Why Pharmacy Benefit Managers and Formulary Design Need a Divorce
The worst marriage in the history of healthcare is the unholy union of PBMs (pharmacy benefit managers) and formulary design. This carefree couple has fostered the creation of inconceivably high priced brand drugs in the U.S. market for decades, and we need an immediate annulment.
Plan formularies are more influenced by quid pro quo payments between PBMs and drugmakers than clinical guidelines. Thanks to a safe harbor exemption from the Anti-Kickback Statute, PBMs can legally receive percentage-based kickbacks (called “rebates”) from drug manufacturers in exchange for formulary inclusion and/or preferred formulary “tier” status. The higher the drug’s price, the better the formulary placement and the more money the PBM makes. PBMs can also exclude drugs from the formulary if drug manufacturers decline to pay rebates or if the rebate payment is too low.
Formulary Placement Rebates Cause High Drug Prices, Artificial Consumer “Savings”
Ostensibly a “cost of doing business”, drug manufacturers add the PBM’s rebate to the drug’s cost, resulting in artificially inflated “list” prices for new medications and a continuous cycle of escalating drug prices. Any “discounts” negotiated between the PBM and the drug manufacturer occur in the artificial price markup created by the rebate, but that doesn’t stop PBMs and their lobbyists from claiming they save clients money while quietly pocketing the rebates for themselves.
PBMs use their ever expanding formulary exclusion lists to intensify the pressure on drug manufacturers to meet PBM rebate demands. With 3 PBMs processing more than 80% of the U.S. prescription market, any drug manufacturer that doesn’t play the high price drug rebate game with the PBM for preferred formulary placement is missing out on potentially significant market share. This leads to the most morally damaging and commonplace circumstance in today’s healthcare landscape: the insurance denial at the pharmacy counter. Doctors prescribe medications based on clinical evidence and what is best for the patient, then send the prescription to the pharmacy. The patient uses their insurance to purchase the medication, and the insurance denies the claim because the drug isn’t on the formulary. Insurance call centers do not offer patients any clinical rationale for the denial of coverage, only canned responses from a flavorless script listing the “preferred” coverage options.
Formulary Rebates Coerce Prescribers and Patients into Purchasing More Expensive Medications for PBM Profit
Pharmacy staff perpetually bear the burden of delivering the bad news of insurance denials and high copays to patients. Even after spending a not-insignificant portion of their paycheck on high insurance premiums, many patients are financially coerced into asking their doctor for the preferred formulary medication. It may not be their best therapeutic option, but it’s the only financial option available to them.
PBM formularies stick it to patients with high copays, and also sometimes literally tell patients where to stick the medication. While inspecting a patient’s Medicare formulary for preferred ulcerative colitis treatments, my pharmacy found mesalamine enemas were preferred over the substantially less expensive mesalamine capsules. Once again, this unholy matrimony between PBMs and formularies has no dignity.
Rebate quid pro quo payments are addictive and present a clear danger, as illustrated by PBMs’ role in the opioid crisis. Between 2003–2012, PBMs took $400,000,000 per year in rebate money from Purdue Pharma, ensuring Oxycontin received “preferred” formulary placement without restrictions — including quantity dispensed — allowing for the free flow of Oxycontin to insured patients. The lesson: PBMs will drug up their own formularies just to get a little extra scratch. Someone needs to save our battered formularies from this financial exploitation!
Fortunately the public is catching on: Vermont, Hawaii, California, Ohio, Kentucky and even the Federal Trade Commission are all actively suing PBMs for these business practices, most notably for their vile use of exclusion lists.
PBMs Use International Corporations to Hide Their Formulary Rebates
Where does all this rebate money go? Back to PBMs through their affiliated GPOs or “group purchasing organizations” — a deceptive administrative term for corporate entities whose ultimate purpose is to “aggregate” rebates, ultimately obfuscating the percentage of rebates that may or may not be passed back to the consumer or plan payer.
The largest PBMs have created GPOs in countries like Switzerland and Ireland, lengthening their reach from the law while facilitating their ability to hide how much rebate money they receive from pharmaceutical companies. As “aggregators” of billions in rebate monies received from drugmakers worldwide, GPOs make it virtually impossible for contracting fiduciaries to discern their own rebates and “cost savings” negotiated by their PBM. The opacity is so far-reaching that several state Medicaid programs have been forced to use litigation to settle for over $1 billion from PBMs for overcharging taxpayer funded health programs.
To reiterate this point, while our tax dollars are used for providing healthcare, PBMs use their wolfish formulary design to extract as much rebate money as possible, then, instead of passing the money back to the government, the government has to hire lawyers with our tax dollars to sue and get the promised money back. States need to hire a divorce lawyer to separate formularies from the manipulative PBMs!
Even patients have tried suing PBMs for these schemes, only to find that their employer — not the PBM — is carrying the fiduciary duty. Johnson and Johnson, Wells Fargo, and JPMorgan Chase are embroiled in complicated lawsuits brought by employees over inflated drug prices.
The best solution for patients and employers is to completely sever the formulary from the PBM. Using an independent Pharmacy and Therapeutics committee to create formularies based on clinical evidence, disconnected from the PBM rebate scheme, will lead to better outcomes, lower cost medication utilization, and needed accountability for employers and patients.
We need a new healthcare system where pharmacy benefit managers have absolutely no influence on formulary design and upkeep. This greed-driven coupling has existed for far too long. It’s time for PBMs and their formulary revenue schemes to permanently break up for the betterment of patients and employers.
Chris Hobart, PharmD, PUTT Board of Directors
Chris Hobart is a pharmacy owner and Board Member of Pharmacists United for Truth and Transparency
Sources:
https://www.ag.ky.gov/Press%20Release%20Attachments/2023.08.01%20MTA%20FAC_Filed_FACOnly.pdf
https://www.nytimes.com/2024/12/17/business/pharmacy-benefit-managers-opioids.html
https://www.drugchannels.net/2023/05/five-or-maybe-six-reasons-that-largest.html
