Many of my friends in the pharma world feel that the evolution of pharmacy benefit managers (PBMs) in the US has led to their operations and impact becoming increasingly mysterious. While we understand in broad strokes the role they play, their business model has broadened to the extent it has become fuzzy—as if by design. We all harbor general skepticism towards middlemen, and question what actual value they add to the healthcare system. When it comes to PBMs, views on this question even among friends vary wildly. Concerns include the lack of transparency in the proportion of savings the PBMs choose to share; bundled contracting that may perpetuate the use of expensive branded products at the expense of generics; and the misuse of the unique middleman position to disadvantage stakeholders on both sides, perfecting the art of moral dilemma to primarily focus on shareholder value, rather than value for all stakeholders.

At the same time, the PBM segment itself faces increasing uncertainty, with a particular threat represented by the inroads being made by newcomers deploying the tools of technology, promising to offer benefits ranging from increased transparency to larger sharing of savings. Potentially disruptive entry in biopharma distribution by the likes of Amazon has contributed to valuation collapse of PBM companies, with the leading pure PBM, Express Scripts, having lost a third of its value since 2015.

We invite you to share your views as we begin the dialog to put this important yet opaque biopharma segment in a balanced context. A brief history of PBMs may help set the stage, and explain how they have become so prominent over the last couple of decades. Your feedback will guide our next column on the subject.

Once Upon A Time

The first PBM started in 1968, just three years after the enactment of Medicaid and Medicare, and a year after the United Auto Workers and Ford reached an agreement to include drug coverage as part of the auto workers’ benefit package. PBMs stepped into a world where prescription drug benefits were becoming an integral part of health insurance coverage, just as managing a high volume of paper based prescription claims before the computer-age was overwhelming insurers’ back office. PBMs initially processed and paid these paper claims. However, it did not take long for them to realize the value of claims data they were accumulating, as they began to develop clinically meaningful insights. At the same time, their growing scale enabled them to extract discounts from pharmaceutical manufacturers on one side, and pharmacies on the other, in return for access to their members to grow market share. During the 1990s there was a move by pharma companies to bring PBMs in house, exemplified by Merck & Co’s acquisition of Medco and Lilly’s acquisition of PCS. But such diversification proved to be short-lived amidst antitrust concerns, conflicts of interest, and other factors.

The Triumvirate

Today the industry is dominated by three players: Express Scripts, the largest pure play PBM with around 80 million members (though it is about to lose a quarter of this roster that belongs to Anthem with the recent announcement that Anthem plans to set up its own PBM, coming full circle after having divested its PBM to create Express Scripts just a decade ago); CVS Caremark also with around 80 million members and owned by one of the largest pharmacy chains; and United Health’s OptumRx, with approximately 60 million members. Together, these three companies process over two-thirds of all prescriptions dispensed in the US. The implications of the rumored CVS merger with Aetna, a leading US healthcare insurer, as well as CVS servicing Anthem PBM members prescriptions will be a part of our next column.

Despite the continuing market concentration, the FTC in their review of Express Scripts’ merger with Medco in 2012 found that in the PBM market “competition for accounts is intense, has driven down prices, and has resulted in declining PBM profit margins.”

Sharing Nicely?

Not surprisingly, other three key stakeholders in this game, insurers, pharmacists, and the pharmaceutical industry do not see the PBM role the same way as the FTC, noting the divergence in invoice price growth for branded drugs vs. the estimated net price growth and implying that a large portion of the rebate benefits accrue directly to the PBM and do not trickle down to the insurer or the patient. However, in one of the settlement litigations, an expert economist estimated that about 90% of the savings that a PBM may choose to share (without specifying what portion the PBMs choose to share) accrue to their third party payers and pharmacists. It is also noteworthy that insurers and pharmacists are mum as to what portion of their profits come from their share of the pharma company rebates to the PBMs. With only about 10% of the savings going to the uninsured consumers, in the end, it is the consumer who seems to get left out of this party, while each of the big boys—the PBMs, pharma companies, third parties including insurers, and pharmacies—believe the other three are getting more than their fair share at their individual expense.

The core of the moral dilemma that the PBMs face is how to be transparent and share the details of their financial transactions without compromising their negotiating power. The question of just who is right in this matter is surprisingly difficult to answer, as the first two Congressional hearings on drug pricing, rebates, and the role of various stakeholders have underscored.

Enforced Opacity

PBM contracts are opaque by design and all parties are prohibited from discussing terms. On the one hand, this lack of transparency on pricing makes the value question difficult to satisfy empirically, but on the other hand lack of transparency could make the system more competitive, since forced disclosure of pricing terms in a consolidated industry makes collusion easier, and has been shown in other industries to at least lower pricing variability and could lead to higher prices overall. Generally, all parties in the pharmaceutical product chain, from manufacturers to PBMs to insurers to pharmacies, have repeatedly argued and generally won the right to variable pricing, as well as lack of transparency, in proportion to their market power over captive consumers, but PBMs have carved out the ultimate middleman role with substantial clout, seemingly able to retain a large share of the savings they are able to negotiate with both the drug makers at one end and the pharmacies at the other. The third-party payers in the middle are increasingly dependent on the so-called PBM consultants, whose role and objectivity are even less well understood.

PBMs also use their size to influence clinical practice and seem to enable the use of higher priced brands via negotiated bundling and other incentives long after their patents have expired. In the end, these primarily benefit the PBM and the manufacturers.

It is clear that PBMs do fulfill their role of helping lower drug costs by extracting ever larger rebates from the biopharma companies, now about a third of the retail prices posted by the biopharma companies. Who do these rebates benefit—that is where the debate becomes heated.

Data Trove

Another positive resource of course is the treasure trove of PBM data and potential intelligence their analytics can yield. This intelligence has great promise to promote evidence based prescribing not only to save the system money, but also to improve health outcomes. All the PBMs have increasingly active ‘research labs’ working towards these objectives and publish some of their findings, and are starting to push for outcomes-based agreements that link reimbursement to successful patient outcomes.

Initial benefits so far, it seems have focuses on maximizing cashflow, even if it means continuing use of expensive branded though now off-patent product use.   Let us hope that convincing and objective studies from the PBM intelligence about the overall value contribution to the society—both about the savings benefiting the society, and better patient care with improved outcomes—would begin to demonstrate the merits of this important industry segment.This column originally appeared on Scrip Biopharma Intelligence, November 8th, 2017