America’s prescription-drug prices are out of control.
The problem is so large that it has begun attracting high-profile new market entrants, like the Mark Cuban Cost Plus Drug Company that launched earlier this year. Cuban seeks to fix the convoluted prescription-drug market by not taking insurance, and charging 15% over cost.
But another path exists for health plans to tame prescription drug costs within the confines of a health plan — a new model of pharmacy benefits managers. PBMs are companies that manage health insurers’ prescription-drug plans. Transparent PBMs, like San Francisco-based SmithRx, provide their clients 100% of payments they receive from drug manufacturers, be they rebates, incentives, administrative fees or data fees. Transparent PBMs also supply clients with any discounts they negotiate with pharmacies.
Other transparent PBMs include CapitalRx, Navitus Health Solutions and TransparentRx.
Passing through rebates and fees isn’t the only benefit of transparent PBMs. A 2019 report by the Commonwealth Fund, for example, found pharmacy benefit plan sponsors could also accrue savings “by reducing the use of high-cost, low-value drugs.” Removing PBM rebates frees them to choose the best value drugs for any given treatment. The Commonwealth Fund estimated that the sponsors it evaluated could save about $63 million annually.
Why affordable prescription coverage remains elusive
Americans spend more than twice the amount on prescription medications compared with our counterparts in the 37 other member nations of the Organisation for Economic Co-operation and Development. U.S. per-capita average spending in 2019 was $1,126 compared to OECD per-capita average spending of $552.
Cuban’s online pharmacy is one example of efforts underway to combat what everyday Americans spend on prescription medications. Customers save money by paying cash for prescriptions at prices Cuban says frequently will be lower than the “discounted rates” negotiated by many insurance plans.
Cuban’s venture addresses a core, systemic obstacle to reducing prescription drug costs: spread prices — the difference between what a PBM pays for a drug, and what it charges its customers.
The current PBM model that pervades the U.S. health care system is one with labyrinthine and opaque costs and pricing, making it almost impossible for patients and payers to make cost-conscious decisions. Worse, the model incentivizes PBMs to promote more expensive drugs.
PBMs historically have negotiated a list price, and typically receive a drug-manufacturer rebate. But PBMs share little or no information about the rebate amount — or how much of that rebate is passed on to the plan or the patient. That lack of transparency makes it difficult for the plan or patient to choose the most cost-effective solution.
Perverse PBM incentives are another consequence of the current model. For example, it makes financial sense for PBMs to include in their covered medications a $100 name-brand drug that provides a $50 rebate, all of which the PBM may keep, and exclude a $20 generic drug with a $5 rebate.
It would appear that employers are aware of these flaws in their current PBMs. A 2017 National Pharmaceutical Council report found that just 41% of employers rated their PBMs as “very good” in negotiating rebates from pharmaceutical manufacturers to secure cost savings. Only one-third described their PBMs as “very trustworthy.” And, 50% believe that PBMs are not transparent with covered medications.
Yet, just a handful of legacy PBMs — namely those owned by Blue Cross Blue Shield, United Healthcare, Cigna, Aetna, Humana, or their parent companies — dominate the market. According to a report released earlier this year by the Drug Channels Institute, the PBMs associated with those insurance giants managed 92% of prescription claims. Data released earlier this year by the independent, non-partisan market research firm Health Industries Research found comparable domination of the PBM market, with those same players handling 92% of claims.
It’s unlikely that big health insurers will seek more effective PBM partners any time soon. Their affiliated PBMs increasingly are driving revenue and profitability growth for those insurers and their parent companies.
The CVS PBM segment, for instance, fueled about $46 billion of the company’s $324 billion in revenue last year. Cigna’s PBM, Express Scripts Holding Co., accounted for much of the doubling in revenue the company reported in 2019, to $38.2 billion from $14.3 billion. United Healthcare’s PBM collected more profit in the fourth quarter of 2019, $3 billion, than the company’s insurance arm, $2.1 billion.
This landscape has resulted in 18 million Americans, or 7% of U.S. adults, being unable to pay for prescriptions they need, according to a 2021 West Health and Gallup survey. That group could not pay for at least one prescribed medication during a three-month period, the survey found. Adults younger than 65 were twice as likely as seniors to report being unable to pay for prescriptions, and that group also was twice as likely to skip doses to save medicine and money.
Solutions to reducing prescription-drug costs
If we can’t depend on the big commercial health plans to drive the shift to transparency, what can we do? In the absence of federal government action, many state legislatures have proposed bills requiring various levels of transparency and limiting costs to patients.
But, businesses need not wait on legislative action. They may partner with transparent PBMs right now through one of two ways. They can negotiate a pharmacy carveout from their legacy-company health plans, which is commonly done for larger businesses. Or, they could find a health plan that utilizes a transparent PBM.
Companies that do so know that incentives will be aligned among the PBM, the payer and member. Many transparent PBMs will also improve employees’ drug choices by providing their respective costs and arming them with real-time information about which drugs are effective treatment options.
Regardless of the path to reducing prescription drug costs, a fundamental starting point is transparency — supplying all stakeholders with clear data on where the money is going and what it’s for. That will enable companies, payers and patients to make better decisions.