This morning, the health insurer Cigna announced that it plans to buy pharmacy benefit manager Express Scripts for $54 billion. And with that move – long-telegraphed but seismic – the market for prescription drugs could change dramatically. The big question: will patients benefit, or will this just protect insurance company bottom lines?
What's the big deal? Most insurance plans use an outside firm called a pharmacy benefit manager ("PBM") to decide what drugs to cover, which ones to force patients to pay a big share of, and to negotiate lower pharmaceutical prices. Three pharmacy benefit managers – Express Scripts, CVS Caremark, and OptumRx – control 72% of the U.S. market. A year ago, only one, Optum, was part of a larger insurance company, UnitedHealth. But CVS announced in December that it plans to purchase Aetna, a health insurer, for $69 billion. And now Express Scripts will be swallowed up by Cigna. A year ago, two of the three largest PBMs were not part of a health insurance company. Now, they all will be.
Unlike the insurers, PBMs are not household names. Most people probably think of CVS as a pharmacy chain, not realizing that the 2011 purchase of the PBM Caremark transformed the company, making the pharmacy counter the tip of an iceberg of supply chain skunk works. But PBMs have been among the loudest proponents of lowering prescription drug costs. And the most vocal has been Express Scripts, mostly through its chief medical officer, Steve Miller, a quotable presence who is always willing to hop on the phone with reporters to talk about drug pricing.
It used to be an absolutely black and white picture: PBMs lowered drug costs. They started as benefit card and mail order pharmacies in the 1970s. The rise of the U.S. generic drug industry in the early 1980s transformed them. PBMs were financially incentivized to switch people from brands to cheaper generics, and they did an admirable job. The vast majority of prescriptions filled in the U.S. are now for generics. Thirty years ago, Merck was so worried about drug costs going down that it bought a PBM, Medco, as a hedge, eventually spinning it back out.
But large pharmaceutical companies like Pfizer, Merck, and AbbVie have come to focus on less common, higher-priced drugs for diseases like rheumatoid arthritis and cancer as a result. Often, the specialty pharmacies that sell these drugs are housed in the PBMs themselves, creating a conflict. More than that, they way that PBMs negotiate lower prices for themselves has itself created a perverse incentive that could be leading to higher drug prices.
A PBM like Express Scripts doesn't just negotiate a lower price on your prescription. It negotiates for the manufacturer to pay it a rebate, paid back after the drug is purchased. According to the Drug Channels Institute, a consultancy, the amount of money drugmakers pay in rebates has tripled in a decade, from $43 billion in 2007 to $127 billion in 2016. This means that drug companies have in some cases dramatically increased prices in order to stand still. For instance, according to the same Drug Channels presentation, the amount of revenue coming from the pharmacy for Eli Lilly's insulin Humalog is about a billion dollars more than Lilly is actually pocketing – and about double the total sales of the drug. In most cases, consumers are paying the higher price at the pharmacy counter until their deductible or out-of-pocket maximum kicks in, with the PBM and their employer pocketing the difference.
One implication of this is that in some cases a pharmaceutical company and a PBM might prefer to raise a drug's list price. The PBM gets to say it is negotiating a bigger discount, and the pharmaceutical company gets more money, but the consumer loses. Pharmacy benefit managers have insisted that they don't profit that much from rebates, and that they are passed on to their clients. United Healthcare announced last week that it will routinely pass rebates back to patients from now on, and both Express Scripts and CVS say they have the ability to do so if their clients want.
But the system as it exists is drawing scrutiny. Yesterday, speaking at a gathering of health insurers, Scott Gottlieb, the commissioner of the Food and Drug Administration, asked if the supply chain was hurting patients. "Patients shouldn’t face exorbitant out of pocket costs, and pay money where the primary purpose is to help subsidize rebates paid to a long list of supply chain intermediaries, or is used to buy down the premium costs for everyone else," he said, according to prepared remarks. "After all, what’s the point of a big co-pay on a costly cancer drug? Is a patient really in a position to make an economically-based decision? Is the co-pay going to discourage overutilization? Is someone in this situation voluntary seeking chemo?"
The new arrangement of having PBMs inside insurers will probably work for shareholders when it comes to the stock market. It's partly driven by the fact that attempts among insurers to merge with each other have been blocked by federal regulators. UnitedHealthcare has already shown that there are financial benefits to having a PBM in-house. The question, in facing an opaque drug supply chain, is whether it will work for those same shareholders when they need a prescription drug.
