A costly PBM trick: set lower copays for expensive brand-name drugs than for generics

When the patent on a brand-name drug expires, and one or more generic versions enter the market, you’d expect consumers to pay less for the generic. That isn’t necessarily the case, thanks to the middlemen known as pharmacy benefit managers.

In a speech last week, FDA Commissioner Scott Gottlieb took aim at these previously little-known but influential players in the health care system. He accused them of colluding with drug makers and insurers to develop “Kabuki drug-pricing constructs.” Gottlieb focused particularly on how such deals affect the generic market.

Once upon a time, drugs were made in manufacturing plants, bought by distributors, and delivered to retail and mail-order pharmacies, which sold the drugs to patients. The cost of drugs were financed through payments covered by insurance companies and patient copays. Today, insurance companies tend to outsource the drug benefit to pharmacy benefit managers. At first, these companies processed drug prescriptions for insurers and helped negotiate lower prices, saving money for insurers and employers.

Over time, they have gained transformative influence in the pharmaceutical supply chain. In 2014, the PBM market stood at $263 billion. The two largest pharmacy benefit managers, CVS Caremark and Express Scripts (now being bought by health insurer Cigna), control 56 percent of the business, covering more than 126 million patients. Their main goal ought to be lowering drug prices — but their current business models don’t necessarily provide incentivizes to do that.

PBMs use their size to negotiate drug prices with manufacturers, passing on a certain percentage of any rebates downstream to the insurance company and keeping rest of the spread for themselves. What makes this murky is that the deals these companies strike with drug makers are kept secret, so no one besides the PBM knows how much of the rebate is actually passed on to consumers. In some cases, they keep more than what they pay the maker for the drug. Since pharmacy benefit managers profit on the spread, they have no real inventive to push pharmaceutical companies to reduce costs since their profits increase with the list price.

The lack of transparency in the deals that occur between drug makers and pharmacy benefit managers paves the way for bad practices. Several colleagues and I discovered this almost by accident in research we were conducting on drug prices.

Our research group, led by Khurram Nasir, a Yale cardiologist and public health researcher, wanted to figure out how much money had been spent on Lipitor, Pfizer’s brand-name, cholesterol-lowering statin, even after generic atorvastatin became available in November 2011. Using data from the detailed Medical Expenditure Panel Survey, we found that $4.3 billion was spent on Lipitor in the United States between 2012 and 2014, even though a generic version was available. During that time, $2.1 billion could have been saved had Lipitor been replaced with generic atorvastatin. We presented this report on Saturday at the annual conference of the American College of Cardiology, and it was published the same day in JAMA Internal Medicine.

We also uncovered something quite surprising: In 2014, patients buying Lipitor had lower copays than those buying generic atorvastatin, even though the generic was much cheaper overall. This finding was so unexpected that we wondered if we had made a mistake, and ran the numbers multiple times. It was the real deal.

How could that happen? It turned out that Pfizer had partnered with pharmacy benefit managers to ensure that its more-expensive Lipitor had a lower copay than less-expensive generic atorvastatin. This might have saved consumers a few dollars, but it boosted the overall cost of the drug.

Deals like that can make it difficult for generic manufacturers to enter a competitive market and drive prices lower.

These shady practices haven’t gone unnoticed. In March 2016, Anthem Blue Cross sued Express Scripts, claiming that the company had withheld $15 billion in savings that should have gone to the insurer. The Department of Justice has also opened investigations to examine covert deals between drug companies and pharmacy benefit managers.

If an employer serves as its own pharmacy benefit manager, it has all the incentive it needs to drive down the costs of drugs for its employees. So it’s no wonder that large employers such as Coca-Cola, Verizon, and IBM, which collectively spend $20 billion a year on health benefits, formed a coalition to devise means to buck the influence of pharmacy benefit managers.

Market forces are also chipping away at pharmacy benefit managers’ hold on the drug distribution chain. Amazon, with its unparalleled expertise in technology solutions and supply-chain mastery, could easily usurp the role of pharmacy benefit managers, as well as drug distributors and retailers. Amazon, Berkshire Hathaway, and JPMorgan announced they will form a new company to address the health care costs of their employees. These steps, along with the Gottlieb speech, should serve as a much-needed wake-up call for pharmacy benefit managers, whose stock prices fell after these events.

American health care is like a pie, with big bites taken out of it by myriad middlemen, including pharmacy benefit managers. These companies could play a highly constructive role in helping lower drug prices by promoting competition for drugs that provide the best value and are then preferred in the drug benefit plan. But as long as pharmacy benefit managers operate and negotiate prices in secret, it seems unlikely that they can be positive agents for change. If they fail to lift the veil and usher in transparency, the revolt by employers, insurers, the market, and the federal government represents an existential threat to their role in the health system.

Haider Warraich, M.D., is a fellow in cardiology at Duke University Medical Center and the Duke Clinical Research Institute, and author of “Modern Death: How Medicine Changed the End of Life” (St. Martin’s Press). The views expressed in this article are those of the author and do not necessarily reflect those of his employer.