Cover Story

The Slow Reveal

Rebates have created pay-to-play dynamics. Employers facing high drug costs have “rebate addiction.” And the impressive “rebate guarantees” are hard to resist. But at least the process of how drugs get formulary placement is becoming clearer, and some PBMs have moved to charging administrative fees only.

Joseph Burns
Contributing Editor

Most PBMs have something in common with the Wizard of Oz. He appeared to be all great and powerful. But when the curtain was pulled back, he was just a guy turning dials and pulling levers.

Today, PBMs are finding that not everyone is happy with their wizardry. The process by which drugs get on a formulary—the hows and whys, the wheeling and the dealing—has been increasingly hidden from view, a mystery except to the parties making the deals.

PBM critics and some employer groups want that to change. They are calling for more transparency and formularies organized according to the cost and effectiveness of drugs. At the same time, there is a walk-don’t-run attitude. Employers want to know more about how drugs get placed on formularies, but they don’t want to upend the drug benefit plans they offer workers and their families. After all, employers design benefits to attract and retain workers, especially with a low unemployment rate. Getting some shelter from ruinously expensive drug costs has made drug coverage, once an afterthought, particularly attractive.

Rebate addiction

Hospitals have been using formularies for decades. Earlier versions for drug benefits were simple and might have had just two tiers, branded and generic. Later, they got more sophisticated and the stated purpose was to offer medications that combined the best clinical utility for the lowest cost, so that drugs with high clinical value and low cost would be added to the list, and those of lesser value omitted—or placed on a tier that would mean higher out-of-pocket costs as a disincentive. Physicians and patients complained that formularies restricted choice but the design and purpose had a reasonable goal of containing rising drug costs.

For large employers, rebates may not be such a bad deal

The structure of PBM rebate arrangements varies. Large employers (5,000 employers or more) have agreements that give them 100% of the rebate on about two thirds of medications.

Source: Drug Channels Institute, “2019 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers,” March 2019

Since then, most—but not all—PBMs have based formulary decisions, at least in part, on the rebates and other fees they get from pharmaceutical manufacturers.

In this way, rebates have become a form of payment for getting listed on the formulary; some low-value drugs get included simply because the manufacturer paid the PBM to add that medication. Employers are not just innocent bystanders in the rebate game. They get a cut of the return payment and those payments can be in the tens of millions of dollars annually.

As a result of getting hooked on such income, employers have developed what Lauren Vela and others call a “rebate ad-diction.” A senior director for the Pacific Business Group Health, a not-for-profit organization of more than 60 large employers in California, Vela says employers should recognize that when PBMs negotiate on their behalf but take rebate revenue from pharma companies that employers can’t see, the rebate isn’t strictly a discount. “It’s a kickback that creates a very misaligned incentive,” she says.

Lauren Vela

PBMs don’t always disclose what they get in rebates from manufacturers, points out Lauren Vela of the Pacific Business Group on Health.

Vela has seen the effects of such dependency first hand. Last year, Vela and PBGH launched a study to evaluate employers’ willingness to adopt a transparent, “waste-free” formulary that eliminates any drugs that PBGH and Integrity Pharmaceutical Advisors, PBGH’s clinical and data analytics vendor, deemed added little—if any—clinical value for extra cost. Decisions about which drugs were added to the waste-free formulary were based on clinical value—their effectiveness when prescribed and used properly for the patient’s medical condition—and cost, Vela says.

But getting employers to adopt a comprehensive waste-free formulary was a bigger challenge than Vela expected. Fearing that workers might complain if certain prescribed but wasteful drugs were no longer available on the for-mulary or placed on a high-cost tier, most employers preferred to continue paying for low-value drugs, she says.

Vela found employers hesitated to adopt a waste-free formulary for two reasons. First, they didn’t want to limit employees’ drug choices. “Employers are very, very sensitive to member disruption,” she says. Even if only two or three dozen workers are taking a drug of low clinical value, employers may be unwilling to remove it. Second, PBMs share the rebates with employers and health plans and both rely on those payments as a way to keep health care costs down. For years, employers have struggled mightily to control costs. The lure of the rebate is difficult—if not impossible—to resist. The problem with rebates is that PBMs do not routinely disclose what they get in rebates and other fees from manufacturers nor the proportion of those payments that they share with employers and health plans, Vela explains. For these reasons, the interests of employers align with those of their PBMs. “It’s a little shortsighted because they’re paying a lot in advance to get that money back in the end,” she says. “It’s akin to paying too much in income tax throughout the year so that you can get a rebate from the IRS.”

Despite these challenges, Vela’s efforts have not been a total failure. “We definitely saw some movement involving the more egregious drugs,” she says. Among these were the “me-too” drugs, which have been revised slightly so a manufacturer can say the new formulation needs patent protection and a higher price, even though a perfectly good and less expensive alternative exists, says Vela. Some of the combination medications that put two useful and inexpensive drugs into one high-priced pill are also in the egregious category, she says—and most physicians prescribing them have no idea how much they cost.

Of course, in some cases, experts debate which me-too and combination pills have value and which do not. Proponents will argue, for example, that a combination drug can increase adherence while those opposed will say the incremental value does not justify the higher price for the new drug. To settle these disputes, PBGH works closely with Integrity Pharmaceutical Advisors and its member employers.

A more selective approach

As Vela found at PBGH, Denise Giambalvo has experienced a similar unwillingness to upset workers in her work as vice president of the Midwest Business Group on Health. “Employers are concerned about the disruption to employees that can happen when they make changes in their formularies,” Giambalvo says. “They’re very hesitant to be too restrictive.” Like PBGH, the Midwest group serves large employers, and both are affiliates of the National Alliance of Healthcare Purchaser Coalitions.

Cheryl Larson

If given a chance, employers would put more effective drugs on their formularies, believes Cheryl Larson of the Midwest Business Group on Health.

Instead of pushing for a waste-free formulary, MBGH embarked on a more targeted effort last year to encourage employers to purge drugs of low or no clinical value from formularies. With this choosing-wisely approach to prescription medications, MBGH did not develop a specific formulary, Giambalvo says. Rather, it launched an employer-member strategy called EmployeRxEvolution, enabling them to optimize their contracts and tweak their formularies and other contract terms to their advantage. Also, some of MBGH’s 120 members are contracting directly with drug manufacturers.

“Optimizing the contract changes everything,” Giambalvo comments. Otherwise PBMs tend to offer standard terms that let the PBM dictate which drugs are placed on their formularies.

“We recommend that employers customize the formulary,” she says. If a PBM does not allow such customization, the employer should find another PBM, Giambalvo says.

It’s too soon to report on results from this initiative but MBGH President and CEO Cheryl Larson says she expects employers will pick drugs with more clinical value and save money in the process.

Overcoming reluctance

The experience of PBGH and MBGH shows that change comes slowly, if it comes at all, to health care benefits. But PBMs have begun to see that they need to be more flexible and more transparent in their dealings with employers, says Mariana P. Socal, MD, PhD, an assistant scientist in the Department of Health Policy and Management at the Johns Hopkins Bloomberg School of Public Health.

Last year, for example, Express Scripts and a group of large employers formed the National Drug Purchasing Coalition that would guarantee price transparency and accountability for performance. The member companies include PepsiCo, ExxonMobil, Chevron, and others. So far, Express Scripts has not disclosed what outcomes it has produced for the coalition—if any. But, says Socal, the effort is worth watching because the large employers involved have significant market clout. As a researcher, Socal has been interviewing large employers about their efforts to remove wasteful spending from drug formularies. So far, she has found the same reluctance to make changes that Vela and Giambalvo uncovered, and she and Vela explain why rebates are so attractive.

When contracting with employers, PBMs know in advance that they’re getting a rebate from pharma companies for placing drugs on employers’ formularies. Therefore, they will offer a percentage—which for large employers could be as high as 95%—of that rebate in the form of a “rebate guarantee” to the employer, Vela says. While smaller employers may get much less than 95%, any guarantee that can total mil-lions of dollars each year is difficult to pass up.

But, as Socal explains, employers have no way of verifying that they get the agreed-upon percentage, because PBMs and pharma companies are almost always bound by nondisclosure agreements that prevent them from discussing contract terms. PBMs also have nondisclosure clauses in their agreements with employer clients.

Completely see-through

The dynamic of retaining employers with rebates is changing, as Express Scripts shows. For its part, CVS also is moving away from nondisclosure clauses in its contracts.

In June, CVS and Connecticut’s comptroller announced what they call a fully-transparent PBM contract in which CVS will report all rebates to state officials and pass them along to consumers.

A handful of PBMs also are operating in an openly transparent manner. One example is Navitus, the PBM for SSM Health, an integrated delivery system with 23 hospitals and 290 physician offices in Illinois, Missouri, Oklahoma, and Wisconsin and the Dean Health Plan, a health insurer in Wisconsin.

Brent Eberle, Navitus’s chief pharmacy officer, says that in the PBM’s 16-year history, all of its contracts have been completely transparent because it doesn’t retain the rebates it gets for placing drugs on the formulary. Rather it passes them on to its employer and health plan clients.

Brent Eberle

Employers audit claims and invoices each year, says Brent Eberle, Navitus’s chief pharmacy officer. Administration fees are the PBM’s sole source of income.

“We operate as a 100% pass-through PBM because our admin fee is our sole source of revenue,” Eberle says. Billed on a per-member-per-month basis, the administration fee is a negotiated amount based on the number of members a client enrolls and the range of services Navitus provides. “This fee covers most everything that’s needed to administer a pharmacy benefit including implementation, member fulfillment (meaning identification cards and booklets), claims management, pharmacy networks, data and client services, customer care and health management programs,” he adds.

Navitus also allows its employer clients to audit results each year by reviewing their claims and invoices, Eberle says. “This is important because even though traditional PBMs allow audits of a small sample of claims, they typically don’t let clients audit down to the claim and invoice levels,” he adds.

“Instead of generating income through spread pricing, pharmacy networks or retaining some manufacturer revenue, we just pass through everything we receive back to our clients,” he says. “Since we started, we’ve done that with 100% of our clients, and we are still on that model today.”

So, if Navitus has succeeded by pulling back the curtain on pharmacy benefit wizardry, why don’t more employers require PBMs to do the same? Could it be that they’ll do so once they no longer depend on rebates as the “cure” they’ve found for the high cost of health care?

Is Connecticut’s deal with CVS Caremark a sign of PBM contracts to come?

On July 1, Connecticut started operating under a new and innovative pharmacy benefit contract with CVS Caremark that could be a model for PBM transparency for states and other large employers.

State Comptroller Kevin Lembo expects to save about $30 million annually on spending that totals about $313 million each year in net state costs for 200,000 state employees and their dependents. That net amount reflects the rebates the state gets from CVS Caremark and employees’ cost-sharing amounts, Lembo explained.

When Lembo announced the deal in June, he called it “the most innovative and transparent pharmacy benefits contract in the nation.” One of the features of the contract that helps ensure transparency is state officials have what Lembo called “a new audit authority to operationalize the commitments the PBM made during the procurement process.”

“This new contract is the first of its kind in the nation between an employer and a major pharmacy benefit manager that gives the state a full line of sight into pharmaceutical costs,” said Lembo. In addition, physicians and other prescribers will have what Lembo said was “a complete view of the true net costs of medications that they prescribe—and that of any therapeutic equivalents—so that doctors and all prescribing providers can make fully informed decisions to help drive down pharmacy costs and improve outcomes for all.”

Before this deal with CVS, state officials had limited influence and not much understanding of the cost of brand name drugs after rebates or the contracted rates the PBM set with network pharmacies, Lembo told MANAGED CARE in an email. “That limited our ability to make informed formulary adjustments for the state employee plan,” he added. Under the new contract, CVS Caremark will be required to pass along all rebates from manufacturers to consumers at the point of sale, he explained.

“Now with full transparency, we anticipate to be able to provide better oversight of the PBM’s formulary decisions and require customizations for the state plan whenever necessary,” he said.

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