The economics of pharmacy benefit management (PBM) remain unnecessarily complicated and opaque for >80% of the market serviced by the traditional PBMs. As a result of PBM price manipulation and quiet profiteering, drug pricing is now more convoluted than ever before. That said, there is reason to be optimistic about incremental change. Of note, state legislative activity – such as one potential bill now being considered in the Commonwealth of Kentucky – is beginning to shine light into the black box of the traditional PBM model.
Capital Rx broadly supports common sense PBM reform initiatives at the state and federal levels, especially those aimed at improving visibility and eliminating misaligned incentives and conflicts of interest. As such, we appreciated the opportunity to testify before government officials like Sen. Alvarado, the chairs, and members of the Interim Joint Committee on Health, Welfare, and Family Services in Kentucky on September 28, 2022.
Read on for the highlights from Capital Rx Senior Vice President of Strategy Josh Golden’s testimony.
Yes, Capital Rx is a PBM…
But we are fundamentally different. Josh explained, “Capital Rx’s financial incentives must be aligned with our clients’ interests, and we must operate transparently – i.e., with no inherent conflict of interest in how we conduct business.”
Fixing a Fundamentally Broken System
Most PBMs are a “financial hub.” They can derive hidden profitability from a vast array of opaque and complex financial relationships. Below are just a few of the conflictive profit tactics that traditional PBMs use:
- PBMs can control prices by leveraging two lists (we often describe these lists as ledgers): one to reimburse pharmacies and another to charge patients and plan sponsors. The two ledgers do not have to match in the current ecosystem, and between those two ledgers is where the PBM can hide what’s commonly referred to as spread pricing.
- PBMs derive immense profit from the dispensing of mail order and specialty drugs by owned dispensing assets. In that capacity, their objective will always be to dispense more drugs, including more expensive drugs. This puts PBMs at odds with their primary purpose, which is to help clients control the cost and utilization of drugs.
- Pharmaceutical revenue streams are structured in ways that allow PBMs to retain hundreds of millions of dollars in rebates from drug manufacturers.
Josh said, “Fortunately, the media and forward-thinking government officials are starting to shine a light into the black box that PBMs sit in. We applaud that effort.”
Will a move to transparency impact the cost of care or premiums?
A typical argument from the traditional PBM is that the move to transparency will increase the cost of care and premiums. “But there is mounting evidence – anecdotal and hard data from Capital Rx’s book of business – that proves this wrong,” said Josh.
He continued, “We serve over 180 clients and over 1 million [plan] members, and we see a consistent year-over-year pattern with clients coming from large, traditional PBMs. They experience a decrease in pharmacy program costs and an increase in rebates. The net of it is a cost decline in the range of 15% - 25% on average… vs. the prior plan year.”
“With Capital Rx, plan sponsors and employers can maintain a sustainable benefit and reasonably predict future costs.”
“We acknowledge that how PBMs make money can influence their behavior.”
The retention of rebates is veiled in obscurity. PBMs will say, “Who cares? If we retain rebates, we can charge a lower admin fee, and everyone wins.” But what that fails to acknowledge is the simple fact that rebate retention creates incentives for the PBM to make decisions that can add costs to a benefit plan.
Take Duexis, a combination of two OTC products (famotidine and ibuprofen; Advil and Pepcid AC) in a single pill, as one example (there are other examples, as we’ve written about recently). Josh said, “A brand manufacturer released Duexis at over $2,000 per month. If you’ve purchased Advil and Pepcid lately, you know you can stock both for a month for under $20. PBMs say the goal is to help plan sponsors manage costs over time. But at one point or another, every major PBM included Duexis on the preferred drug list because of the massive rebate. It’s pure waste…. this misaligned source of profit adds cost to the system that’s ultimately borne by patients, plan sponsors, and taxpayers. And this is just one of many wasteful drugs that have ended up on PBM formularies over the years.”
Free Market Principles Work
“With over-the-counter (OTC) drugs, a patient goes into a pharmacy and can see the price. They can compare the price to what’s down the street at another pharmacy – the retailer is held to competitive pressure. That’s why OTC costs experience a generally deflationary trend.”
Josh suggested comparing that to the experience of walking ten steps back to the pharmacy counter where “it's a roulette wheel.” The patient has no idea what they’ll be charged at the pharmacy counter. “Bizarrely, two patients getting the exact same drug could be charged radically different prices,” he added.
Better Pricing Methodologies Exist
On pricing, Josh said, “Consider NADAC’s utility as a better benchmark. This is the benchmark that Capital Rx has elected to use for reimbursement to pharmacies. It’s a fair acquisition cost index used by many state Medicaid programs… Using NADAC stabilizes reimbursement across pharmacies, creating a more consistent price experience for patients compared to the volatility that comes with MAC lists and AWP.”
And finally, Josh encouraged lawmakers to establish policies that would “allow retailers to operate in a free-market system and eliminate the price discrimination and manipulation that result from the traditional PBM model.”
Capital Rx’s model is a successful case study and one that government officials may wish to consider as PBM legislation is crafted and refined. Clear pricing and a cost-plus profit structure are at the heart of the model.
CONTACT US if you’d like to learn more about Capital Rx’s full-service pharmacy benefits solutions.
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