Pharmacy Benefit Managers (PBMs): Bending the cost curve in the wrong direction

In the NY Times article, “Take the Generic, Patients Are Told. Until They Are Not.”, Pharmacy Benefit Managers (PBMs) were called out for pushing branded products over generics to patients.

PBMs are primarily responsible for developing and maintaining the formulary, contracting with pharmacies, negotiating discounts and rebates with drug manufacturers, and processing and paying prescription drug claims. They predominately work with insurers, self-insured companies and government programs striving to maintain or reduce the pharmacy expenditures of the plan while concurrently trying to improve healthcare outcomes.[1]

In The New York Times article, UnitedHealthcare was called out for putting Adderall XR (a branded drug) as the first line for plan members, despite the availability of many (cheaper) generic drugs. For patients and most of the time for Payors, these generics are far cheaper and have significantly lower co-pays. In this circumstance, the PBM chose the more expensive branded drug, with a significantly higher co-pay and actual drug cost to patients, over cheaper generic alternatives. Why would they seemingly pay more for a drug rather than less? Besides, isn’t this contrary to their charter – to improve health care outcomes while reducing costs?

In the current drug supply chain in the US, higher prices can mean higher profits for middlemen such as pharmacy benefit managers. There is no way to know exactly how much, however, because the savings are in confidential contracts created by the PBM.

By shifting to the expensive branded drug, when cheaper generics are available, many patients (particularly those with high-deductible plans) not only pay a higher co-pay but also end up paying the full cost for the drug if they haven’t met their deductibles yet. Generally speaking, for patients, this can raise the cost of filling a prescription from $15 to $20 in generic form to several hundred dollars in branded form.

Due to the substantial cost, many patients may simply skip filling their prescription, or will try to skip doses in order to stretch out their supply. In this respect, it is likely to have an adverse effect on health care outcomes – diametrically opposed to one of the major benefits the PBM is supposed to be providing.

Yet, to the PBM plan’s bottom line, this could be viewed as a rational economic choice. In many cases, pharmaceutical companies are able to provide incentives to the PBMs that outweigh the benefit of a generic. For instance, a pharmaceutical company might provide a back-end discount (a “rebate”) to a PBM for achieving specific volume goals in a given category (e.g., central nervous system (CNS) – ADHD, depression, etc.). Thus, while there are generic drugs available in one area of the category, the PBM may benefit from savings on some costly branded drugs in the same category that more than offset the lack of savings from the use of one or two generics. Remember PBMs don’t work for the patients, but for the Payors. They are successful if they hold costs down or return a profit to the Payor. Profits are typically shared, providing an even greater incentive for PBMs to continue this behavior.

Hopefully, Payors will recognize that these programs aren’t in their best interest. While they may benefit in the short-term on the profit from such an approach, the loss from an adherence perspective, not to mention the financial burden to the patient, is far greater than the value of this quarter’s profit in a given category.

As with so many things in medicine, the short-term benefit of any decision will depend upon where an entity (e.g. Payor, PBM, Patient) fits in the value chain. Over the long-term, decisions like this have unintended consequences (i.e., reduced patient adherence, potential patient churn, etc.) likely negating that benefit.

Ironically, while swapping branded drugs for generics is suddenly the poster child for poor decision-making in healthcare, it has been a practice used for years. What has brought it to the forefront, however, is that drug manufacturers and PBMs are getting more aggressive, as more and more drugs go off patent. This is happening across all disease areas. It’s time that Payors step up and stop the foxes from guarding the hen house. The PBMs work on behalf of the Payors. While these tactics are certainly bending the cost curve, they are unfortunately bending it in the wrong direction.

[1] "Pharmacy Benefit Management" (PDF). American Pharmacists Association. July 9, 2009.