Quantifying a Pharmacy Benefit Manager (PBM) Fee-For-Service Business Model

Summary:

Using CVS’s 2017 10-K reports to the SEC and its 2017 drug trend report, we convert its PBM segment (a.k.a. Caremark) reseller gross profits business model to a single transparent fee-for-service expressed in terms of dollars per member per year (PMPY).  

The following table summarized our results:

Our estimated FFS equivalent of $64 PMPY is a relatively small 6% of CVS’s  $1,067 PMPY drug spend delivered. But, it must be remembered that Rx drugs are a relatively homogenous healthcare benefit compared to hospital procedures or even office visits.

The relatively ease of managing a drug benefit versus a medical benefit is reflected in CVS’s SG&A expense ratio of 1.0% of sales.  In contrast, the SG&A expense ratio in 2017 for healthcare insurance companies Aetna and Cigna was 24.5% and 19.5%, respectively.  

If PBM business models shift to FFS, we expect plans to shift their attention to PMPY trend delivered via significant increases in formulary exclusions.  It would be ironic if  “a world without rebates” becomes a greater threat to Pharma profitability than a world with rebates.   

 

Introduction

PBMs have come under attack since the early 2000s 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.

Over the course of the last 15 years, we have observed dramatic shifts in the distribution of PBM gross profits. These radical shifts in source of gross profits in such a short period of time is unprecedented among Fortune 50 companies.  It 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 pharmaceutical drug companies.   These upstream suppliers and the Big 3 PBMs make up two sides of intermediate market bilateral oligopolies.

Our paper Three Phases of the Pharmacy Benefit Manager Business Model  is an attempt to deduce motives for these shifts.  

We believe that motive is key to determining whether it is Pharma or PBMs who should be blamed for the gross-to-net drug price bubble since 2010. Based on our analysis of the shifting sources of gross profits presented in our paper cited above, we place the blame on PBMs.

In February, 2019,  Health and Human Services Secretary Alex Azar called on Congress to eliminate anti-kickback safe harbors for rebates as a mechanism for making formulary (insurance coverage) choices by private sector PBMs who manage Medicare Part D drug plans. This has been followed up by a bill introduced by Senator Mike Braun (R-Ind) to extend the elimination of rebates to commercial plans in the private sector.

In order to have any meaningful reduction in drug list price,  we strongly believe that two interrelated changes need to be embedded in government or private sector initiatives:

  1. PBMs need to convert to a transparent fee-for-service business model
  2. PBMs need to find an alternative the high list – high rebate market design for formulary placement

Despite our fifteen year critique of PBMs and their misaligned business model, we are not supportive of rebate-ending initiatives if they fail to include alternative PBM business models and alternative formulary market designs.  

Studies by consultants of the impact of eliminating PBM rebates on Medicare Part D varies greatly depending on assumptions about Pharma list price reductions.  To us, this variability in outcomes suggest that it would be dangerous to implement such changes without more specifics about what alternative business model and market design PBMs are likely to adopt.  

The purpose of this paper to take the first steps forward in “a world without rebates” by presenting an estimate a single transparent FFS to replace reseller gross profits using data from the largest PBM — CVS’s pharmacy segment ( a.k.a. Caremark).

The financial data comes from their 2017 annual 10-K report to the SEC: Source: CVS 10-K 2018, Page 14. The PMPY drug trend expenditures comes their 2017 annual drug trend reports: Source: CVS Trend Report – 2017. The number of covered lives comes from another annual reports: Source: CVS Facts and Figures – 2017

 

The Current PBM Reseller Business Model

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 current PBM business model is a reseller business model where the PBM earns margins on prescription drug fills at retail and mail order and retains a percentage of rebates paid by brand drug manufacturers in return for preferred formulary placement.

Specifically, the current PBM business model features five major streams of revenue and gross profits flowing through their financials:

  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.

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.

 

Converting CVS’s Business Model to a Single Fee-for-Service

Currently, PBMs such as CVS actually buy prescriptions, mark them up (i.e. “spread margin”), and then resell them to plan sponsors that contract with them for drug benefit management.  This spread margin is on top of a dispensing pharmacy fill margin. Separately, PBMs negotiate with brand name drug manufacturers for the payment of rebates, of which they retain a percent, in return for preferred formulary placement.  

As principals in these transactions, these flows are accounted for on  PBMs’ income statement. An interesting accounting question would be raised If PBMs converted customers to a single FFS business model with 100% pass-through of pharmacy claims and Pharma rebates.  Here PBMs become agents, and generally accepted accounting practices (GAAP) might dictate that these flows by-pass the PBM income statements to be posted first on their balance sheets as client receivables and payables.  The account balances would be relieved as they are paid to / by clients.

Today, we estimate that a majority of Big 3 PBMs profits comes from retained rebates.  We still have retail spread margins at 7% of gross profits, which is surprisingly low given the attention to this source of PBM profit at the state level driven by independent pharmacists.

 

Details of our disaggregation of PBM gross profits by source over the past 15 years can be found at Three Phases of the Pharmacy Benefit Manager Business Model .  Here is  summary graph from that paper:

 

We propose an alternative business model featuring a single fee-for-service equivalent to PBM gross profits.  It would entail 100% pass through of all Rx claims without any spread margin and 100% pass through of all rebates and drug inflation guarantees. It would also entail elimination of all miscellaneous claims processing and data fees.

Instead of gross profits, the transparent FFS would be used to cover corporate indirect sales, general, and administrative (SG&A) costs. What is left over, “falls to the bottom line” as operating profits and taxes.  As we said before, all other flows would be 100% pass-throughs and no longer have any impact on gross profits.

Whether 100% pass-through would flow through the income statement or by-pass it and flow directly to the balance sheet depends on whether PBM auditors decide to keep PBMs current classification as principals with legal liability in these transactions or re-classify them as agents.

Below is our calculation of a single FFS equivalent for CVS pharmacy segment (Caremark) for 2017.

Discussion of Results:

Our estimated FFS equivalent of $64 PMPY is a small 6% of the average $1,067 PMPY trend management. But, it must be remembered that Rx drugs are a relatively homogenous healthcare benefit compared to a hospital and outpatient procedures,  or even physicians’ office visits.

Plus, most of claims managed come from only 3 drug store chains including CVS’s own whereas healthcare benefit managers need to manage thousands of hospital, outpatient, and physicians accounts.

The relatively ease of managing a drug benefit versus a medical benefit is reflected in CVS’s SG&A expense ratio of 1.0% of sales.  In contrast, the SG&A expense ratio in 2017 for healthcare insurance companies Aetna and Cigna was 24.5% and 19.5%, respectively.  

The relative size of a plan’s drug benefit management cost — $64 PMPY — versus its cost of the drug benefit itself — $1,067 PMPY — suggests plans pay more attention to trend delivered.  So what, if a smaller PBM charges 20% higher FFS — increasing management costs by $13 PMPY –if it can deliver a 10% reduction in trend — saving $107 PMPY.

The movement toward demanding more PBM transparency culminating in significant switches to a FFS business model just might be the beginning of a movement toward more attention being paid by plan sponsors to trend delivered.

Concluding Remarks

FFS is just the beginning in defining an alternative PBM business model.

  1. Our estimated $64 PMPY FFS is too high to serve as a starting point as it represents profits earned by an oligopolist using an opaque business model;
  2. It lacks incentives to bargain hard with Pharma.

The key to discovering what FFS number would emerge in a competitive market is to get small PBMs to start with our estimated $64 PMPY and go from there.

For example, the University of Michigan has been at the forefront at playing an active role in the design of their drug benefit plan at the highest level (formulary and copay design) while contracting out to a small PBM — MedImpact — for claims and rebate management.  Based on data presented in their 2017 annual report, we calculated that their management costs at $17 PMPY — 27% of CVS’s average $64 PMPY.

On the other hand, their trend delivered — $1,246 PMPY — was $179 PMPY or 17% higher.   The question is this higher trend the result of relatively weak rebates bargaining power of MedImpact or a more expansive formulary?

 

To be sure, smaller PBMs currently do compete with the Big 3 PBMs on the basis of business model, primarily touting 100% pass-through of rebates.  But, their business models are still a mish-mash of fees and even opaque spread margins on retail Rx.

The second problem is that the incentives to bargain down the now inflated drug list prices is lessened when a simple FFS replaces retained rebates.  Incentives for meeting or exceeding drug spend as measured on a PMPY basis needs to be added to a FFS. Also, incentives for meeting patient adherence and other outcome measures need to be included.

Express Scripts and CVS Caremark do disclose average drug spend (“trend”) in their annual Trend Reports.  They are proud of their delivered trend reductions and the importance of formularies in managing trend. But, they do not compete outwardly on that basis.  

Source: CVS Trend Report, 2017

 

Source: Express Scripts Trend Report, 2017


CVS’s 2019 Formulary Removals – Negligent Handling Diabetes Test Strip Change

Summary

Around the first week in August for the past four years, CVS has made an official announcement of its next year’s formulary changes. It posts these changes on its own websites.

But that changed in 2018. During an August 8th 3Q2018 Earning Conference Call,  CVS said that 2019 formulary details would be available around October 1, 2018.  

But, CVS waited until November 16, 2018 to post details on its own website. We believe that there has been a willful intent by CVS to minimize attention to upcoming formulary changes fearing bad publicity would delay government approval of their merger with the insurance company Aetna. The review included the Department of Justice, state Attorney Generals and Judge Richard Leon of the U.S. District Court of the District of Columbia.    

In particular, CVS has been negligent in giving ample warning to diabetes patients of an upcoming switch in blood glucose test strips from LifeScan’s OneTouch brand to Roche’s Accu-Chek brand.   We estimate that this change is going to affect up to 7.2% of CVS’s 94 Million covered lives,  or 6.8 Million people who have Type I or Type II diabetes, as they require daily blood glucose monitoring via a glucometer and test strips.

We conclude with a look at the impact of this event on state “frozen formulary” laws.

 

What is a formulary?

One of the most effective cost-controls employed by pharmacy benefit managers (PBMs) are their national formularies. Formularies are lookup tables embedded in software at the retail and mail order point of sale that alerts pharmacists as to which drugs are covered by a customer’s drug benefit plan.   

Via formularies,  PBMs’ have the power to affect the demand for patented, but therapeutically equivalent drugs.  This power enables them to negotiate rebates with pharmaceutical manufacturers (Pharma) in return for formulary placement.  Placement entails more that just inclusion vs exclusion, but also entails a whole array of other conditions including prior authorization, step therapy, and quantity limits.

The more a PBM shelters a given drug from competition via its array of formulary controls, the higher Pharma is willing to pay formulary rebates to avoid those controls.

 

PBM formulary switches and exclusions are growing

It has only been since 2012 that PBMs began to make significant formulary exclusions of FDA-approved prescriptions drugs. Before that, they would include non-preferred drugs in Tier III of a formulary which carried the highest copayments.

In our 2005 paper The Effect of Corporate Structure on Formulary Design, we looked at key therapeutic classes with small molecule brands having close therapeutic equivalents — proton pump inhibitors (PPI), COX-2 inhibitors, and 2nd generation antihistamines.  We found that  PBMs practiced what we called the “the Soprano approach” to negotiation — threaten harm to all, but negotiate payoffs from all to abstain from harm.

We called this negotiating strategy a “sin of omission” as there was no evidence of harm like formulary exclusion.  It was a sin of omission in that PBMs should have excluded high cost brands in cases where there were generics that were close therapeutic equivalents.  For example, in the mid-2000s, PBMs should have excluded the high cost brand PPI Nexium in favor of other near equivalent PPIs that had gone generic like omeprazole (Prilosec).

Below is a spreadsheet from a 2005 paper The Effect of Corporate Structure on Formulary Design  indicating a tendency in the mid-2000s for PBMs not to exclude brands that had close therapeutic equivalents.

Formulary design has changed significantly since the mid-2000s.  Now, there is a decided tendency among the Big 3 PBMs to grant exclusivity to drugs in formulary therapeutic classes where there are a number of therapeutic equivalents.  

In our 2017 paper Three Phases of the PBM Business Model, we argued that the trend of formulary exclusions stemmed from fundamental shift in the PBM business model after 2010.  PBMs shifted from a reliance on gross profits from mail order generics to a renewed reliance on retained rebates, this time from high list priced specialty drugs.

In addition to outright increases in net exclusions (see graph below), PBMs have become more aggressive in making one-for-one switches between two therapeutic equivalents resulting in no net change in the total number of exclusions.

 

CVS’s upcoming formulary switch of branded diabetes test strips

This paper focuses on CVS’s handling of one upcoming formulary switch effective January 1, 2019. It involves the replacement of LifeScan’s OneTouch branded diabetes glucometer and test strips with Roche’s Accu-Chek branded glucometer and test strips.  It is by no means the only upcoming switch as “leaked” (more on this later) by a PBM contract consultant and on websites of various plan sponsors using CVS as their PBM.

By far,  it is this test strip switch that will affect the most people.   We estimate that this change will affect up to 7.2% of CVS’s 94 Million covered lives,  or 6.8 Million people who have Type I or Type II diabetes, as they require daily blood sugar monitoring.

The switch in coverage for a medical diagnostic device requires patients to invest a lot more time and energy than a switch between therapeutic equivalent pills.  First, users will have to order the new glucometer and have it arrive before being able to use the new test strips. There is not telling how long that will take.

Then users will have to spend time learning how to calibrate and read their new glucometer.  Finally, if users have installed OneTouch software on their PCs with histories of readings, they will have to transfer that data to Accu-Chek software which will be no easy feat.

 

Why did CVS decide to switch coverage for test strips?

Our search of past formularies confirmed that CVS gave LifeScan’s OneTouch exclusive formulary placement between 2015-2018.  OneTouch likely enjoyed exclusive coverage going back even longer. Our cursory view of the formularies of the other two big PBMs — Express Scripts and OptumRx — indicated that for the past few years the other two PBMs also included OneTouch on their formularies, although not always exclusively. Finally only CVS decided to make a switch in 2019.

Obviously, gross rebates and related net costs to CVS were important factors in making this impactful switch.  Although we are a leading critic of the PBM practice of making formulary choices on the basis of gross rebates rather than net costs after rebates, we give CVS the benefit of the doubt here.  

Give the inconvenience that this switch will cause to users,  we just cannot fathom CVS making this switch based on small differences in net costs. CVS made the switch because Roche’s likely decided that 2019 was the year to go “all in” with rebates.  Note that it looks like Roche’s substantial rebate commitment to win CVS over in 2019 likely left Roche in no position to offer substantial rebates to the other two Big PBMs as they both continue their exclusive coverage for OneTouch in 2019.    

But, quality may have been another significant factor involved in CVS’s decision to switch.  While LifeScan was the pioneer in electrochemical glucometers and test strips, it has lost its lead to the likes of Accu-Chek, Contour, a division of Panasonic Health Products, and FreeStyle Lite, a division of Abbott.   

Evidence to support this comes from results of a Blood Glucose Monitor System Surveillance Program conducted by the respected Diabetes Technology Society. (see below). They found that only 6 out of 18 meters tested passed their 95% accuracy threshold.   Contour and Accu-Chek were at the top. Both LifeScan OneTouch brands failed the accuracy threshold test.

Another factor in CVS’s decision to switch might have been a change in ownership of LifeScan in 2018.  According to Wikipedia entries, after first being put up for sale in 2017,  LifeScan, a division of Johnson & Johnson, was bought finally by the private equity firm Platinum Equity in June 2018.  

The reason why this sale might have been a factor is that large Pharma companies have a developed a strategy of bundling rebates to lock in exclusive formulary placements for an array of their drugs.  The new private equity firm who bought LifeScan in 2018 was in no position to compete with Roche on basis of  bundled rebates.

We wish to reiterate that our problem with CVS is not its choice to replace OneTouch with Accu-Chek.  The switch looks good both from a net cost and well as from a quality standpoint. The problem we have is CVS’s handling of the switch.  

 

CVS delayed for three months an official announcement of its 2019 formulary removals

Around the first week in August for the past four years, CVS has made an official announcement of its next year’s formulary changes. It posts details of these changes on its own websites.  Plan sponsors using CVS as their PBM follow suit soon thereafter. This practice is similar to that of the other two big PBMs — Express Scripts and OptumRx

But that changed in 2018.

During a 3Q2018 Earning Conference Call on August 8, 2018,  CVS said that formulary change details would be available around October 1, 2018.

However, on October 1, 2018, there was no official announcement.  Instead, CVS posted a .pdf refresh of its 2018 formulary exclusions accessed via the following URL.   

https://www.caremark.com/portal/asset/Formulary_Exclusion_Drug_List.pdf

Then, on or after November 16, 2018, CVS deceptively posted the long delayed 2019 formulary change details using THE SAME URL previously used to access its October refresh of the 2018 formulary.  In other words, it deceptively replaced a 2018 formulary .pdf with a 2019 formulary .pdf  leaving no trail indicating there was a sequence of postings.

The document number at the bottom of 2019 .pdf was 106-25923A and the date used was 010119 v2. It also had a document date of November 16, 2018

 

Fortunately we downloaded the 2018 refresh which now can be accessed  from our website https://nu-retail.com/CVS_100118_refresh.pdf

The document number at the bottom of the 2018 refresh pdf was 106-25923A (same as 2019), but the date used was 100118.  

Here is a the timeline indicating that an official October 1st announcement would have come toward the end of CVS’s efforts to gain government approval for earlier announced merger with the insurance company Aetna.  

October 26, 2017     WSJ first reports merger talks between CVS and Aetna

December 3, 2017   Negotiations complete, submit to DOJ for approval

October 1, 2018   CVS scheduled to announce 2019 removals. Instead posts refresh of 2018 removals using the following URL               https://www.caremark.com/portal/asset/Formulary_Exclusion_Drug_List.pdf

October 10, 2018     DOJ approves merger

October 18, 2018     Multi-state coalition of Attorney Generals approves merger

November 16, 2018   CVS posts actual 2019 Formulary Exclusion List using same URL as the 2018 formulary refresh 

November 28, 2018  CVS announces close of merger agreement with Aetna

November 29, 2018  Federal Judge raises prospect of not approving merger

Any bad publicity from an October announcement of the 2019 formulary changes might have derailed the conclusion of the government approval process.  As it turned out, the merger was approved. The absence of an October 1st announcement might have helped.  

In our opinion, CVS’s failure to announce this major change is a case of negligence.   There has been a willful intent on CVS’s part to downplay this switch in order to minimize potential bad publicity during a period where CVS’s merger with the insurance company Aetna was being reviewed.

 

“Leaks” of CVS’s 2019 Formulary Switches

While CVS delayed posting the official announcement until November 16, 2018, there has been a series of  “leaks” in the form of PBM consultant blog posts and postings of .pdfs on websites of plan sponsors using CVS as their PBM.  Basically, a PBM consultant and plan sponsors “jumped the gun” in these announcements thinking that CVS would made it official by October 1, 2018.

We were first alerted to the test strip switch on September 27, 2018.  Knowing that CVS had promised to announce details by October 1st, our online search that day turned up the following  blog post  by the CEO of the largest pure PBM contract consultant Pharmaceutical Strategy Group (PSG).

“CVS is changing their only covered test strips, One-Touch to Accu-Check where members will need to obtain a new meter and learn any new or different features of the new preferred products.”

Further searches revealed other “leaks” of 2019 details in the form of .pdf files. Below is a listing of some of our findings.  Each file was stamped with CVS’s logos and marked with CVS-generated document numbers and date.

 

What should have CVS done?

With a few exceptions (see below), the following  footnote at the end of the each .pdf on plan sponsor sites is the only effort to date to inform and guide consumers through this switch.

“An ACCU-CHEK  blood glucose meter may be provided at no charge by the manufacturer for those members currently using a meter other than ACCU-CHEK. For more information on how to obtain a blood glucose meter, call 1-877-418-4746

ACCU-CHEK brand test strips are only preferred options.”

In our search of online websites,  we found only  Carefirst Blue Cross Blue Shield, one of CVS’s largest clients covering 3.2 million in the Mid-Atlantic region and the State Health Benefits Plan (SHBP) of Georgia making a real effort to inform and guide members.

On November 14, 2018 , Caremark published a letter that it would be sending via regular mail to every impacted member. Carefirst even labeled the test strip change as constituting “the majority of the negative disruption”

Below is a screenshot of the full letter Carefirst said it would be sending to each impacted member.

The following is a list of other measures  we have come up with that CVS should have undertaken to smooth the transition.

  • Like Carefirst, urge all client plan sponsors to send a letter via regular mail to all impacted members informing them of switch and instructions for ordering a new meter.
  • Upon request, offer December delivery of new Accu-Chek glucometer and one package of test strips. (done by the SHBP of Georgia)
  • Get retail pharmacies involved early by offering to build up inventory with new Accu-Chek meters and test-strips.
  • Post online videos showing how to use new meters. (done by the SHBP of Georgia)
  • Make sure history of readings stored on members’ PC can be transferred easily between OneTouch software programs to Accu-Chek software programs.

 

Will CVS handling of this switch hasten the adoption of “frozen formulary” laws?

Currently, there is a smattering of states that have passed legislation limiting how often PBMs can make formulary changes during any plan year and require prior notice before the changes takes effect. Due to the trend toward formulary exclusions, more and more  states are considering adopting their own “frozen formulary” laws.  

These so-called  “frozen formulary” laws generally focus on changes within any given plan year.  We could find no state law dealing with requirements for sufficient notification of  formulary changes for the new plan year. 

For example, the general rule has been for the Big 3 PBMs to announce new plan year formulary changes around the first week in August, a full 5 months before the new plan year.  CVS’s official announcement delay to November 16th occurred only 35 days before the beginning of the new plan year.  

As late as this was, it looks like CVS’s November official notification did not violate any existing state laws.  

Still, if CVS’s switch in diabetes test strip coverage causes as much disruption and negative publicity as we anticipate,  we could envision that this event becoming the spark for a whole slew of “frozen formulary” laws requiring a minimum of 3 months or 90 days prior notification of new plan year formulary changes, including individual letters mailed out to impacted consumers.  


The Problem with CVS’s “Guaranteed Net Cost” PBM Business Model

Summary:

Consider this meta:  CVS opaquely is substituting one opaque source of gross profits — guaranteed net cost markup — for another opaque source — retained rebates.

The pharmacy benefit manager (PBM) CVS Caremark has offered its self-insured corporate clients an alternative business model called “Guaranteed Net Cost”.  The pricing scheme features 100% pass-through of drug rebates and the end of rebate retention as an opaque source of PBM gross profits.

But, CVS has glossed over the fact that their “guaranteed net cost” price to plans is not the same as the net costs to them.  Until CVS tells us otherwise, the new business model allows for a opaque markup on top of PBM net cost. In graphs below, we demonstrate how a markup of guaranteed net costs serves as an opaque offset to foregone rebate retention.  

It is naive to think that CVS Caremark is about to give back a significant source of its annual gross profits without some sort of offset. In fact, CVS admits as much as their spokesperson is quoted as saying

CVS’ manager of corporate communications, Christina Beckerman, told Fierce Healthcare that the company does not expect CVS Health’s profitability to increase or decrease as a result of the shift to 100 percent pass-through rebates.

It is not even clear that CVS’s new business model lessens the incentives to Pharma to inflate list prices in order to compete on rebates for formulary placement.

The Problem With the Current PBM Business Model

The current PBM reseller business model features five major streams of revenue and gross profits.  Four of the five are opaque.

  1. Opaque rebate retention % on speciality (biotech) drugs in return for preferred or exclusive placement on formularies;
  2. Opaque rebate retention % on small molecule brand drugs in return for preferred or exclusive status on formularies;
  3. Opaque profit margins on 90-day generic Rx filled by captive mail order operations of the PBM;
  4. Opaque “spread margins” added by the PBM on top of reimbursements to retail pharmacies included in their networks;
  5. Transparent claims processing and data fees.

The opacity of drug rebates is magnified by the fact that reimbursements for brand drug Rx and related rebates come at different times.   It is impossible for plans match up these two streams and calculate a single net price its pays per drug.

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 two other transparent business models used by managed care companies:  

  1. a PMPY fee-for-service agency model where 100% of all reimbursements and rebates are passed through to plans.
  2. a risk-based insurance model with capitated premiums paid by plans.

Until the PBM Medco’s merger with Express Scripts in 2012, Medco’s financial 10-Q and 10-K reports to the SEC broke out gross rebates received — a credit to cost of sale — and rebates retained — a credit to sales.  We were able to calculate with certainty Medco’s “rebate retention rate”, a name we coined fifteen year ago in 2003.

We calculated that Medco’s rebate retention rate — the percentage of gross rebates retained — fell from 55% in 1Q03 to 28% in 2Q05.  This rapid decline was due to the sudden awareness by clients of the whole rebate retention scheme. To offset this loss, Medco began to push clients toward its captive mail order and fat margins it began to earn on mail order generic Rx fills.

The share of Medco’s overall gross profits coming from retained rebates reflected  outrageous 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.

In our 2017 paper “Three Phases of the PBM Business Model”, we carried forward our mid-2000s work on disaggregating PBM gross profits by sources.  Below is a summary of that work.

Here is a graph of the above data:

CVS’s Guaranteed Net Cost Business Model

On December 5, 2018,  CVS Caremark introduced a new pharmacy benefit manager (PBM) business model option for self-insured corporate drug benefit plans.   

The core of this new business model is a simplified reimbursement price paid by plans to CVS that the company craftily describes as “Guaranteed Net Cost”.  Craftily, in that this so-called “cost” is really a “price” where the difference between “cost” and “price” is a markup.

The company touts the following distinguishing features of this simplified reimbursement price.

  • Drug cost predictability and simplicity
  • 100% of rebates are passed through to plan sponsors
  • Simpler payments flow — no retrospective rebates or inflation adjustments
  • Simpler way to compare different PBM contract proposals

Note this new pricing model is for brand drugs only dispensed at retail, mail order and specialty pharmacies.  The generic Rx drug reimbursement pricing scheme remains the same. That is to say, it preserves an opaque “spread margins” that PBMs like CVS add on top of CVS reimbursements to retail pharmacies for generic Rx drug fills.

This new CVS’s initiative clearly is in response to the tsunami of criticism by plan sponsors over an opaque PBM business model and the difficulty in matching initial Rx reimbursements at an inflated list prices with retrospective rebates occurring months later.

The Problem with CVS’s Guaranteed Net Cost Business Model

One: Opaque Markups

The problem with CVS’s new business model is that guaranteed net cost to plans is not necessarily the same as the net cost to PBMs. CVS never states unequivocally that its guaranteed net cost to plans = net cost to CVS.  In other words, CVS’s new business model allows for an opaque markup on top of its net cost.

Consider this meta:  CVS opaquely is substituting one opaque source of gross profits — guaranteed net cost markup — for another opaque source — retained rebates.

It is naive to think that CVS is about to give back some of its oligopolistic profits.  In fact, CVS admits as much as their spokesperson is quoted as saying

“ CVS’ manager of corporate communications, Christina Beckerman, told Fierce Healthcare that the company does not expect CVS Health’s profitability to increase or decrease as a result of the shift to 100 percent pass-through rebates”

The following is a numeral example of how the opaque markup can serve as a 1-for-1 substitute for retained rebates:

Here is a graphical depiction of our view that CVS is substituting an opaque markup for an opaque rebate retention:

 

To CVS’s credit, its new guaranteed net cost eliminates timing complexity. It does this by taking a risk and netting the current period Rx reimbursement with an estimated “expected” rebate rather than wait to credit plans with the actual rebate when it is paid by Pharma months later.  

CVS certainly is justified in including some markup as compensation for taking the risk that their estimated expected rebates turn out to be less than actual rebates.

Instead, CVS decided not mention markup at all,  let alone a justified markup as a compensation for assuming timing risk.

TWO: Doubtful Elimination of Incentive to Play the High List – High Rebate Game

Under the current retained rebate business model,  PBMs are incentivized to favor drugs with the highest gross rebates to the exclusion of therapeutically equivalent drugs with the lowest net cost.  To be in a position to win this rebate game, Pharma is driven by the PBM-created rebate game to inflate list prices for its brand drugs.  See our paper: Blame PBMs (Not Pharma) for Drive Drug Price Inflation.

The list price – net price bubble began around 2010 and reached its peak in 2017. It was in 2017 that AbbVie first broke the PBM rebate game  winning formulary placement by Express Scripts despite pricing its late entrant Hepatitis C Virus (HCV) drug Mavyret with an ultra low list price with no rebate potential.  However, this was an exception and the norm remains that the basis for formulary placement is gross rebates over net price (list price – gross rebates).

Below is a graphical depiction of how AbbVie broke the rebate game with its ultra low list = no rebate drug HCV drug Mavyret.

It is possible that the rebate game of high list – high gross rebate may be lessened under CVS’s new guaranteed net cost new business model. This is because the basis for PBM profits — markups — could be any number as opposed to being tethered to something like % of gross rebates or % of net cost.

Below is a depiction of CVS’s flexibility in choosing a markup that is independent of the list price or gross rebate. 

On the other hand, we can see the possibility that the new business model preserves the status quo. Here is our line of reasoning for this:

it is likely that brand drug list prices, which are publically available,  will serve as an upward bound for guaranteed net cost as it would look bad for CVS to set a guaranteed net cost that exceeded a drug’s list price.

To look good, CVS will want to show that guaranteed net costs is consistently 40% to 70% below the brand list prices.  

To achieve these percentages while still having room for oligopolistic markups, CVS will signal to Pharma that, while formulary placement is no longer based on gross rebates, high list – high rebate drugs afford CVS latitude in setting guaranteed net cost markups.

Below is a graphical depiction of why, under the new business model, CVS still would be incentivized to favor the high list – high rebate drug.

 


AbbVie’s Mavyret Drug Pricing: Disruptive to the Pharmacy Benefit Manager Business Model

Summary:

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.

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.”

As promised, on September 15th Express Scripts released its choices for HCV class.  It chose to add AbbVie’s Mavyret even though the pricing afforded them little to no rebates potential.  

This choice represents a clear statement by Express Scripts that it is aligned with client interests.

Surprising to us was that Express Scripts also chose to open up the HCV class to 3 other drugs as indicated in the table below.

Source: Express Scripts Formulary and Exclusion List 2017

Source: Express Scripts Formulary and Exclusion List 2018

CVS Health has yet to announce its final choices for the HVC class despite promising that it would do so by mid-September 2017.

If CVS chooses not to add Mavyret, it will be a sign that CVS is so desperate for rebate income that it is willing incur a very public case of misaligned interests.

In October 2017, CVS Caremark (CVS) finally decided to  exclude from its 2018 drug formulary the new-to-market Hepatitis C Virus (HCV) drug Mavyret despite it being list priced aggressively by its manufacturer AbbVie at an estimated 72% below the list price of Gilead Sciences’ incumbent HCV drug Harvoni.

 

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.”

As promised, on September 15th Express Scripts released its choices for HCV class.  It chose to add AbbVie’s Mavyret even though the pricing afforded them little to no rebates potential.  

This choice represents a clear statement by Express Scripts that it is aligned with client interests.

Surprising to us was that Express Scripts also chose to open up the HCV class to 3 other drugs as indicated in the table below.

Source: Express Scripts Formulary and Exclusion List 2017

Source: Express Scripts Formulary and Exclusion List 2018

CVS Health has yet to announce its final choices for the HVC class despite promising that it would do so by mid-September 2017.

If CVS chooses not to add Mavyret, it will be a sign that CVS is so desperate for rebate income that it is willing incur a very public case of misaligned interests.

In October 2017, CVS Caremark (CVS) finally decided to  exclude from its 2018 drug formulary the new-to-market Hepatitis C Virus (HCV) drug Mavyret despite it being list priced aggressively by its manufacturer AbbVie at an estimated 72% below the list price of Gilead Sciences’ incumbent HCV drug Harvoni.

We estimate that Gilead Sciences had to offer CVS a minimum of a 83% rebate percentage in order for Harvoni to have a net price below Mavyret’s list price.  The 83% figure would represent an outlier in reported gross rebate percentages today that generally fall in the 40% to 60% range.

If it turns out that the rebate percentage was less, it sets up an anti-competitive and antitrust case that Mavyret was excluded because of lack of pharmacy benefit manager (PBM) rebate retention despite being the lowest cost drug in the HCV therapeutic class.

We call on CVS Caremark to issue a public statement confirming that its choice to exclude Mavyret was in the best interest of clients because Harvoni was the lower cost drug after rebates.


Blame Pharmacy Benefit Managers (Not Pharma) For Driving Drug Price Inflation

Summary:

We start with a review of the history of the opaque pharmacy benefit manager (PBM) reseller business model. We present our prior estimates of the distribution of PBM gross profits over the past decade showing that they have become dependent today on retained rebates from specialty drugs.

Next, we present numbers showing how PBMs today have painted themselves into a corner with a relatively small basis for drug rebates coupled with promises to hold their overall average rebate retention rate, a term we coined in 2003, to a “reasonable” 10%.

We conclude the paper with a deconstruction of the growing divergence between brand drug list prices (gross) and the prices Pharma actually receive after PBM rebates (net) — the so-called “gross-to-net price bubble”.  We use data supplied by the drug company Merck to go through 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 grow gross profit DOLLARS over time while fixing the rebate retention rate at 10%.  

We show that the outcome of such constrained negotiations produces a gross-to-net price bubble.

The “Gross-To-Net Price Bubble”

Before 2017, there had been two well-publicized exposes of massive increases in the list price of off-patented brand drugs that were rubber-stamped by pharmacy benefit managers (PBMs).  This included Mylan’s EpiPen and Martin Shkreli and his Turning Pharmaceutical’s HIV drug Daraprim.

There are now numerous reports providing quantitative evidence of outrageous increases in specialty brand drugs list prices over the past 5 year.  For example, consider this table of list price inflation between 2012-7 of Multiple Sclerosis drugs taken from Congressman Michael Vounatsos’ request to manufacturers for more information:

In April 2017, Adam Fein first reported on his blog Drug Channels that the health information company QuintilesIMS had just published  aggregate trend data for brand name drug prices before (gross) and AFTER rebates (net) had been paid to pharmacy benefit managers (PBMs).

The data showed  two trends beginning in 2011: (1) gross prices were growing faster than net prices; (2) the divergence itself was growing.

Dr. Fein coined the term “gross-to-net rebate bubble” to describe (2) above, which has become the standard lexicon for the phenomena. Below is graph summarizing QuintilesIMS latest findings taken from an April 2017 blog post by Dr. Fein:

The PBM Business Model:  2005 – 2010

In an earlier 2017 paper, we presented the case that there has been three distinct phases of the pharmacy benefit manager (PBM) business model over the past 15 years. Each has been demarcated by radical shifts in their 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 graph of our estimates of the distribution of PBM gross profits over the past 15 years.

The majority of PBMs gross profits between 2005 – 2010 came from mail order generic Rx.   The Big 3 PBMs devised a strategy of tacitly colluding with their counterpart Big 3 retail pharmacies — Walgreen, CVS, and Rite-Aid — to hold up margins on generic Rx fills.  

Essentially the Big 3 PBMs have the power to set their competitors’ prices, an anti-competitive weapon if there ever was one.   PBMs gave retailers fat margins for 30-day generics in return for promises not to compete on 90-day Rx.  Then, PBMs set the prices of generic Rx filled by captive mail order operations slightly less than retail to give the appearance of alignment with client interests.  But, the supply chain hold up still allowed for fat mail order generic Rx margins.

The first blow to this scheme came in late 2006 when Walmart saw the fat retail margins and began a disruptive  $4 / generic Rx campaign. They could do this as an “outsider” retailer because their business model wasn’t dependent on fat pharmacy margins subsidizing the rest of the store.

The final blow to this “hold-up” scheme came around 2008 several years after the vertical merger of the pharmacy retailer CVS and the PBM Caremark.   Consistent with the business model of the merged company, CVS-Caremark began offering preferred provider pharmacy networks featuring lower  unit prices at retail in return for Rx volume.  

While this managed care technique is used successfully in reducing hospital and physician costs, it has never really been instituted by PBMs prior to the CVS-Caremark merger.  This absence had been an obvious sign to us at the time of tacit collusion between the Big 3 retail pharmacies and the Big 3 PBMs.

The PBM Business Model: 2010 – today

To compensate for declining mail order generic 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 were several problems with the goal of deriving a majority of gross profits from specialty drug rebates.    Reconstructing how PBMs solved these problems is the key to understand why PBMs, not Pharma, drive the gross-to-net drug price bubble today.

First, assume that since 2010, the Big 3 PBMs needed additional gross profits each year from specialty drug retained rebates to replace incremental losses in margins from mail order generics Rx.

This creates a problem 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.  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 at 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 is an awareness by their clients that retained rebate dollars can be a substantial yet opaque source of PBM gross profits.    

Today,  there seems to be an order of magnitude more articles critical of PBMs in general, and retained rebates specifically,  As a defensive move, CVS Health finally declared 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 a majority of gross profits from specialty Rx while maintaining a transparent rebate retention rate at 10% on average.

The business model of the drug companies is simple and stable by comparison.  Sure, drug companies want to maximize profits just like the PBMs.  But drug companies are not constrained as much as the Big 3 PBMs and don’t need a convoluted gross-to-net price scheme to achieve their targets.

It is important to remember that it takes two parties to negotiate drug rebate deals. Drug companies have some power in determining how these deals are structured, especially if there are only one or two other brands drugs that are therapeutic equivalents.

The Big 3 PBMs today have a lot of power in rebate negotiations.  Drug companies have a lot to lose if negotiations fall through.  Exclusion of a single drug from one of Big 3 PBMs’ national lists of drugs covered by an insurance plan  — called formularies — can cost a widely-used or expensive drug $1+ Billion dollars in lost revenue.

It is the Big 3 PBMs who drive schemes involving high-list-price / high-rebate specialty drug deals.  For now, drug companies are accomplices along for the ride. They are culpable, but much less so than PBMs. 

This analysis has relevance to RICO cases in at least three areas:

  • the  “proximate cause” of damages : Pharma, PBMs, and/or plan sponsors?
  • the “association-in-fact” enterprises — horizontal, vertical, or both?
  • the  very question of conspiracy — a cooperative vs non-cooperative game?

For example, assuming this is a racket, we would argue that PBMs are the “capos” and drug companies are the flunkies.  And what about plan sponsors, including the Federal, state and local governments?

Aren’t plan sponsors, not PBMs, directly responsible for setting copayment or coinsurance?     We addressed this question 12 years ago in our 2005 letter published by the Journal of Managed Care Pharmacy called The Role of Pharmacy Benefits Managers in Formulary Design: Service Providers or Fiduciaries? 

So, why don’t RICO lawyers go after the Feds with their donut hole concoction?  Well, RICO lawyers are calculating types and their cost-benefit calculations point to flunkies, not “capos”, and surely not the Feds, are the most likely to “cop a plea” here.

(Note: see a detailed follow-up article written in January, 2018 called Insulin Drug Price Inflation: Racketeering or Perverse Competition? )

A Deconstruction of Merck’s Gross-to-Net Drug Price Bubble

We conclude the paper with a deconstruction of the growing divergence between brand drug list prices (gross) and the prices Pharma actually receive after PBM rebates (net) — the so-called “gross-to-net price bubble”.  We use data supplied by the drug company Merck to go through 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 grow gross profit DOLLARS over time while fixing the rebate retention rate at 10%.

We show that the outcome of such constrained negotiations reproduces produces a gross-to-net price bubble.

Below is a screenshot from a Merck memo laying out for all to see their “gross-to-net drug price bubble”.  Other drug companies are publishing similar data as a way of defending themselves against charges of “double-digit” price-gouging tactics.

This is a graphic depiction of Merck’s gross-to-net price bubble:

Below we build a spreadsheet which “deconstructs” Merck’s bubble for a hypothetical specialty drug.  It  shows how PBMs can grow retained rebates dollars via a combination of growing rebate percentages while maintaining a retention rate fixed at 10%.

A larger view of the spreadsheet above:

 

Note that despite being constrained to a 10% rebate retention rate, this deal scheme give PBMs yearly retained rebate DOLLARS that are 176% greater that what they received 6 years earlier.

Some have predicted that the divergence between gross and net prices will level off after 2017.

We tend to agree with that prediction as the current bubble was fueled by PBMs’ need to REPLACE a declining trend in gross profits from mail order generic Rx.  With that loss fully offset, PBMs could grow gross profits in the future by maintain a steady divergence between list prices and net prices.


Three Phases of the Pharmacy Benefit Manager Business Model

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”.

Today, there are several disruptive forces, including PBM vs PBM,  challenging the PBM business model.  In our opinion, these rent-seeking initiatives  will increase consumer welfare more and faster than any government regulation or ill-conceived RICO lawsuit.

  1. Express Scripts is going after CVS’s bricks and mortar pharmacies by announcing it will soon open up its networks to outside mail order pharmacies.  Express Scripts is positioning itself to cover Rx drugs by Amazon’s soon-to-be rolled out online pharmacy.
  2. Amazon will be rolling out an online pharmacy.  Likely, it will be subscription business model designed NOT to make money on Rx but make it up on whim purchases of private label, beauty, household, and OTC healthcare products.
  3. Pharma is showing signs of challenging the current (see below) PBM rebate game of high list – high rebate by list pricing drugs below net prices of therapeutic class leaders.  The first crack in the PBM rebate game came a year ago with AbbVie’s pricing of its HCV drug Mayrret.
  4. Startups are recognizing that you don’t have to be come a full-fledge PBM to disrupt the Big 3.  The core money maker of PBMs today is “smarts” — formulary management — not “plumbing” — mail order pharmacies and retail Rx adjudication software.   Our open-source idea for an independent formulary company fits this trend.

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.

While we are naming names responsible for one the most consumer unfriendly antitrust  decisions in recent history, we want to called out Howard Shelanski et al  at the FTC and George Rozanski, partner at Bates White  Economic Consulting as the economists whose analysis of this merger focused mistakenly on PBMs as sellers of benefits management services rather than as buyers of drugs for resale to plans.

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 considerably 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.

At the same time Medco’s rebate retention rate — rebates retained divided by gross rebates received — dropped from 55% in 1Q03 to 28% in 2Q05

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  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 reducing 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 read our 2005 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 ten times 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?  This is achieved by a perverse business model that forces Pharma to play a two-step negotiating game starting with lock-step list price inflation 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 drug now on the market.

 

PBMs as Business Model Imperialists

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.

An example of this is Express Scripts’  October 2017 acquisition of the medical benefit management company eviCore Healthcare for $3.6 Billion dollars.

On the one hand, self-injectable biologic drugs are covered under a drug benefit plan administered by a PBM like Express Scripts. On the other hand,  biologic drugs requiring infusion or injection supervised by a physician at a doctor’s office, clinic, or hospital are covered by a medical benefit plan managed by insurance companies and contracted specialists like eviCore.

The business models are different with PBMs using a reseller model while companies like eviCore use a fee-for-service model.

We think that Express Scripts will try to convince insurance companies that contract with eviCore to switch from a fee-for-service model to a reseller model.  Express Scripts will promise eviCore customers a reduction in overall drug benefit costs if they allow a business model switch.

Express Scripts will achieve cost-saving by promising specialty drug companies exclusivity in insurance coverage for any given therapeutic class in return for greater rebates.  The opaque rebate retention Express Scripts earns should exceed what eviCorp had been getting from fees-for-services.

This is not the first time that a PBM has pursued  a new area of managed care with the intent of changing the business model.

In a 2008 article, we called Medco’s move into fee-for-service disease management a case of “business model imperialism.”

Another example of PBM business model imperialism was a 2009 deal between Express Scripts and Anthem (formerly Wellpoint) to manage its PBM business.  It was structured as a “book of business” deal  where Express paid $4.68 Billion upfront in return a 10 year right to the opaque P&L.  An alternative would have been to structure the deal as a normal fee-for-service PBM contract with 100% pass through.

We called the deal a “double-trouble front” and sure enough, it proved very lucrative for Express Scripts.  It was a headache for Anthem because they had no idea how much Express Scripts was profiting from managing their PBM business.

Express Scripts was painted as the bad guy in this deal, but the fault lies mostly with Wellpoint’s then CEO Angela Braley for selling out Wellpoint’s customers with little controls over how much Express Scripts could make.

The top priority of both Express Scripts and CVS Caremark today is looking to get into the medical drug benefit business — managing drugs requiring infusion or injection  at physician offices, clinics, or by mobile nurses in the home — and converting the business model from fee-for service or capitated insurance premium to a reseller model with opaque retained rebates.

In January 2018, the new Secretary of Health and Human Services Alex Azar made the recommendation at a Senate Finance Committee that infused drugs coverage Medicare Part B be taken over by private sector PBMs who manage Medicare Part D.

This change might result in a lower costs incurred by the government. But, under the current opaque PBM reseller business model, it would be impossible to tell how much profits PBMs would be making.


Pharmacy Benefit Managers

CURRENT PAPERS ON PBMs

A Position Auction Demonstration Project for Lowering Reference + Biosimilar Rx Drug Prices in Medicare Part B  (8/19)

Off-Target: Pelosi’s Binding Arbitration Proposal to Reduce Medicare Part D Drug Prices (04/19)

Quantifying a Pharmacy Benefit Manager (PBM) Fee-For-Service Business Model   (03/19)

CVS’s Negligent Handling of Its 2019 Formulary Change In Coverage for Diabetes Test Strips (01/19)

The Problem with CVS’s “Guaranteed Net  Cost” PBM Business Model  (12/18)

Will PBM-Health Insurance Mergers Change PBM Formulary Design? (3/18)

Insulin Drug Price Inflation: Racketeering or Perverse Competition? (01/18)

IFC Health : An Independent Formulary Company (01/18)

Three Phases of the Pharmacy Benefit  Manager Business Model (9/17)

Biosimilar Drugs in 2017: Good for Competition, Bad for the Competitors  (12/17)

Will Amazon’s Online Pharmacy Display Therapeutic Interchange (12/17)

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

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

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

LEGAL ISSUES

Biosimilars & Exclusive Dealing Antitrust Law: The Case of Pfizer Inc v Johnson & Johnson et al. (10/17)

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

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

Blame Pharmacy Benefit Managers (Not Pharma) For Driving Drug Price Inflation (09/17)

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

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

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

The Formulary Game (07/03)

 THE PHARMACY BENEFIT MANAGER BUSINESS MODEL

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)

 UNDERSTANDING DRUG REBATES THROUGH BARGAINING THEORY

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

PREFERRED PROVIDER PHARMACY NETWORKS

The CVS-Caremark Merger and the Coming Preferred Provider War (12/06)

Medicare Part D and Preferred Provider Pharmacy (04/05)

The CVS-Caremark Merger: The Creation of an Elasticity of Demand for Retail Rx (11/06)

Contrary to What Wall Street and the FTC Say, The PBM Business Model is Misaligned (11/05)

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

THE EXPRESS SCRIPTS – ANTHEM 2009 DEAL

Express Scripts – Anthem 2009 Deal as Double Trouble Front (08/09)

Express Scripts Misses on Guidance of Anthem’s NextRx PBM Business Article Written for Seeking Alpha, November 4, 2010

THE FUTURE OF CONSUMER-DIRECTED PHARMACY BENEFITS

The Future of Consumer-Directed Pharmacy Benefits (08/07)

Show Me the Display: A Review of an ESI Study of Consumer-Directed Pharmacy Benefits (07/07)

About the author:

I have a B.A. in Economics from Amherst College. I have a Ph.D. in Economics from Washington University in St. Louis.

My writings are at the intersection of economics, accounting,  financial analysis, and high tech.

I have received no remuneration for these articles. I have no financial relation with any company written about in these articles.

Lawrence W. Abrams

To Contact:
labrams9@gmail.com
831-254-7325

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Preferred Provider Pharmacy Networks

PREFERRED PROVIDER PHARMACY NETWORKS

The CVS-Caremark Merger and the Coming Preferred Provider War (12/06)

Medicare Part D and Preferred Provider Pharmacy (04/05)

The CVS-Caremark Merger: The Creation of an Elasticity of Demand for Retail Rx (11/06)

Contrary to What Wall Street and the FTC Say, The PBM Business Model is Misaligned (11/05)

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