, but then we’ll see overpriced specialty medications and patients being forced to use PBM owned pharmacies, where they see overpaying a pharmacies as a means to claw back excess payments by the PBM a year after the transaction has been theoretically completed. So PBMs are very, very good at the pivot, right? But like anything, you know, the more and more transparency that you can inject into the system, the more you can route those problems out right from the start. And so I don’t, I think PBMs will usually be a few steps ahead of us, but I think the transparency on prescription drug prices and how money flows to the drug channel provides a huge opportunity to minimize the amount of pivot and essentially the squeezing of the balloon that we typically see in them.
Sally: So other state models that you think are promising, I mean, do you need to have both the West Virginia and Ohio model adapted to various states in order to require transparency, require that any profits go into the pockets of plans or consumers, how do you think we want to navigate that road ahead?
Antonio: Yes. I think from a consumer perspective, what we learn is that with mystery comes margin and PBMs have become the masters of mystery in the prescription drug supply chain. And obviously as the fortune 15 list will show you that mystery has created much margin. And so by eliminating mystery, I believe that we can come up with more consumer oriented policies, not just from a law perspective, but from a contracting perspective, because many consumers are exposed to drug costs via their employer or a government program. And how that cost exposure occurs is typically governed by a contract. And so the more that we can clear up the gunk that lives within the prescription drug channel and some of the opacity that lives within the pricing, I believe that there could be real disruptive efforts to lean out some of the fat that PBMs has cooked into the system. And so I lean very heavily on maximum transparency so that whether it’s research firms like ours or consumers or employers or fill in the blank is better equipped to navigate the complicated map that the drug supply chain has created for that.
Sally: So we could do this State by State, but there’s probably a more efficient way to address this if it can be done. And this may be a state problem because it involves state players like pharmacies, which are regulated by States and health plans, to some extent, is this something that Congress can and should take up legislatively? Let me just note that there was a really good report from the finance committee and the Senate bipartisan report. I believe it was last year or the year before that shine the light on how PBMs ratchet up the list prices for drugs, the way you described, and because there’s so much rebate activity going on, I’m probably oversimplifying this and that, in fact, the drug companies, even though their prices go up, they’re not necessarily increasing their profit margins. And the takeaway is that PBMs are the largest beneficiary, by far, in the increasing cost of prescription drugs. So the question is, should there be a legislative follow-up that could address these issues on a federal level? So we don’t have to go State by State. I’m sure you’ve testified on these issues. Tell us what your advice is on that for advocates and people who have the consumer’s best interest in mind.
Antonio: Here’s what I would say at the onset. I don’t know where the federal government’s role needs to be but I could tell you what I see from them. The federal government has direct purview over State Medicaid programs and Medicare programs. Within that context, they absolutely have a role to try and lean out some of the inefficiencies that we see within the drug supply chain. But beyond that, what are we seeing right now, Sally? What’s the big drum beat that we’re hearing in Washington, as we look through the reconciliation right now, what do we keep hearing from federal officials?
Sally: Of course, they are consistently vilified for raising the cost of prescription drugs and vilified for enriching themselves, exactly.
Antonio: If you look at the federal government, they say our drug problems are solely drug maker problems and be clear. We see a lot of dysfunction in the drug maker channel. We see a lot of dysfunction in the wholesaler channel, the pharmacy channel and the PBM channel. You know, the entire drug supply chain is incredibly complicated, but the federal focus is almost solely on the drug maker in pushing down the list prices of the medications.
But as we’ve established, there’s a massive disconnect between the list prices of medications and the actual prices that drug makers take. Yet, the only focus I’ve seen from the federal government in recent years has been largely concentrated on how we impact the list price by pushing down reducing drug maker incentives, regardless of whether that’s right or wrong. If the federal government has an active role in trying to tackle prescription drug pricing, I believe it’s a dereliction of duty to leave out the rest of the drug supply chain. That creates a lot of the incentives that drug makers respond to. At the end of the day insurance companies and PBMs, they come up with the tools and methodology with which most of us acquire our medications and the cost that we pay out of pocket and the cost to plan sponsors. It is impossible to root out dysfunction in the drug supply chain, if we only look at the top layer and not recognize that the individuals who create these bad incentives in the first place are getting completely overlooked.
Sally: I think that there is a ray of hope that that ought to be changing. This was a Senator Chuck Grassley, Senator Ron Wyden reports, so it is a leading Republican and a leading Democrat. And we have links to that report on our website, but they really looked at the cost of insulin. And I’m sure you’ve got expertise on this, but they saw established in that report that they ratcheting up of the cost of insulin, which is obviously a very critical life saving drug for people with diabetes has largely been going into the pockets of PBMs and they are influencing very specifically the higher and higher costs of insulin. So they did talk about it, they did shine a light on it. I haven’t seen any legislative efforts, but you make a really good point about Medicare and Medicaid being issues that the federal government should and must care about.
I think we’ve covered the territory here pretty well. Is there anything that we ought to be doing or thinking about both on a State and federal level, besides, you know, maybe there ought to be a hearing on this, about the role of PBMs, a hearing that brings us up to date with some of the information you shared about State activity. I think that would be one way to go. Anything more that you think we ought to be doing on the consumer end of things, to ensure that we’re being treated fairly as consumers in the marketplaces, we’re watching drug prices up.
Antonio: So I believe one of the things that I think consumers can benefit directly from and indirectly from is increased transparency into the flow of money in the drug channel. One of the things that we’ve been huge proponents of, it’s really one of the bedrocks of how we got our research started, with CMS has some little known datasets, one of them is called national average drug acquisition costs. And it is a survey that is voluntary. They send it out to about 2,000 to 2,500 pharmacies on a monthly basis, and they simply ask them, what did you pay to acquire the drugs at your pharmacy? And because it’s voluntary about 400 to 600 pharmacies ended up submitting data back to CMS through their actuarial for Myers and Stouffer. And with that, we get, it’s not perfect because it’s voluntary, some drugs are missing, pharmacies can receive some off invoice discounts that aren’t necessarily cooked in those numbers, but at a fundamental level, what it does is it gives us at least a ballpark idea of what the price of a medication is by the time it reaches the pharmacy counter, with that because there’s so much smoke and mirrors within the flow of drugs and within the flow of money in the drug channel, it at least gives us a point in the middle where we could say, hey, the gallon of milk, isn’t $50 It should be $3 or $4, right?
Right now we don’t have that ability as consumers to decipher what the real price of Lisinopril should be or any of the other thousands of drugs in the marketplace. One of the things that we believe would be very helpful is if we could create a more trustworthy idea of what price is at the pharmacy counter that a lot of the smoke and mirrors games that lives within how PBM set prices at the pharmacy channel level can be rooted out. And so that national average drug acquisition costs survey, there’s a State like Alabama, for example that mandates that all pharmacies participate in a state run survey of pharmacy acquisition costs. We were able to determine with a study with a transparent PBM that if pharmacies would submit all of their pricing data, they would capture more drugs and figure out what the real price of those medications are and furthermore, get more up-to-date pricing throughout the duration of a year.
That ability to capture that type of data knocked about 20% off of what the national benchmark looks like. And it’s not to say that we need to set prices as a government, but what it is saying is that we as consumers and plan sponsors deserve at least at a minimum before the government steps in and says, we’re going to set all these prices, at least give us an idea of what the price should be, right? And so we’ve been huge proponents of increasing the visibility of pricing throughout different layers of the drug channel so that we can better diagnose where dysfunction and arbitrage is being exploited.
Sally: I want to thank you for your expertise, Antonio. And it’s thanks to the difficulties of overcoming organic chemistry classes that we have someone with your background and skills working on this issue to get consumers and plan sponsors a much better deal on their prescriptions. I cannot imagine anyone better equipped to discuss the role of PBMs in our very complex drug pricing system. For our listeners who are interested in learning more, please visit nclnet.org/pbms. Again, that’s nclnet.org/pbms.
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