Cover Story

PBMs: New Power and Influence

They are bigger than ever. Specialty pharmacy drugs have made their bargaining power more important than ever. Do the P and B in PBM stand for power broker?

Robert Calandra

When Express Scripts announced last December that it had negotiated a discount with AbbVie for Viekira Pak, the company’s hepatitis C drug, it caught the health care world’s attention. Express Scripts chose Viekira Pak’s multiple-pill-per-day therapy for its national formulary after Gilead refused to budge off its $84,000 asking price for a course of Sovaldi, its one-dose daily hepatitis C therapy.

People wondered if Express Scripts was writing its own script, putting pharmaceutical manufacturers on notice that the country’s largest pharmacy benefit manager was ready to wield its considerable influence on drug spending in a new, even more demonstrable way—particularly for specialty drugs—and in the process, anoint winners and losers in drug development.

Or had Express Scripts simply haggled an unusual one-off discount because one company was locked in a marketing battle against a rival manufacturer with an equally effective hepatitis C therapy?

Agreeing to the discount may have been a pretty smart business calculation by the manufacturers rather than a display of PBM muscle.

Industry observers say Express Scripts was flexing the muscles that come when you have an incredible 85 million covered lives. PBMs are hardly new kids on the block, but they are exerting greater influence on the marketplace with some hard bargaining and nimble moves.

And it’s not just Express Scripts. The next three largest PBMs—CVS Caremark, UnitedHealthcare’s OptumRx, and Catamaran—have since announced their own special deals with pharmaceutical manufacturers. So does that mean we should be proclaiming the era of PBM power and influence?

Perhaps. But that is a rhetorical perhaps that leans heavily in the direction of it sure is.

Like any part of the health care industry that survives, PBMs have shapeshifting powers, changing and evolving with the times. The first PBMs appeared in the late 1970s and were operated by pharmacists who saw an opportunity to make money by processing claims.

The industry grew quickly, and by the 1990s PBMs were thriving by controlling drug costs with tiered formularies. Then, in the early 2000s, the first of two consolidations swept through the industry. Several years ago, there was another round of consolidation. The big PBMs, seeing economies of scale, decided the smart money was to get even bigger. They began gobbling up smaller PBMs and before long there were four major players.

Express Scripts has grown from 12 million to 85 million covered lives in the past decade. As a point of comparison, Medicare has just fewer than 50 million beneficiaries.

Throughout these iterations, the stated goal of PBMs has remained the same—to keep a tight leash on drug spending while also making sure clinical needs are being met.

Exemplars of managed care

PBMs can, with some justification, brag that they are one of the few bona fide success stories in the management of health care costs. Millions of Americans are now taking cheaper generic drugs, in part because tiered formularies have lured people away from brand-name drugs to generics with lower copayments. Spending on retail drugs is still going up, but it has lagged behind overall spending on health care in recent years. The value-based payment schemes sweeping through American health care are following in the footsteps of PBMs and their tiers by using cost sharing to influence patient choices. Think of those inexpensive generics as being analogous to the in-network provider with the lower copayment.

Memories have faded somewhat but the acceptance of generics came after a hard-fought battle. In an interview with Managed Care, Steve Miller, MD, chief medical officer for Express Scripts, says that the company’s 2005 move to take Lipitor off its formulary was as “newsworthy and audacious” as anything the company is doing now with the hepatitis C drugs and exclusionary formularies (see our Q&A with Steve Miller, MD).

As with almost anything you can think of, there’s a web of interrelated reasons for the growing power and influence of PBMs. But two stand out. One is the flood of specialty drugs on the market. There are more than 900 and counting (the definition of specialty drug is squishy, so the count varies).

PBMs’ high profile can be attributed to the fact that a significant portion of health care spending pays for pharmaceuticals, says Don Liss, MD, vice president for clinical programs and policy at Independence Blue Cross.

Probably the main reason PBMs have such a high profile these days is that a significant chunk of health care spending goes to cover pharmaceuticals and is paid through the pharmacy benefit that PBMs manage, says Don Liss, MD, vice president for clinical programs and policy for Independence Blue Cross in Pennsylvania: “A huge portion of health insurance premiums are dedicated to pharmacy.”

With the number of specialty drug prescriptions expected to balloon in the coming years, large insurers, unions, and private corporations are looking to PBMs to help reel in pharmacy costs. Some are integrating PBMs into their overall health care management system and having them create specialty drug precertification requirements.

PBMs are also overseeing more complicated, multi-tiered benefit plans. Unlike the old plans that featured a flat copayment, the new packages can include an elaborate set of copayments, deductibles, and coinsurance that fit together in any number of ways.

As usual, size matters

The other standout reason for PBM clout is their size and the market power that brings. Pharmaceutical companies, pharmacies, health plans, provider organizations­—they all have to take notice.

Miller notes that Express Scripts has grown from 12 million to 85 million covered lives during the decade he has been there. As a point of comparison, Medicare has just fewer than 50 million beneficiaries. True, just 25 million of those covered lives are on the company’s national preferred formulary. Miller says half the company’s business is with managed care companies that have their own P&T committees that make their own decisions. But clearly, Express Scripts has influence. Miller clearly relishes the power-in-numbers that his company has at its disposal: “If you think about any other aspect of health care, no one has accumulated 85 million lives that they can represent.”

The more members a PBM represents, the bigger its buying power. The bigger its buying power, the larger its influence on the marketplace. The larger its influence … well, you get the idea.

“There are fewer choices of PBMs with which to do business, that’s for sure,” Independence’s Liss says. “But with PBMs having more market share, they are obviously trying to use that leverage in their dealings to get lower prices from manufacturers that they can then offer to their customers.” In other words, strong PBMs can be a blessing for health plans. Liss says Independence controls its formulary but has found that it has more variety and drug options now, working with Catamaran as its PBM, than it did in the past.

PBMs can use this buying power as either a stick or a carrot. For instance, a drug manufacturer unwilling to yield on a price risks having its product excluded from the PBM’s formulary (see our story on exclusionary formularies). Translation: X number of consumers won’t be using the manufacturer’s drug, and that could put a big dent in the bottom line. In our Q&A with Miller, he says that Express Scripts moved to exclude 48 drugs in 2013 to push back against coupon programs that, in his view, erode the effectiveness of formulary tiers.

For drug manufacturers, the carrot can be as sweet as the stick is harsh. Getting included on a gargantuan PBM’s formulary can open a huge market for a drug in one fell swoop. Contrast that with having to persuade hundreds, if not thousands, of individual providers.

David Lassen, PharmD, chief clinical officer at Prime Therapeutics, calibrates his comments carefully but the meaning is clear: “The formulary exclusion lists are being utilized to improve the PBM’s leverage and manage the market share of preferred products, thus producing better pricing.”

But the very issues that are driving PBMs’ expanding influence also pose a challenge for the industry. And the answers go well beyond simply securing price concessions from pharmaceutical makers.

“We have to manage pharmacy with an eye for improved outcomes for the total cost of care,” says Lassen. “The reality is outcomes and improvement in total cost of care should drive the use of medications and drive lower total cost of care.” He adds: “PBMs simply can’t manage pharmacy in a silo by excluding drugs and lowering the price of drugs.”

Cancer may be the tougher case

That broader, nobler way of thinking works well when it comes to the new hepatitis C drugs because they are curative and presumably will save money in the long run because newly cured people won’t need as much medical care.

That’s the argument Gilead has made repeatedly to justify a price that is equal to four years of tuition at some colleges or a sizable down payment on a house.

That same philosophy, however, may be precisely why the formulary decisions about equally expensive oncology drugs that offer short-term improvement but no cure will be so difficult. Lassen says that “no health care company has figured it out.” One way to address the problem, he says, would be setting standards based on quality-of-life measurements.

“We’re not simply a dictator trying to determine who should be on what medication,” Lassen continues. “If we do that, we’ve fallen short and we are not going to be relevant for addressing the true, unsustainable cost that we see coming at us.”

Miller says Express Scripts is ready to take a more aggressive approach to managing oncology drug costs, partly because there are now multiple treatments for many cancers. “We put clinical first, but when given the opportunity to pit drugs against each other, we do that.”

Maybe not such a big deal

Mark Pauly, PhD, isn’t convinced that wrangling a markdown on hepatitis C drugs constitutes a watershed moment for PBMs. In fact, the professor of health care management at the University of Pennsylvania’s Wharton School thinks that agreeing to the discount may have been a pretty smart business calculation by the manufacturers—yes, the manufacturers—rather than a display of PBM muscle. Pauly speculates (and he emphasizes that it’s only speculation) that the manufacturers of the hepatitis C drug understand that they have a one-and-done therapy.

It’s one thing to have price competition in a new drug class when everything is fluid, says Mark Pauly, PhD, professor of health care management at the University of Pennsylvania. It’s another to have it in an established class of drugs with very high profit margins.

But that’s not the case with expensive specialty drugs for rheumatoid arthritis, inflammatory bowel disease, and other chronic conditions that are managed but not cured with medications. With drugs people take for chronic conditions for the rest of their lives, there is less of a threat from the PBMs, notes Pauly. Price competition has not broken out at all, as far as he can tell.

“Buying decisions” in the future will un­doubtedly include more expensive specialty drugs. So the question comes back to whether PBMs can consistently use their size and formulary tactics to negotiate price and other concessions from pharmaceutical manufacturers.

It certainly seems that things are headed in that direction with Express Scripts celebrating its discounted hepatitis C price coup.

But in Pauly’s view, it’s one thing to have price competition and PBM swagger in a new drug class when everything is fluid. It’s another to have it in an established class of drugs with very high profit margins. If price competition were to break out in the older market, then Pauly would become a believer in the new era of PBM clout—and then some: “I would think that the revolution had started.”

Robert Calandra is a freelance writer in Philadelphia with more than 20 years of experience writing about health care.