The second most important issue in the last presidential election – right after the economy, and ahead of the novel coronavirus outbreak, according to an August 2020 Pew Research Center survey – was healthcare. Key components of healthcare for Americans are prescription drug coverage, insurance costs and drug co-pay amounts.

According to the Center for Disease Control, nearly 70 percent of Americans aged 40 through 79 take at least one prescription drug daily; more than 22 percent take five or more drugs on a daily basis. Pharmacy costs are top-of-mind for both employers and employees, one reason that many employers have turned to pharmacy benefit managers.

Pharmacy benefit managers (PBMs) are third-party administrators retained by health plans, including commercial plans, self-insured employer plans, Medicare Part D plans, and government employee health insurance plans. The first PBM was created in 1968 by Pharmaceutical Card System Inc. (which became AdvancePCS) as a benefit card, but the shift to what PBMs do today – negotiate prices with pharmaceutical firms – happened in the 1970s.

Although healthcare industry analysts say PBMs are a necessary force – “If you didn’t have an entity called a PBM, you would want to create one,” according to Professor Geoffrey Joyce at the USC School of Pharmacy – they have come under scrutiny over the past 20 years. The Wall Street Journal noted in 2002 that PBMs had “quietly moved” into promoting expensive branded drugs. A bigger shift happened in 2007, when CVS bought Caremark, a PBM, and the concept of the “formulary” (what drugs are covered by an insurer, in what order of preference, and at what price) was developed.

Today, PBMs wield a great deal of power in the marketplace. PBMs are also, practically speaking, a small group. Although there are 30 PBMs operating in the United States, the three largest PBMs (CVS Health, Express Scripts, and UnitedHealth Group’s OptumRx) hold more than three-fourths of the market.

A brief history

of PBMs in the

Medicaid market

Because they exist at the layer of the drug supply chain between drug companies and insurers, and again between insurers and pharmacies, PBMs have been able to grab money by reimbursing pharmacies a lower amount than pharmacies typically pay to stock prescription drugs. When this happens, pharmacies swallow the uncovered cost – a cost that, over time, can add up, putting independent local pharmacies out of business.

One big market in which the reimbursement disparity was particularly egregious until recently was the Medicaid market. We spoke with Antonio Ciaccia, a health insurance consultant with 3 Axis Advisors who also gathers and analyzes data for nonprofit 46Brooklyn, about his observations on pharmacy reimbursements from the years he spent working for the Ohio Pharmacists Association (OPA). Ciaccia told us that in 2016, pharmacies participating in Medicaid saw 60 to 80 percent decreases in their gross margin – because of plummeting Medicaid reimbursement rates from PBMs – which threatened to close the doors of some drugstores with 70 percent or more of their customer base on Medicaid.

At issue was something called the Maximum Allowable Cost (MAC), which PBMs generated from the prices charged in the marketplace for all drugs with at least two manufacturers. PBMs refused to pay more than the MAC to reimburse pharmacies, even though pharmacies frequently couldn’t find manufacturers willing to sell them drugs at MAC prices. When the Ohio legislature stepped in and required PBMs to hear appeals from pharmacies, PBMs responded by anchoring to a different metric – the Generic Effective Rate – effectively nullifying the legislation.

The situation continued to worsen, and pharmacies continued to complain to the OPA and to Ciaccia. With Eric Pachman, who would go on to co-found 46Brooklyn, Ciaccia analyzed reimbursements and compared them with publicly available data points known as National Average Drug Acquisition Costs (NADACs). The Center for Medicare and Medicaid Services (CMS) uses an actuarial firm to survey Medicaid-participating pharmacies about the prices they’ve paid for drugs in the past month. The figures from the 400 to 600 pharmacies who respond each month are the source for the NADAC for each drug.

Ciaccia and Pachman compared NADACs, drug by drug, quarter by quarter, with CMS State Drug Utilization data. This data set shows what drugs are being dispensed through state Medicaid programs, including the number of prescriptions, the number of pills, and the reported cost to the Medicaid program. They found that there was a gap between the price pharmacies paid for drugs, the amount they were reimbursed by PBMs, and the amount that PBMs charged the Ohio Medicaid program – and that gap was growing over time.

As a result of a series of exposés by Robert Langreth of Bloomberg News and by Catherine Candisky, Lucas Sullivan and colleagues from the Columbus Dispatch, Ciaccia and Pachman’s work drew the attention of the Ohio Auditor of State Dave Yost. (Yost is now Ohio Attorney General.) Ultimately, Ohio changed the way it handles Medicaid drug coverage, switching to a straight pass-through arrangement, with a single PBM that has a contract with the state. The state’s Medicaid program, which was underpaid $244 million during a single year prior to the change, now pays just $21 million to its PBM per year.

Similar changes are underway in California, Michigan and New York. Here in Pennsylvania, Lehigh County Controller Mark Pinsley released an audit arguing that improper management of county employees’ health insurance drug coverage by Express Scripts – one of the largest PBMs – cost the county $1.4 million. Pinsley also believes Express Scripts is sending drug beneficiaries to pharmacies outside Pennsylvania, creating a loss of tax revenue for the state. (Pinsley’s report can be found here: https://www.lehighcounty.org/Portals/0/PDF/controller/General_Reports/Highmark%20Audit%20Final%20Issue%20Public%20Release.pdf)

One state at a time, PBMs are losing some of the power they have to set reimbursement prices arbitrarily.

Too afraid to speak

to the press?

The change may not happen soon enough for local independent pharmacies, and they are treading carefully.

On Feb. 12, National Public Radio’s Morning Edition aired an investigative report on PBMs featuring an interview, conducted over a period of months with an independent pharmacy owner who would not give his name out of fear of reprisals by PBMs. (The report can be heard in its entirety here: https://whyy.org/episodes/the-hidden-force-shaping-drug-prices/.)

When the Bethlehem Press contacted independent Easton pharmacy Bell Apothecary, we were quickly rebuffed. A polite offer to check with the manager about an interview was followed by a brusque, “No one’s available to talk to you,” and a lightning-fast phone hang-up that left no room for discussion.

It seems that for local independent drugstores, the choice is clear: Be quiet about PBMs.

Independent Bethlehem Township drugstore Young’s Pharmacy closed in December 2018, after 26 years in business. Owner Jeannette Young went to work the next day at the CVS pharmacy location on Freemansburg Avenue, and Young’s sold its assets, including customers’ prescriptions, to CVS, as reported by Lehigh Valley Live (https://www.lehighvalleylive.com/bethlehem/2018/12/cvs-pharmacy-acquires-youngs-pharmacy-in-bethlehem-township-spokeswoman-says.html). The listed number for Young’s is no longer in service.

One group consistently advocating for lower, value-based drug prices is the Institute for Clinical and Economic Review (ICER). When we spoke with ICER President Dr. Steve Pearson, he told us that ICER has not explored the internal mechanics of the payment systems between PBMs and independent pharmacies, and recommended we speak with Dr. Adam Fein. Dr. Fein is founder and CEO of Drug Channels Institute (DCI). Players in the pharmaceutical industry from drug manufacturers to PBMs to health insurers read DCI publications, and Dr. Fein’s research is often cited by national news media.

DCI published its 2021 economic report on pharmacies and PBMs March 16. An advance copy of the topics to be covered notes that “Insurers, PBMs, and specialty pharmacies have combined into vertically integrated organizations [. . .] These organizations are [. . .] poised to exert greater control over patient access, sites of care, dispensing locations, and pricing” (https://drugchannelsinstitute.com/files/2021-PharmacyPBM-DCI-Overview.pdf).

When we reached out to Dr. Fein in a Feb. 16, 2021, email message, he responded that he “didn’t have time” to speak with us. Although Fein’s website, DrugChannels.net, counts PBMs as a sizable portion of its reader base and carries a testimonial from someone in PBM Express Scripts management, Dr. Fein’s firm, Pembroke Consulting, does not accept consulting fees from PBMs and PBMs have not advertised on Drug Channels. All sponsored posts are tagged and can be viewed here at https://www.drugchannels.net/search/label/Sponsored%20Post.

According to DCI’s website: “Dr. Fein’s work with healthcare products manufacturers precludes him from any business consulting assignments with wholesalers, distributors, pharmacy benefit managers, and dispensers of healthcare products and pharmaceuticals.” While the website refers to its readers as “subscribers,” there is no fee for a subscription to DrugChannels. “We use the term ‘subscriber’ to distinguish people who subscribe via email vs. those who follow me/Drug Channels on Twitter and LinkedIn,” Dr. Fein explained in an April 14 email.

How much do patients benefit from rebates?

Some prescription drug customers might deem the loss of “mom and pop” stores a reasonable price to pay in exchange for lower drug prices. But is the PBM promise of savings being fulfilled? In many cases, the answer is “No.”

Here is how the process works. In addition to setting prices and reimbursement rates, PBMs negotiate discounts (known as rebates) with drug companies. Sometimes PBMs pass the entire rebate on to the insurance company, but raise their own fees. In other instances, they keep a portion of the rebate as a reward for themselves, meaning that the manufacturer lowered the price, but the insurance company did not receive the full benefit of the reduction. Critics say PBMs’ method of determining their commission is opaque, and the Trump administration mulled (but ultimately never made) a change in Medicare rules that would have compelled PBMs to pass the entire rebate on to Medicare.

What makes the situation frustrating for consumers is that pharmaceutical firms can help PBMs look as if they’re negotiating successfully, without losing a dime, merely by raising the price of the drug and then handing the PBM what looks like a big rebate. The customer and the insurer pay the same amount they’ve always paid, but the PBM gets a fee for the “discount” it theoretically negotiated.

As reported in Time magazine in 2019 (https://time.com/5564547/drug-prices-medicine/), PBMs’ contracts with pharmaceutical firms and with health insurance firms are confidential. Even after the passage of the 2018 Know the Lowest Price Act and Patient Right to Know Drug Prices Act, the only real recourse pharmacy customers have is to ask the pharmacist if their out-of-pocket cost for a drug would be lower than their co-pay – a situation that University of Southern California researchers found is true 25 percent of the time (https://www.pbs.org/newshour/health/why-a-patient-paid-a-285-copay-for-a-40-drug).

‘Clawbacks’ mean plummeting reimbursements for independent pharmacies

PBMs also allegedly engage in the practice of “clawbacks” when the covered patient is a Medicare participant, asserting that pharmacies owe them fees, and simply deducting these fees from pharmacies’ reimbursements. One justification PBMs give for the fees they charge is that pharmacies have fallen short of Medicare quality metrics such as high patient medication adherence rates – metrics originally created by CMS to serve as incentives by generating bonus payments. The NPR report cited earlier noted that one former pharmacy owner saw his monthly fees escalate from $20,000 to $40,000 before he decided to sell his business.

The problem with these so-called quality metrics, according to observers like Ciaccia, is that they are primarily incentives to fill more prescriptions, more regularly. After all, no one is at the patient’s home watching him take his medication. “Medication adherence” just means “regular prescription drug deliveries” – something chain pharmacies do very well, particularly with mail-order subscriptions.

Change is happening in the way PBMs affect drug prices and reimbursements, but for many independent pharmacies, it may be too little, too late.