Tag Archive bilateral oligopoly

Pharmacy Benefit Managers: The Sopranos of the Specialty Drug Market

Lawrence W. Abrams No Comments

Summary:

We present the case that Big 3 PBMs — CVS Health, Express Scripts, and OptumRx —  and the Sopranos are both gatekeepers who limit access to otherwise competitive markets.  In return, PBMs and the Sopranos take an outsized slice of the super-competitive profits.  The analogy is presented in the diagram below:  

 

The Sopranos Business Model

In the pilot episode of the HBO hit series The Sopranos, Tony Soprano complained to his therapist Dr. Melfi about the stresses of being a “waste management consultant.”

Tony’s “consulting practice” consisted of managing the competing interests of various sanitation companies wishing to win lucrative garbage collection contracts put out to bid by suburban New Jersey municipalities.

Tony guaranteed garbage collection companies exclusivity in bidding on any given municipal garbage contract.  This exclusivity was insured via dispatching his nephew Christopher to persuade the unfavored that bidding on a given contract would be dangerous to their health.  

In return for exclusivity, Tony and his crew received a large slice of the super-competitive profits earned by the favored bidder.

The Sopranos provide no real value added here.  Their operation was designed to transfer value, a.k.a. theft,  from down-steam consumers to sanitation companies while taking an outsized slice of the transfer.

The competition-limiting gatekeeper role can be stressful.  Hence the need for Tony to seek out Dr. Melfi. Tensions can break out among the sell-side sanitation companies with cries of favoritism and “unfairness” in the Sopranos cut of the overall surplus.  Instead of a psychiatrist, maybe Tony should have sought out the advice of game and bargaining theorists with knowledge of Nash equilibriums?  

Being the wisest guy in the Soprano crew,  Tony was careful not to play favorites and cognizant of being too greedy. That way no sanitation company was motivated to break ranks and seek out other gatekeeping crews like the DiMeo’s or the Lupertazzi’s.

Note that the few players on both the sell-side — sanitation companies — and the buy-side — Mafia crews — mattered here.  Had there been 10+ sell-side sanitation companies, there would have been no way Tony’s nephew Christopher could have the time to enforce limited competition for bids.  Competitive bidding would breakout eliminating super-competitive profits.

Also,  had there been 10+ Mafia crews competing with the Tony’s crew, he would not have been able to demand and get the outsized kickbacks that he got.

In economic terms, a market characterized by a few buyers and a few sellers is known as a bilateral oligopoly.  Prices are negotiable as the gain or loss of single trading partner has a material effect.

Note that business model matters here.  Tony could have been a legitimate fee-for-service waste management consultant helping NJ municipalities structure bid contracts and perform due diligence on sanitation companies.  Under this business model, Tony’s interests align with his buy-side clients’ interests in getting most cost-effective service. There would have been no “theft” from downstream consumers.

The Pharmacy Benefit Manager Business Model

The management of the prescription (Rx) drug benefit portion of health care plans has become the domain of contracted specialists called pharmacy benefit managers (PBMs).

The three largest, independent PBMs — Express Scripts, CVS Health,  and Optum Rx, (known as “The Big 3”) control 73% of the total Rx claims processed the United State in 2015.

PBMs provide a bundle of managed care services designed to provide a cost-effective Rx drug benefit to plan sponsors and their members.  

Since the early 2000s, PBMs have continually come under attack for not acting in the best interest of their clients.  We have written a number of papers since 2004 pinpointing an opaque reseller business model as the source of this misalignment.

The PBM reseller business model is in stark contrast to the two other transparent business models used by managed care companies:  

  1. a self-insurance agency model with 100% pass through of claims expenses to plans accompanied by per-member-per-month (PMPM) management fees;
  2. a risk-based insurance model with capitated premiums paid by plans.

The current PBM business model features five major streams of revenue and gross profits:

  1. “spread margins” on top of retailers own margins and lately, direct and indirect reimbursement (DIR) fees, that are collected from retail pharmacies in return for being included in preferred provider networks;
  2. claims processing and data fees;
  3. rebates given by Pharma on small molecule brand drugs in return for preferred status on formularies;
  4. rebates give by Pharma on speciality (biotech) drugs in return for preferred status on formularies;
  5. profit margins on 90-day generic Rx filled by captive mail order operations.

Since we began following PBMs in 2002, the distribution of gross profits has changed dramatically. These radical shifts in such a short period of time is unprecedented among Fortune 50 companies.

We see 3 distinct phases of the PBM business model over the past 15 years demarcated by radical shifts in the primary source of gross profits:

  1. up to 2005 — reliance on retained rebates from small molecule brand drugs;  
  2. 2005 – 2010 — reliance on mail order generic Rx margins;
  3. 2010 – today — reliance on retained rebates from specialty drugs.

Below is a summary graph of our work on estimating the distribution of PBM gross profits by source over time.  Details about its derivation and causes of shift can be found in our 2017 paper Three Phases of the Pharmacy Benefit Manager Business Model.

These radical changes are indicative of the opaqueness of the PBM business model to downstream customers — health insurance plan sponsors.  It is also indicative of the power of the Big 3 PBMs to negotiate rapid changes in payment streams with upstream suppliers — retail pharmacies and brand drug companies –who tacitly collude with them to hold up prices and divide up the super-competitive profits in two intermediate market bilateral oligopolies.

PBMs As Competition-Limiting Gatekeepers to Markets

As we have summarized earlier, the PBM business model relies heavily on retaining a portion of rebates received from Pharma in return for placement on a list of drugs covered by a Rx benefit plan.  That list of covered drugs is called a formulary.

The purpose of this section is to present our conceptualization of formularies as a group of markets.  On the sell-side are brand drug companies with close, but not perfect substitutes, call therapeutic equivalents.  On the buy-side are the Big 3 PBMs representing plan sponsors and their members.

Economists call such markets bilateral oligopolies.  We have written a number of papers about the Pharma – PBM bilateral oligopoly available for download free on our website.

Rebates are essentially tariffs paid by drug companies to PBMs for access to markets with limited competition.

The formulary is a lookup table that PBMs add to their claims processing systems that checks a Rx request against a list of therapeutic equivalents preferred by the plan.  The formulary is designed to limit Rx to the most cost-effective drug(s) in each of 50-80 different therapeutic classes.  

In terms of pinpointing where drug companies and PBM negotiate rebates, it is important to note that there are 3 basic types of therapeutic classes or markets:

  1. competitive — featuring at 2+ drugs that have lost patent protection and have lower cost generics that are therapeutic equivalents to remaining brands;
  2. monopolistic – featuring a single first-to-market “innovative” patented drug;
  3. oligopolistic — featuring a small number of patented drugs that are therapeutic equivalents that becomes increasingly competitive over time as new “me too” drugs enter and older drugs lose patent protection opening the door to generics or “biosimilars”.

In the case of (1),  drug companies are powerless and prices fall to marginal costs so no rebates can be paid. Also, no substantial rebates are paid in the case of (2). Here the monopolist drug company is all powerful knowing that they must be included.  It is only in case (3), the bilateral oligopoly, that prices are negotiated among the few.

Our assessment of where rebates are paid was confirmed by a  2005 FTC study of PBM operations.  It confirmed that Pharma pays rebates only on a small portion of brand drugs. It does not pay on brand drugs with a monopoly position.  Nor does Pharma pay on brand drugs in aging therapeutic classes where most of the competing brands have lost patent protection.

The FTC study also confirmed that Pharma negotiates brand rebate deals only with PBMs, and not retail drugstore chains like Walgreen and CVS. Size does not matter on the buy-side if an entity does not also have the power to affect the demand for brand drugs through discretion in formulary design and compliance.

On the other hand, it is generic drug manufacturers that negotiate volume discount deals with drugstores because only dispensing pharmacies have the power to choose from an array of suppliers of perfect substitutes.  

Again, no rebates would be paid even in case (3) if there were many PBMs competing for business.  PBMs would be price takers in this case as any attempt to extract a lower price from a drug company and the drug company would walk away from the deal with little loss in business.

Finally, there would be no concerns about PBMs resorting to misaligned formularies  and opaque rebate retentions if they would have adopted a transparent fee-for-service and 100% pass through business model.

In other words, PBMs as countervailing powers, a term coined by economist J.K. Galbreath in the 1950s, have the potential to enhance consumer welfare.  But, countervailing powers with a misaligned business models won’t. See our 2007 paper  PBMs As Conflicted Countervailing Powers.

The Connection Between Formulary Design and Rebates

We conclude this paper with an observation that PBMs have changed their approach to formulary design over the past 15 years.  We are just beginning to figure out the causes of this change.  

But the basic idea, appearing first in our 2005 paper on PBMs as bargaining agents, is this:

The more a gatekeeper limits competition, the more potential entrants will pay for access.  Small molecule therapeutic classes tend to be open, hence less valuable to entrants.  Specialty and biotech therapeutic classes tend to be closed, hence more valuable to the single favored entrant.  

Today, PBMs need to squeeze everything they can from access to specialty therapeutic classes because there are lot fewer of those classes than the small molecule drug therapeutic classes that they relied on before 2010.   

A recent paper of ours presents in more detail how PBMs  coax Pharma into having high list prices so that they can take back most of the inflated list price via opaque deep discount rebate rates.

Today PBMs struggle with a rebate “basis”  that is a lot less than it was ten years ago.  How much less?  A study sponsored by the Pew Foundation found that in 2015 specialty Rx comprised only 1% of total Rx.  

A decade ago, we estimated that about 20% of total Rx filled were “rebatable” brand drugs, i.e. in formulary classes with a few other brand drugs that were therapeutic equivalents.  So instead of 1:100 specialty Rx to total Rx basis differential, we arrive a 1:20  “rebatable” specialty drug Rx to “rebatable” small molecule brand drug Rx basis differential.

In other words,  ten years ago PBMs has 20 times the volume of Rx available to them to use as a basis for generating retained rebates as they do today.

It is the greatly reduced basis for generating retained rebates today that is root cause of formulary designs with closed therapeutic classes. The greatly reduced rebate basis is also a factor in such new phenomena as the gross-to-net drug price bubble, and a growing lists of drugs outright excluded from formularies.

 

Three Phases of the Pharmacy Benefit Manager Business Model

Lawrence W. Abrams No Comments

We present the case that there has been three distinct phases of the pharmacy benefit manager (PBM) business model over the past 15 years. Each phase has been demarcated by a major shift in the dominant source of gross profits.

These radical shifts in the primary source of gross profits in such a short period of time is unprecedented among Fortune 50 companies.  This is indicative of the opaqueness of the PBM business model to their downstream customers — health care plan sponsors.  

It is also indicative of PBMs’ relative power to negotiate rapid changes in payment streams from upstream suppliers — the Big 3 retail pharmacies and drug companies.   These upstream suppliers and the Big 3 PBMs make up two sides of intermediate market bilateral oligopolies.

It is instructive to understand why PBMs had to recalibrate their business model twice now in the last 15 years.  In today’s terminology,  what “disrupted” this powerful cartel? Our examination of recent history suggests that  government regulations and lawsuits have had little impact on PBM decisions to change their business model.  

Rather, our view is that the disruptors have been “rent-seekers” whose business models were not in alignment with the rest of the cartel.  This included the emergence of a vertically integrated PBM in the form of CVS-Caremark and the powerful outsider Walmart with a business model that allowed for the retail pharmacy to be a “loss-leader”.

Below is a spreadsheet which summarizes the data sources for our estimation of distribution of PBM gross profits over the past 15 years.

Below is a graph of our estimates of PBM gross profits share by source over the past 15 years indicating that there have been 3 distinct periods where a different source dominated.

In support of our contention of the replacement of lost margins on mail order generics with retained rebates after 2010, we present data assembled by Adam Fein  estimating total rebates to PBMs and discounts to drug distributors between 2007 – 2016.   Note that the total increases was 126% between 2010 and 2016.

 

The Pharmacy Benefit Management Business

PBMs provide a bundle of managed care services designed to provide a cost-effective prescription (Rx) drug benefit to plan sponsors and their members.  The PBM bundle includes the following list of services:  

  1. create a retail preferred provider pharmacy network and negotiate brand and generic Rx reimbursements;
  2. provide 90-day Rx exclusively from captive mail order pharmacies;  
  3. provide specialty (high priced and biotech) drugs Rx from captive specialty pharmacies;
  4. create a formulary — a look up table that restricts fills to preferred drugs — and negotiate rebates with Pharma in return for placement;
  5. provide other Rx cost-saving measures such as prior authorization, step-therapy, quantity limits, and co-pays.   

Concentration in the PBM Business

The three largest PBMs today — Express Scripts, CVS Health,  and Optum Rx, (known as “The Big 3”) control 73% of the total Rx claims processed the United State in 2015.  

Prior to 2013, the Big 3 PBMs were Express Scripts, Medco, and Caremark with a combined concentration similar to today.  The concentration in the PBM industry today has been the result of a series of horizontal mergers mistakenly approved by the Federal Trade Commission (FTC).

In 2004, there was a horizontal merger between #3 PBM Caremark and #4 PBM AdvancePCS.

In 2007, there was, in our opinion, a disruptive pro-competitive, vertical merger between #2 retail pharmacy CVS and #2 PBM Caremark. At the time, #1 PBM Express Scripts make a hostile bid for Caremark, but withdrew over concerns over the length of antitrust investigations by the FTC.

In 2012, there was a horizontal merger between the #1 PBM Express Scripts and #3 PBM Medco.  In our opinion, this anti-competitive merger was mistakenly approved by the FTC with a one vote majority.  The deciding vote was made by a President Obama appointee, and Harvard Law School classmate, Edith Ramirez.  In our opinion, Edith Ramirez has cost the American public $75+ Billion in excessive Rx costs over the past 5 years —   5 times an estimated inflated 5% of $300 Billion in yearly Rx drug expenses.

In 2013, the largest health insurer in the USA, UnitedHealth Group,  ended its long running PBM contract with Medco, now owned by Express Scripts.  To handle its own PBM needs, UnitedHealth created an internal unit OptumRx. It grew the unit via taking business away from CVS and Express Scripts and via a 2015 purchase of the tech-savvy PBM Catamaran.

The Pharmacy Benefit Manager Business Model

Since the early 2000s, PBMs have continually come under attack for not acting in the best interest of their clients.  We have written a number of papers since 2004 pinpointing an opaque reseller business model as the source of this misalignment.

The PBM reseller business model is in stark contrast to the two other transparent business models used by managed care companies:  

  1. a self-insurance agency model with 100% pass through of claims expenses to plans accompanied by per-member-per-month (PMPM) management fees;
  2. a risk-based insurance model with capitated premiums paid by plans.

The way companies monetize their businesses — a key component of their overall business model — is a choice.  Often companies sell bundles of products and services and make strategic decisions to monetize one component at a higher margin rate than another component.  Disguising gross profit margins by line of business or bundle components is considered a good business practice.

Take, for example, General Motors. It aspires to build great cars, yet a good share of its gross profits comes from car finance. McDonald’s aspires to offer customers a great tasting hamburger, yet the company has a higher markup on beverages that it does on food. Best Buy recoups slim margins on consumer electronics products with fat margins on extended warranties.

So why should the opaque PBM reseller business model be judged differently than, say, Best Buy’s?  Aren’t PBMs subject to ERISA laws mandating fiduciary responsibility — i.e. acting in best interest of clients?  

Actually no, according to court cases.  It is up to clients of PBMs to hold them accountable for claims that they act in clients’ best interests.  It is up to clients of PBMs to pressure them to offer alternative, more transparent business models.

The Evolution of the PBM Business Model

The PBM business model has evolved considerable over the past 15 years both in terms of the array of managed care services offered and the corresponding distribution of gross profits.

In 2001, PriceWaterhouseCoopers  published an excellent business history of PBMs to that date.   PBMs started out in the 1980s as computer networking specialists who automated Rx claims processing by connecting retail pharmacy point of sales terminals to back-office health insurance mainframes.  

Between 1980-1990, PBMs’ prime source of revenue was claims processing fees.  PBMs only focus was minimizing claims processing costs, a goal totally in line with the goals of their clients.

The excellent PriceWaterhouseCoopers PBM history did mention that PBMs tried a totally transparent insurance premium business model in the early 1990s. But, they abandoned it after a few years due to losses caused by unexpected mid-year increases in unit drug costs and uncontrollable, Pharma-initiated direct-to-consumer advertising campaigns that greatly increased utilization.

The current PBM business model features five major streams of revenue and gross profits:

  1. “spread margins” on top of retailers’ own margins and lately, direct and indirect reimbursement (DIR) fees, that are collected from retail pharmacies in return for being included in their networks;
  2. claims processing and data fees;
  3. rebates given by Pharma on small molecule brand drugs in return for preferred status on formularies;
  4. rebates give by Pharma on speciality (biotech) drugs in return for preferred status on formularies;
  5. profit margins on 90-day generic Rx filled by captive mail order operations.

Since we began following PBMs in 2002, the distribution of gross profits has changed dramatically. These radical shifts in such a short period of time is unprecedented among Fortune 50 companies.

These radical changes are indicative of the opaqueness of the PBM business model to their downstream customers — health insurance plan sponsors.  It is also indicative of the power of the Big 3  PBMs to negotiate rapid changes in payment streams with upstream suppliers — retail pharmacies and brand drug companies — who tacitly collude with them in two intermediate market bilateral oligopolies.

We see 3 distinct phases of the PBM business model over the past 15 years demarcated by radical shifts in the primary source of gross profits:

  1. up to 2005 — reliance on retained rebates from small molecule brand drugs;  
  2. 2005 – 2010 — reliance on mail order generic Rx margins;
  3. 2010 – today — reliance on retained rebates from specialty drugs.

Phase 1:  Retained Rebates from Small Molecule Brand Drugs

Phase 1 ended in 2005 after blog posts started appearing which disaggregated the 10-Qs and 10-Ks of Medco’s business model revealing outrageous rebate retention rates.  There was also a 2004 lawsuit initiated by U.S. Philadelphia District Attorney Patrick Meehan (now Congressman) accusing Medco of switching mail order generic Rx to higher priced rebatable brands.  As part of the settlement, Medco agreed to inform plans of gross rebates received and their rebate retention rates.

For 3Q04, we derived with certainty from Medco’s 10-Q that 71% of its gross profits came from retained rebates from small molecule brand drugs.  By 2Q05, we estimated with certainty that Medco’s retained rebate share of gross profits had dropped to 48% with the difference going to their newly found focus on mail order generics.

We have written extensively about the Pharma – PBM bilateral oligopoly that enabled this phase of the PBM business model.  Rather than rehash this, we refer to the following papers downloadable for free from our website:

  1. Pharmacy Benefit Managers as Conflicted Countervailing Powers , January 2007
  2. Who is Best at Negotiating Pharmaceutical Rebates?  December 2005
  3. PBMs as Bargaining Agents Paper presented at the 80th Annual Western Economic Association Meeting, July 6, 2005, San Francisco
  4. PBMs as Bargaining Agents PowerPoint presented at the 80th Annual Western Economic Association, Meeting, July 6, 2005, San Francisco
  5. The Effect of Corporate Structure on Formulary Design: The Case of Large Insurance Companies Poster Presentation, ISPOR 10th Annual Meeting, Washington DC, May 2005
  6. The Role of Pharmacy Benefit Managers in Formulary Design: Service Providers or Fiduciaries? Journal of Managed Care Pharmacy Vol. 10 No. 4 July/August 2004 pp 359-60

Phase 2: Mail Order Generic Rx Margins

The “interregnum” Phase 2 featured a successful replacement of retained rebates with mail order generic margins.   The Big 3 PBMs devised a strategy of tacitly colluding with the Big 3 sell-side retail pharmacies  — Walgreen, CVS, and Rite-Aid — to hold up retail generic prices in order to allow for PBMs’ mail order generics prices to be lower but still with fat margins.  

Essentially, it was a scheme to limit price competition between retailers and mail order by “buying off” retail pharmacies with reimbursements for 30-day generic Rx at fat margins in return for ceding  90-day generics Rx to captive mail order operations at lower prices but equally fat margins.

According to PBMs,  mail order was good for plans because mail order generic Rx were cheaper than at retail.  Nevermind, if this was only because of PBMs’ rare ability to set the price of their competitors.  This hold-up scheme was just a sure-fire version the anti-competitive tactic of raising rivals costs.

Below is a diagram which compares the margins at the height of Phase 2 “hold-up” scheme versus the lower prices and margins existing today.

The “hold-up” scheme worked for a couple of years. Our 2003 paper which disaggregated Walgreen’s gross profits likely was read by an “outsider” retailer with a different business model that wasn’t dependent on fat Rx margins subsidizing the rest of the store.  That outsider was Walmart.  

Our paper confirmed what they saw — the fat generic Rx margins of Walgreen, etc. dispensed from a “1,000 square foot hole in the back” (our words) making up for slim margins coming the poorly merchandised, 10,000 square foot “front store”.   

In 2006,  Walmart rolled out a  transparent $4 / generic Rx campaign that proved to be the first blow to this hold-up scheme.

The 2007 vertical  merger of the pharmacy retailer CVS and the PBM Caremark marked the beginning of the end of the era of fat generic Rx margins.

A fundamental tool of managed care companies are preferred provider networks.  They succeed in reduce costs by promising increased volume to preferred providers in return for lower unit prices.  In 2006,  we found PBMs’ lack of use of preferred provider networks , along with lack of 90-day Rx at retail, to be obvious signs of the tacit collusion between the Big 3 pharmacy retailers and the Big 3 PBMs.

CVS likely read our 2015 paper confirming their success at beating out competitors in a Medicare Part D precursor program which was agnostic as to whether the Rx was filled at retail or mail order.

At the time of the CVS Caremark merger in 2006, we predicted  a “coming preferred provider war” among PBMs. Ten years later  “narrow networks” are common.  Generic Rx prices and margins are on a downtrend. And, PBMs no longer tout their mail order generics as the key to their profitability.

Phase 3: Retained Rebates From Specialty Drugs

To compensate for declining mail order generic margins, PBMs saw the rising trend of specialty and biotech drugs as a basis for a renewed reliance on retained rebates.

But there are several problems with the goal of deriving a majority of gross profits from specialty drug rebates.   Reconstructing how PBMs solved these problems provides insights in two observable phenomena of the era of specialty drug rebates:

  1. the so-called deep rebate practice and related gross to net drug price bubble;
  2. the trend of growing number of drugs excluded outright from PBM formulary lists.

First, assume that Big 3 PBMs need to derive about the same 50% of gross profits from specialty drug retained rebates as was derived a decade ago from retained rebates from small molecule “rebatable” brands.

This creates a problem in that the Rx volume “basis” for collecting rebates today is a lot less than it was ten years ago.  How much less?  The Pew Charitable Trust Foundation sponsored a study which found that in 2015 special Rx comprised only 1% of total Rx.  

A decade ago, we estimated that about 20% of total Rx filled were “rebatable” brand drugs, i.e. in therapeutic classes with a few other brand drugs that were therapeutic equivalents.  So instead of 1:100 specialty Rx to total Rx basis differential, we arrive a 1:20  “rebatable” specialty drug Rx to “rebatable” small molecule brand drug Rx basis differential.

In other words,  ten years ago PBMs has 20 times the volume of Rx available to them to use as a basis for generating retained rebates as they do today.

The second constraint that PBMs have today that they did not have a decade ago was the awareness by plans and the public that opaque retained rebate could be a dominant source of gross profits.    

Our 2003-8 era papers listed below were rare examples of quantitative articles exposing PBM reliance on retained rebates:

  1. Quantifying Medco’s Business Model: An Update November 2008
  2. Medco As a Business Model Imperialist  July 2008
  3. A Tale of Two PBMs: Express Scripts vs. Medco November 2005
  4. Quantifying Medco’s Business Model April 2005
  5. Estimating the Rebate-Retention Rate of Pharmacy Benefit Managers April 2003

Today,  articles critical of PBMs in general, and retained rebates specifically,  seem to be at least 10 more numerous than a decade ago.  In 2016, CVS Health has even stated publicly on its website that,

“CVS Caremark was able to reduce trend for clients through… negotiation of rebates, of which more than 90 percent are passed back to clients.”

The problem facing PBMs today is how to derive around 50% of gross profits from specialty Rx while maintaining a transparent “reasonable” rebate retention rate at 10% on average?

How have the Big 3 PBMs accomplished this?  They are doing by tacitly colluding with Pharma to increase brand list price at double digit rates which enables PBMs to opaquely offset the list price inflation with growing “deep discount” rebates.  

Below is a screenshot from a Merck memo laying out for all to see its “gross-to-net drug price bubble”: 

In another paper, we “deconstructed” the Merck data by laying out a step-by-step sequence of how PBMs and drug companies might negotiate the parameters of a rebate deal today under the constraint that PBMs have to increase gross profit DOLLARS over time while fixing the rebate retention rate at 10%.   Below is a spreadsheet of that step-by-step process:

It is clear that Pharma is getting fed up as an enabler of a convoluted PBM business model. There are other drug companies besides Merck that are publishing similar data as way of defending themselves against charges of “double-digit” price-gouging tactics.  A testy exchange between executives at Gilead Science and Express Scripts over who is to blame for the high list prices of Gilead’s top selling Hepatitis C virus drugs went public.

We have written about AbbVie’s “disruptive” low list pricing of its new HCV drug Mavyret that dares PBMs to exclude a no-rebate drug that also happens to be the most cost-effective HCV now the market.

It is the PBM business model, not the Pharma business model, that is currently stressed.   If PBMs can no longer rely on specialty drug retained rebates,   they will have to seek a new service to build up opaque margins or convert finally to a 100%  pass through fee-for-service business model.

 

Understanding Drug Rebates Through Bargaining Theory

Lawrence W. Abrams No Comments

All papers downloadable .pdf

 Pharmacy Benefit Managers as Conflicted Countervailing Powers (01/07)

Who is Best at Negotiating Pharmaceutical Rebates? (12/05)

The Role of Pharmacy Benefit Managers in Formulary Design: Service Providers or Fiduciaries?
Journal of Managed Care Pharmacy Vol. 10 No. 4 July/August 2004 pp 359-60

PBMs as Bargaining Agents
Paper presented at the 80th Annual Western Economic Association Meeting, July 6, 2005, San Francisco

PBMs as Bargaining Agents
PowerPoint presented at the 80th Annual Western Economic Association, Meeting, July 6, 2005, San Francisco

The Effect of Corporate Structure on Formulary Design: The Case of Large Insurance Companies
Poster Presentation, ISPOR 10th Annual Meeting, Washington DC, May 2005

 

The Pharmacy Benefit Manager Business Model

Lawrence W. Abrams No Comments

CURRENT PAPERS:

Three Phases of the Pharmacy Benefit Manager Business Model (09/17)

It is Pharmacy Benefit Managers that Drive the Gross-to-Net Drug Price Bubble (09/17)

Merck Data Discredits PBM-Sponsored Study of Brand Drug Price Inflation (09/17) 

Pharmacy Benefit Managers: The Sopranos of The Specialty Drug Market (09/17)

Hepatitis C Virus Formulary Choices for 2018: Will CVS Caremark Risk Looking Bad? (09/17)

AbbVie’s Mavyret Hep C Drug Pricing is Disruptive to the PBM Business Model (09/17)

PAST PAPERS:

Pharmacy Benefit Manager Valuation and Profitability: Business Models Matter (07/09)

Medco As a Business Model Imperialist (07/08)

Quantifying Medco’s Business Model: An Update (11/08)

A Tale of Two PBMs: Express Scripts vs. Medco (11/05)

Searching for Windfall Profits from a Change in the AWP Markup Ratio (09/09)

Exclusionary Practices in the Mail Order Pharmacy Market (09/05)

Quantifying Medco’s Business Model (04/05)

Estimating the Rebate-Retention Rate of Pharmacy Benefit Managers (04/03)

Walgreen’s Transparency Issue (11/03)

 

Legal Issues – Pharmacy Benefit Managers – PBMs

Lawrence W. Abrams No Comments

Was CVS’s Formulary Exclusion of Mavyret A Violation of Antitrust Laws? (10/17)

 Exclusionary Practices in the Mail Order Pharmacy Market

Practical Issues With PBM Full Disclosure Laws
Originally Published in Update Magazine, Issue 4, 2004. Available with permission from FDLI

The Formulary Game

Contrary to What Wall Street and the FTC Say, The PBM Business Model is Misaligned

Sins of Omission’: A Review of the FTC Study of PBM Conflict of Interest (10/05)