AbbVie’s pricing for its new Hepatitis C Virus (HCV) drug Mavyret is disruptive to the current PBM business model because it forces the Big 3 PBMs to consider a drug for inclusion in their national formularies that is aligned with their clients interests — more cost-effective than Harvoni — but not aligned with their own interest of squeezing out all the rebates they can from specialty drug manufacturers.

Will PBMs open up the HCV therapeutic class and include Mavyret?

Or, will they expose themselves to claims of misalignment by excluding AbbVie’s Mavyret?

Stay tuned.

The PBM Business Model Today

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 States in 2015.

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.

In a 2017 paper, we presented the case that there have been 3 distinct phases of the PBM business model over the past 15 years demarcated by radical shifts in the primary source of gross profits: (graph below)

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

To compensate for declining mail order generics Rx margins after 2010, PBMs saw the rising trend of specialty and biotech drugs as a promising basis for a renewed reliance on retained rebates.

But there are several constraints today on this phase of the PBM business model.

The first constraint in that the specialty drug Rx volume “basis” for collecting rebates today is a lot less than it was ten years ago when small molecule drugs were the basis for rebates.

The second constraint is a newfound awareness by clients that retained rebate dollars can be substantial yet an opaque source of PBM gross profits.   As a defensive move, CVS Health finally declared publicly on their website that,

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

The problem facing PBMs today is how to derive a majority of gross profits from specialty Rx while maintaining a transparent rebate retention rate of 10% on average.

Using data supplied by the drug company Merck, we reconstructed a step-by-step sequence of how PBMs and drug companies might negotiate the parameters of a rebate deal under the triple constraints of (1) Pharma’s net prices must grow; (2)  PBMs retained rebate gross profit DOLLARS must grow; and (3) PBM rebate retention rate must be fixed at 10%.  

We found that to do this required PBMs to “coax” drug companies into increasing list prices for brand drugs at double-digit rates yearly while demanding that nearly all of it be rebated back to the PBMs. The result of this scheme is an occurrence now known as the “gross-to-net price bubble.”  Below is a graph of the phenomenon using data supplied by Merck:

PBMs and Formulary Choice

As we said in the prior section, the PBM business model relies heavily today on rebates received from drug companies 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 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 PBMs and rubber-stamped by plans.  The formulary is designed to limit Rx to the most cost-effective drug(s) in each of 50-80 different therapeutic classes.  

In 2005, we were the first to conceptualize formularies and their 50-80 therapeutic classes as a group of markets.  On the sell-side are brand drug companies with close, but not perfect substitutes, called 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 gatekeepers (PBMs) for access to markets with limited competition. We have presented that case that the most “rebatable” brand drugs fall in oligopolistic therapeutic classes featuring a small number of patented drugs that are therapeutic equivalents.  

Over time, “me too” drugs enter and older drugs lose patent protection opening the door to generics or biosimilars.  The therapeutic class becomes competitive and no manufacturer has any wiggle room left to negotiate price reductions with PBMs.

We have observed a change in PBMs’ approach to formulary design over the past 15 years.  Basically, “rebatable” therapeutic classes have gone from being open — a few approved drugs — to being closed — a single approved drug.  We are just beginning to figure out the causes of this change.  

But our basic view of what drives PBMs to choose  open versus closed therapeutic classes is this:

The more a PBMs limits competition in a therapeutic class, 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 granting access to specialty therapeutic classes.  This is the reason for the trend toward closed formularies and correspondingly more drugs on excluded lists.   

The Hepatitis C Virus Drug Therapeutic Class

In 2013,  the biotech company Gilead Sciences got FDA approval for its “innovative” Hepatitis C Virus (HCV) drug combo called Sovaldi.  Eight month later, an improved version of Sovaldi,  called Harvoni, came on the market.  These drugs produced fewer side effects than first generation combo drugs requiring interferon.  Also, Sovaldi / Harvoni only required regimens lasting 12 weeks, instead of 24 to 28 weeks with prior combo drugs.  

In 2016, Gilead’s Harvoni stood at #2 on the list of top selling Rx drugs at $10.0 Billion a year, after AbbVie’s top selling biotech drug Humira at $12.9 Billion used to treat a variety of autoimmune diseases.

In the three years since Harvoni came on there market, there have been 5 additional HCV drugs approved by the FDA, but only AbbVie’s Viekira Pak has garnered any significant sales.  

The reason has been that the Big 3 PBMs have decided the make the HCV therapeutic class a “winner-take-all” proposition, coaxing competing companies to choose a high list price to be in a position to offer PBMs  a “deep discount” rebate reaching 70% to 80% of list price to gain exclusivity in the HCV therapeutic class.  Below is a summary of the formulary choices of Big 3 PBMs and Prime Therapeutics for the HCV therapeutic class for 2017.   

Gilead has secured exclusive preferred status for Harvoni with CVS Health, OptumRx and Prime Therapeutics. AbbVie has secured exclusive status for Viekira Pak with Express Scripts.   

All of these choices are aligned with plan interests of having the most cost-effective drug included in the formulary.  All choices are also aligned with PBMs’ interest of securing the most rebate DOLLARS.

Harvoni and Viekira Pak are both about equally effective so rebates become the determining factor for cost-effectiveness.  For CVS Health, OptumRx and Prime Therapeutics, Gilead’s Harvoni is more cost-effective choice because Gilead’s rebate offer was greater than AbbVie’s.

For Express Scripts, Viekira Pak is the most cost-effect choice because AbbVie’s rebate offer was greater than Gilead’s whose bid might have been constrained due to a depleted budget after all the other wins.   

AbbVie’s Mavyret Drug Pricing Is Disruptive to the PBM Business Model

On August 3, 2017, the FDA approved a new HCV drug call Mavyret from AbbVie. According the Speciality Pharmacy Times, this new drug has the potential to challenge the dominant position of Gilead’s Harvoni on two fronts: (1) a regimen requiring only 8 weeks versus 12 weeks for Harvoni; and (2) a disruptive ultra-low regimen list price that leaves little to no room for PBM rebates.  

Below is our spreadsheet comparison of the NET REGIMEN for Mavyret versus Harvoni:

AbbVie’s pricing for Mavyret is disruptive to the current PBM business model because it forces the Big 3 PBMs to consider a drug for inclusion in their national formularies that is aligned with their clients interests — more cost-effective than Harvoni — but not aligned with their own interest of squeezing out all the rebates they can from specialty drugs.

On July 31, 2017,Express Scripts released its 2018 National Formulary, but noted:

“Please note that product placement for Hepatitis C and treatment for Inflammatory Conditions are under consideration and changes may occur based upon changes in market dynamics and new product launches. The full list of excluded products will be available on or before September 15, 2017.”

In August 2017, CVS Health released a white paper outlining the criteria it uses for formulary choices and exclusion lists. It stated that in January 1, 2018,  it expects to remove 17 products from their Standard Control Formulary in 10 drug classes, but noted that  

“We are in the process of finalizing changes for autoimmune and hepatitis C categories, which will be communicated mid-September.”

Will the PBMs open up the HCV therapeutic class and add Mavyret?  

Or, will they expose themselves to claims of misalignment by excluding AbbVie’s Mavyret?

Stay tuned.

Postscript added October 17, 2017

Was CVS’s Formulary Exclusion of Mavyret a Violation of Antitrust Laws?