Tag pharmacy benefit manager business model

Will Amazon’s Online Pharmacy Display Therapeutic Equivalents?

Postscript (12/2/2017)  

Amazon is now the best hope for a consumer-directed pharmacy benefits website that “crosses the chasm” by suggesting lower cost therapeutic equivalents.

It has been ten years since we wrote a paper on The Future of Consumer-Directed Pharmacy Benefits .  The possibility of consumer-directed health care got a new life in the mid-2000s with Web 2.0.  We thought that the likes of Google, Microsoft, or a Steve Case funded startup might soon launch a consumer-directed pharmacy benefit website that might “cross the chasm” by presenting therapeutic interchange informed by “wisdom of the crowd.”

Since then, websites like GoodRx and Blink Health have advanced the cause of drug price transparency, but have failed to “cross the chasm”.  In fact, these so-called disruptive startups have sold out to PBMs by receiving PBM-negotiated brand drug rebates in return for unstated “sins of omission” of not suggesting lower cost therapeutic equivalents when consumers are viewing information about PBM-favored brands.

For us, the surest sign that an online pharmacy is not aligned with the best interests of consumers is the appearance of ads for expensive new brands showing up alongside search results for another drug.

Consider this example of an ad for the very expensive autoimmune drug Imbruvica that showed up while we were searching on GoodRx for pricing of a generic diabetes drug called Acarbose.

Note to ad platform used by GoodRx:  if you are going to allow this kind of c**p, at least you should be serving an ad for a drug that may be of interest to a diabetic, not an ad for some drug based on cookies indicating prior visits to websites with information about autoimmune drugs.

Summary of Original Paper (8/10/07)

Pharmacy benefits present the best opportunity for consumer-directed healthcare (CDHC) to outperform traditional managed care.

This is due to the fact that drugs are commodity purchases with little quality issues. Also, drug price transparency does not require any government intervention because there is a group of “outsider” pharmacies like Costco showing a willingness to compete on price.  

Pharmacy benefits also presents the best entry point for new healthcare intermediaries. The role of new intermediaries will be to link user-created “scrapbooks” of health data to rankings of treatment options based on the “wisdom of crowds” and, in turn,  to price competitive pharmacies.

The following diagram summarizes our view of the future of consumer-directed pharmacy benefits.

                

The Wellness Information Branch

Consumer-directed healthcare (CDHC) is about presenting consumers with information about price and treatment options so that they can pursue cost-saving opportunities.  It is not surprising then that the vanguard this movement is found online.  There are actually two basic branches of the CDHC movement. One branch is what we call the wellness information branch while the other is what we call the purchasing information branch.  

The wellness information branch traces its roots back to the early 1970s and is marked, in our minds, by the publication of Our Body Ourselves in 1973.  There are plenty of websites today with information about wellness and treatment options, but few are directly linked up to prices displayed on provider websites.  

The wellness information branch can evolve in several fundamentally different directions.  One fundamental split will be over the evaluation of treatment options.  One branch will feature options ranked by experts.  This branch is the domain of traditional healthcare intermediaries – insurance companies with captive pharmacy benefit managers (PBMs) and independent PBMs.   The other branch will feature options ranked by au courant social networks. This branch will be the domain of new intermediaries.

The other fundamental split will be over the business model chosen by these new intermediaries.  

The two major options are a fee-based business model, with fees paid by customers or their insurance plan, and an advertising-based business model.  There are early signs that an advertising-based business model will dominate. This is not unexpected as the dominant business model for search and information websites today is advertising-based.

 Furthermore, there are signs that banner ads will dominate. The drugs now featured on television – brand name drugs in blockbuster therapeutic classes facing competition from other brand and generic therapeutic equivalents – will be the very same ones that will dominate online advertising.  This includes such drugs as Lipitor, Crestor, Vytorin, Nexium, Lunesta, and Clarinex.

The website developed by the Mayo Clinic, www.mayoclinic.com, is an outstanding example of the treatment options representing the “wisdom of an elite”. The website is free, but the business model is heavily dependent on advertising of brand name “me too” drugs in oligopolistic therapeutic classes.   

Search for information on insomnia and up pops up advertisement for Lunesta. Search for information how to reduce cholesterol and up pop up ad for Vytorin. These ads are not some minimalist Google-style hyperlink, but full color Flash ads that dominate the right third of the page.  While the Mayo Clinic makes it clear that their editorial staff is isolated from marketing pressures, one always must be wary of content supported by advertising.  

It is interesting to compare the drug treatment recommendations on the Mayo Clinic website with those presented in a Consumer Reports based on recommendations of the Drug Effectiveness Review Project – a 15 state initiative to help guide Medicaid drug coverage.   

The Consumer Reports repeatedly recommends generics and OTC drugs as substitutes for more costly “me too” brands, whereas the Mayo Clinic is non-committal about therapeutic interchange.  Compare the recommendations of each site for the proton pump inhibitor therapeutic class:

Mayo Clinic: 1

Prescription-strength proton pump inhibitors. These are long-acting and are the most effective medications for suppressing acid production. They’re safe and have few side effects for long-term treatment. To prevent possible side effects, such as diarrhea or headaches, your doctor will likely prescribe the lowest effective dose. Prescription-strength proton pump inhibitors include esomeprazole (Nexium), lansoprazole (Prevacid), omeprazole (Prilosec), pantoprazole (Protonix) and rabeprazole (Aciphex).

Consumer Reports:2

The five available PPI medicines are roughly equal in effectiveness and safety, but differ in cost. One – omeprazole (Prilosec OTC) – is available as a prescription and nonprescription generic drug.

Taking the evidence for effectiveness, safety, cost, and other factors into account, Prilosec OTC is our choice as a Consumer Reports Best Buy Drug if you need a PPI. You could save $100 to $200 a month by choosing this medicine over more expensive prescription PPIs

Could the differences in recommendations be due to differences in business models?

There is another approach to the display of wellness information and treatment options that does not rely on elites like the Mayo Clinic or PBMs. This approach is based on the idea of “the wisdom of crowds”.  

It is being championed by several Internet pioneers committed to adapting the latest Web 2.0 tools to helping individuals manage their wellness.  These internet companies are prime candidates for becoming new intermediaries between healthcare providers, health insurance plans, and consumers.

It includes Google, led by Adam Bosworth, one of the inventors of XML technology, and now VP of Google Health. He is leading Google’s effort at creating “a better educated patient” through specialized search and the application of “PageRank” algorithms to treatment options all linked to user generated “scrapbooks” of personal medical history.3

It includes Microsoft, led by Peter Neupert, founder and former CEO of drugstore.com and now VP for health strategy at Microsoft.  Microsoft has recently bought two software companies that have developed innovative ways to integrate and disseminate patient medical data in different formats.4   

This effort may be viewed as “Neupert’s Revenge” – a payback to the Big 3 PBMs for not extending coverage to prescriptions filled by drugstore.com, the company Neupert headed during the heyday of the dot-com era.

While Google’s and Microsoft’s efforts are still largely under wraps, the efforts of Steve Case, founder of AOL, are ready to roll out now.  His latest venture is a company called Revolution Health, which is focused on applying social networking and specialized search based on user-generated ratings of the “trustworthiness” of providers (information and health services).

“Isn’t it crazy that we have ratings to help us pick movies, restaurants and hotels,” Case wrote in an introductory letter quoted by CNN.com, “but no comparable tools to help evaluate doctors, hospitals and treatments?” 5   

Unfortunately, there are signs that Case’s venture will be anything but revolutionary – i.e. challenge the status quo in the healthcare industry.  In an interview, Case has been quoted as saying that “we’ll accept advertising from a number of industries, including Pharma…” 6   

Also, Revolution Health has signed on Medco Health Solutions, one of entrenched Big 3 PBMs, as a strategic partner in developing the pharmacy portion of its website.7

 

The Purchasing Information Branch  

The other branch of the CDHC movement is focused on providing consumers with information so that they can purchase the most cost-effective treatment.  The key pieces of purchasing information are prices, quality, and treatment options. It is not surprising that the vanguard of this movement is also found online.

And it is online pharmacies that are the leaders in healthcare price transparency. No other area of healthcare comes close to the degree of transparency we found in our survey of online pharmacies today. Furthermore, the trend has occurred quietly without government coercion.  This is in stark contract to hospitals and physicians groups who seem only willing to disclose “usual and customary” prices to the public if mandated by law.

While online drug prices today come with a disclaimer about “subject to change without notice”, they are real offer prices as opposed to “usual and customer” list prices.  They are meaningful as they do not require additional information about quality in order to compare prices offered by different providers.   

 

Price Transparency as a Threat to the Big 3 PBMs and Chain Drugstores

Of course, the willingness to display drug prices online is not universal in the drug supply chain. Price transparency is a threat to Big 3 independent PBMs – Medco Health Solutions, Express Scripts, and CVS-Caremark – and to large chain drugstores – Walgreen and CVS-Caremark.   

This is due to the conflicted nature of their business models, summarized in our papers “Pharmacy Benefit Managers as Conflicted Countervailing Powers” and “The CVS-Caremark Merger and the Coming Preferred Provider War” 8

The Big 3 PBMs now generate a substantial portion of their gross profits from mail order generics.  Their business model is full of cross subsidies where high margins on rebates and mail order generics subsidize low to nil margins on claims processing, disease management, and mail order brands.  

We have presented the case elsewhere that the price superiority of the captive mail order operations of the Big 3 PBMs is not due to dispensing and procurement scale economies relative to large chain drugstores. 9   PBMs “hold up” retail pharmacy reimbursements because this allows them to offer lower mail order prices without suffering margin erosion.

In turn, the hold-up of retail prescription reimbursements has enabled chain drugstores like Walgreens to engage in “competition by convenience” characterized by aggressive store growth.  This aggressive store growth has outpaced the growth of front stores sales, depressing the net profitability of the front store.10 Walgreens and CVS can live with this because the lack of front store profitability is covered by the high net profitability of the pharmacy in the back.

Both large chain drugstores and the Big 3 PBMs are now locked into business models that rely on high margin generics subsidizing other businesses.  As long as the bulk of prescriptions are covered by traditional insurance plans managed by the Big 3 PBMs, generic prescriptions filled at retail or mail order are protected from price competition.  Otherwise, the chain drugstores and the Big 3 PBMs might be forced to abandon their reliance on high margins generics and would be forced to raise prices elsewhere.  

While there is universal agreement that consumer-directed healthcare has the potential to lower total costs, the value of that outcome depends on how the cost reductions are achieved.  If it achieved through lower unit prices and more cost-effective treatment mix (utilization), then the outcome is positive.  If it is achieve through a shift in burden from business to the consumer or through reduced usage, then the outcome is problematic.

There is a growing body of work, both theoretical and applied, suggesting that CDHC will fail to outperform traditional managed care in the area of unit prices and cost-effective treatment mix.   However, because of the conflicted nature of the Big 3 PBM business model and the hold up of prices of generic drugs, we believe that the best opportunity for CDHC to outperform traditional manage care is in the area of pharmacy benefits.

 

The Current State of Online Pharmacies

Online pharmacies represent the vanguard of healthcare price transparency. Close followers of healthcare price transparency are oblivious to this development. 11 The majority of sites surveyed allowed access without prior registration.  However, CVS, Long’s and Wal-Mart did not.  The accessible sites gave the consumer a good sense of fill economies by presenting a single page display of prices at various prescription counts (e.g. 30, 60, 90)  

 Most sites only quoted prices for delivery via their in-house mail order operation.  One online pharmacy – Wellpartner, an independent mail order pharmacy based in Portland – also provided consumers with a comparison of their own mail order prices with the typical retail prices paid by 100% cash paying customers. The prices presented below are actual prices taken from five online pharmacies on 3-30-07. It includes the following companies:

  •       Costco – a large mass merchant
  •       RxSolutions – the captive PBM of PacifiCare that is chartered to go after outside business.
  •       Wellpartner – an independent mail order pharmacy
  •       Drugstore.com – an independent mail order pharmacy
  •       Walgreen – a very large retail drugstore chain with mail order capability.

 

List of URLs of Online Pharmacy Survey:

  •         Costco:   http://www.costco.com/
  •         RxSolutions:  http://rxsolutions.com/a/discountrx/discountrx.asp
  •         Wellpartner:  http://www.wellpartner.com/
  •         Drugstore.com:    http://www.drugstore.com/default.asp?aid=9225

        Walgreens:    http://www.walgreens.com/library/finddrug/druginfosearch.jsp?cf=ln

None of the websites represented their prices as firm offer prices as you would find at a typical online store.  The price lookup screens were separate from the order entry systems.  Costco and Walgreens come closest to standing by their quotes. Wellpartner, drugstore.com and RxSolutions clearly stated that actual purchase prices may vary. What follows is a summary of the price disclaimers found in our survey of online pharmacies: 12

Costco: “The prices listed apply to those prescriptions purchased and mailed from Costco.com. Our pharmacies located in Costco Warehouses nationwide offer pricing consistent with those listed here. Occasionally prices may vary due to local differences in generic product selection or the bulk package size stocked.”

Walgreens:  “The prices listed reflect the full cash purchase price (excluding shipping) for prescriptions purchased from Walgreens.com and shipped to you.”

Wellpartner:  “Prices show the difference between our retail price and the price available with WellpartnerPLUS, a prescription savings program open to registered members… Prices are also subject to change without notice.”

Drugstore.com: “These are self-pay prices for drugstore.com mail-order delivery and do not take into account any discounts or insurance coverage that you may have. Actual prices are calculated at the time of your order.”

RxSolutions: “Pricing is only for medications available through the Prescriptions Solutions Mail Service Pharmacy. Due to market conditions, prices are subject to change. You will be responsible for the actual price of the medication when it is shipped.”

 

Judged by sheer purchasing power, one might expect that Walgreens would offer the lowest online market prices.  But, their business model is based on a very profitable pharmacy business subsidizing a front store that has low to nil net profitability.  The other companies, while smaller, do not depend on high margin generics subsidizing other lines.  The results are a dramatic confounding of the adage that consumers are best served by purchasing drugs through large intermediaries.

The results also suggest that large drugstore chains like Walgreens are threatened by the consumer-directed health care movement.  Price transparency, so much a part of this movement, exposes the high prices drugstore chains have to charge for generic prescriptions to make up for deficiencies in their front store. CDHC brings the retail pharmacy business a step closer to real price competition and this has the potential to blow apart the cross-subsidies that have been built into the drugstore business model over the last fifteen years.

 

The Display of Generic Substitutes

There are two types of treatment options that might be displayed online: generic substitution and therapeutic interchange.

Generic substitution is a substitution of a generic drug that is bioequivalent to a brand drug that has lost its patent protection.  It varies only in color, shape, and binding agents.  After a brand loses it patent protection, the original manufacturer will market the brand at a much lower price, but will never lower it to match new generics on the market as there is still value in the “brand name”.  The off-patent brand still is priced at 3 to 4 times the price of bioequivalent generics.

Unless a physician indicates that a prescription be “dispensed as written”, it is legal for pharmacists in many states to substitute automatically a generic of an off-patent brand. Most traditional pharmacy benefit plans reinforce this switch by making it a requirement. Today within weeks after losing patent protection, the generic substitution rate exceeds 95%.

If an online pharmacy displayed any prices at all, it always included displays of cost-savings opportunities through generic substitution.  This is as expected as there is little liability risk in such displays.  Still, there are always disclaimers to “consult with your physician” attached to displays of generic substitution.

It is reasonable to assume that all savings opportunities via generic substitution will be mandated as well in CDHC plans, rather than left up to enrollee discretion.  Thus, online displays of generic substitution are unlikely to contribution to additional cost-savings.

The display below is typical of the cost-savings opportunities now displayed online.  We used actual on-line prices of Costco, a mass-merchant that does not depend on its pharmacy to subsidize other operations.

Source: www.costco.com, 3-30-07

 

The Hypothetical Display of Therapeutic Interchange

Therapeutic interchange involves a switch from a costly on-patent brand drug to another drug that deemed to be a therapeutic equivalent, but not bio-equivalent. The less costly drug could be a prescription generic, and OTC drug, or an herbal drug.   While generic substitution is a “no-brainer” choice, therapeutic interchange should only be undertaken with the approval of a prescribing physician.  Nevertheless, there is a large body of evidence in support of drugs deemed therapeutically equivalent to blockbuster “me-to” drugs like Lipitor, Nexium, Celebrex, and Clarinex.  

We have presented the case the Big 3 PBMs receive rebates from Pharma for abstaining from therapeutic interchange of blockbuster “me-too” brand drugs.13  At the same time, no online pharmacy in our survey has taken upon itself to present consumers with treatment options representing therapeutic interchange.  This “chasm” presents a cost-saving opportunity for CDHC entities.  This could be traditional managed care entities without a conflicted business model—from large integrated insurance companies to small startup PBM with fee-based business models.  It could be new intermediaries.

The cost-saving potential of therapeutic interchange is concentrated in a few therapeutic classes as evidenced by recent Express Scripts report.  The number of displays needed to make a big difference is quite limited.  The percentage saved per prescription exceed 90% as exemplified in the hypothetical display presented below using prices taken from Costco’s online pharmacy.

 

Source: www.costco.com, 3-30-07

 

Therapeutic Interchange Involving OTC Drugs

Most statistics of drug usage takes into account only prescription drugs. If a technique like raising copayments or moving to a CDHC plan causes usage to decline, the result is deemed problematic by researchers.

But, recently there have been two prominent instances of drugs in top 10 selling therapeutic classes that have become available over-the-counter (OTC) after losing patent protection.  One instance occurred in the anti-ulcer therapeutic class where Prilosec become available as Prilosec OTC and various OTC versions of omeprazole, the generic version of Prilosec.  The other instance was in the 2nd generation antihistamine class where Claritin became available as OTC Claritin and various OTC versions of loratadine, the generic version of Claritin.  

There is one additional therapeutic class that should be mentioned.  That is anti-arthritis COX II inhibitor class dominated by brand Celebrex.  While there are no other COX II inhibitors that have lost patent protection, there are OTC generics that are generally accepted therapeutic equivalents – ibuprofen and naproxen.

A broader measure of usage is needed in studies where switches to OTC drugs might be significant. We believe this is the case in any study of a consumer-directed pharmacy benefits. 14

The following table is a hypothetical display of cost saving potential of therapeutic interchange involving non-prescription OTC drugs.  It is doubtful that anything like this is made available to enrollees in consumer-directed plans managed by traditional PBMs. But, to give consumer-directed plans a fair chance to succeed, such a display should be offered.

 Source: www.walgreens.com/library/finddrug/druginfosearch.jsp?cf=ln, 5-3-07

 

Therapeutic Interchange Involving Herbal Alternatives

Enrollees in consumer-directed plans are highly motivated to seek out alternatives to costly prescription brand drugs. Managers of such plans should consider presenting enrollees with price comparisons involving herbal alternatives to brand drugs.  While this might understandably not be something that an existing PBM might consider, nevertheless well-respected health experts like the Mayo Clinic and Harvard Medical School to discuss herbal alternatives to traditional drugs on their websites.

We expect that if treatment options are ranked by Web 2.0 social networks, the “wisdom of crowds” will almost assuredly rank herbal drugs as a viable treatment options.  Below is a hypothetical display of savings opportunities available through therapeutic interchange involving herbal drugs.  As in the case of OTC drugs, a decline in usage by CDHP enrollees might not be so problematic if it involves switches displayed below.

     Source: www.walgreens.com/library/finddrug/druginfosearch.jsp?cf=ln, 5-3-07

 

Estimating the Cost-Saving Potential of Consumer-Directed Pharmacy Benefits

Health care costs can be viewed as the product of “U*U*U” – unit prices * utilization * usage — where utilization is treatment option utilized, and usage is the frequency, or persistence, of treatment.  There is concern that CDHC works mostly to reduce the 3rd U – persistence of treatment, which is a dubious benefit.  

If persistence of treatment is set aside, there is a growing believe that CDHC could actual result in higher unit prices and less cost-effective treatments to be chosen. The concern comes from a more sophisticated view of price transparency and skepticism about the potential to guide the consumer through the labyrinth of options involved in treating any given condition.  

Since the initial outburst of enthusiasm for CDHC, there has arisen a more careful consideration of what might be lost by replacing managed care with consumerism.  One valid area of concern is the loss of managed care’s ability to use it purchasing power to countervail providers and negotiate lower unit prices.  Another valid area of concern is the potential of online price transparency to facilitate tacit collusion among sellers resulting in higher, not lower market prices.15

While these concerns are valid, we have presented that case that they are minimized when it comes to outpatient drug prescriptions. Drug price transparency has to potential to break-up tacit collusion in the drug supply chain, not facilitate it.  While there is always a debate among scientists about therapeutic interchange, there are a number of generally accepted options for substituting less expensive generics drugs for brand drugs.

 Estimates of the effect CDHC on persistence of use, and any shift in employer contribution, are beyond the scope of this paper.  Most agree that the benefits derived from reduce usage and increased share are dubious, although one must be open to usage statistics that include switches to over-the-counter drugs and, even herbal drugs like valerian and Estroven.

 

Cost-Saving From Drug Price Transparency

In our paper “Pharmacy Benefit Managers as Conflicted Countervailing Power”, we summarized our case for a PBM holdup of generic drug prices.  The market for generic drugs is characterized by high list prices coupled by steep charge-back credits posted to large drugstore chains accounts at distributors  Generic drug manufacturers negotiate volume discount deals with drugstores, as opposed to PBMs ,because only dispensing pharmacies have the power to choose from an array of suppliers of perfect substitutes.

It hard for insurance companies to know what are the true market prices for generics because the steep discounts off list prices are proprietary information. This gives PBMs some discretion in negotiating reimbursements with retail pharmacies allowing shift in their business model from a dependency on retained rebates to a dependency on mail order gross profits.  Now, the Big 3 PBMs find it in their own self interest to holdup retail prices for generics so that they can price their mail order operations competitively without margin erosion.

Online price transparency has the potential to breakup the PBM stranglehold on generic drug pricing.  

The table below presents our estimate of cost saving potential of drug price transparency, one component of CDHC.  We assume that it will reduce generic drug prices by 25% and have no impact on brand drug prices. We also believe that drug price transparency will cause the mail order channel to gain a 20% market share for outpatient drug fulfillment.

 

Cost Saving From Therapeutic Interchange

Consumer-directed healthcare will have an impact on the unit prices of brand drugs, but it won’t be through price transparency, but therapeutic interchange.  Brand drugs for retailers are a derived demand.  They have no discretionary in affecting demand for a particular brand drug.  On the other hand, PBMs can influence the demand for brand drugs that face competition via therapeutic interchange.  As a result, Pharma only negotiates brand rebates with PBMs, and not retail pharmacies.

The Big 3 PBMs receive rebates from Pharma for abstaining from therapeutic interchange of generics that are therapeutically equivalent to more expensive blockbuster “me too” drugs like Lipitor and Nexium. The power to switch prescriptions by PBMs is greatly reduced in consumer-directed plans.  They can no longer threaten Pharma with adverse switches unless paid rebates to abstain.

We have stated that case before that we expect that CDHC to generate no additional cost saving through generic substitution.   On the other hand, it is reasonable to expect that consumer-direct pharmacy benefits to generate a 10 percentage point increase in the generic dispensing rate strictly through therapeutic interchange.  Based on an Express Scripts study cited in the table below, this translates into a 10% reduction in overall drug spend.16

There is another Express Scripts study in support of the cost-saving potential of therapeutic interchange.  Total brand drug spending today runs about $200 Billion.  Express Scripts recently completed a study of the potential savings that could be obtained if all potential brand-to-generic therapeutic interchange were realized. 17  The table presented earlier summarized Express Scripts’ estimate of the potential for cost-saving switches to generics.

 The $20 Billion estimate comes in at 10% of total drug spend.

Of course, the cost-savings generated by unbiased display of therapeutic interchange will be partially offset by lower rebates received from Pharma.   Based on Medco disclosures, we have estimated that its gross rebates received in 3Q2005 totaled 10.1% of its total brand spend.18  It is reasonable to expect any unbiased CDHC plan to incur a 50% reduction in brand rebates received resulting in an overall 3.5% increase in drug costs.

In sum, we estimate the cost saving potential of consumer-directed pharmacy benefits to be around 15.6% — 9.1% from price transparency, an additional 10% from therapeutic interchange, with a 3.5% offset from lower brand drug rebates.  This does not include any additional saving from reduced usage, including switches to OTC and herbal drugs.  The table below presents the full derivation of our estimate.

The Vanguard of Consumer-Directed Pharmacy Benefits

The vanguard of consumer-directed pharmacy benefits will be those companies whose business models are not threatened by the display of therapeutic interchange and the display of free market prices for prescription drugs.  The list includes large, integrated insurance companies with captive mail order operations.  At the other end, the list includes small startup PBMs whose business model is fee-based, rather than margin-based and a host of specialized pharmacy service providers.  Finally, the list includes new healthcare intermediaries with expertise in specialized search and the use of social networks to rank options.

The vanguard does not include the Big 3 PBMs – Medco, Express Scripts, and CVS-Caremark — or the large chain drugstores – Walgreens, CVS-Caremark, Rite-Aid.

It should be noted that current stance of the chain drugstores toward CDHC is “bipolar”, an appropriate pharmaceutical metaphor.  Drugstores represent the vanguard of the retail health clinic movement and seem very open to price transparency in that area.  At the same, the drugstore chains seem resistant to drug price transparency, especially generics, because they know that this will expose their dependency on high margin generics.  

Right now, the only difference between chain drugstores and “dime store dinosaurs” are those little 200 square foot holes-in-the-wall in that back that generate 70% of sales and virtually 100% of the net profits.

Even among chain drugstore executives, there is a sense that the cross subsidies in the chain drugstore business model cannot continue forever. We have viewed CVS’s acquisition of Caremark as an attempt to transition the chain from an era of “competition by convenience” to an era of “competition by price”.    

But, what happens to the front store when a price competitive pharmacy is not longer able to cover the profitability deficiency in the front store?  The business model of coupling a front store of sundry items with a pharmacy –conceived of 84 years ago by Charles Walgreen when he asked his wife Myrtle to make soup and sandwiches to sell to pharmacy customers during lunch hours — is vulnerable.

There is a way out. We see the “chain drugstore of the future” as the marriage of a price competitive pharmacy in the back with retail clinics on the sides and a Whole Foods style “wellness” midsection replete with knowledgeable associates roaming the isles. Stores are smaller, fewer, but better merchandised.  The convenience business that drugstore chains drop is picked up by supermarket chains, mass merchants, and 7-11 type stores.

Theoretically, the vanguard of consumer-directed pharmacy benefits should include major mass merchants and grocery chains because their pharmacies are not dependent on high margins on generics subsidizing other businesses.  However, we have included only Costco on our list as Costco has been the only entity from this group that currently offers online price transparency.  We are puzzled why Wal-Mart and Target have yet to offer full online price transparency even though they have generated a lot of publicity about their $4/ generic prescription program.  

We are also miffed why none of the pharmacies of the major supermarket chains like Kroger, SuperValu, and Safeway has yet to implement price transparency online.  However, a Consumer Reports survey of “cash only” prices for a bundle of popular generic drug prescriptions indicated that supermarket pharmacies are not price competitive.19   For some reason other than the need to subsidize other businesses, supermarket chains choose not to price generics competitively.  The Consumer Reports survey also confirms the lack of price competitiveness of chain drugstores.  

The only reservation we have for the integrated insurance companies is their willingness to expose their captive mail order operations to an open market for prescriptions. There may be a tendency to protect their investment by limiting choice of mail order fulfillment to their captive operations.  

Finally, we have a concern about the dependency of the vanguard of consumer-directed pharmacy benefits on SXC Health Solutions to provide claims processing, the real “heavy-lifting” of pharmacy benefits management.  SXC Health Solutions already is the key enabler to startup PBMs like Envision and Innoviant.  It is the key enabler of a trend by self-insured private and public plans to drop one of the Big 3 PBMs and to “disintegrate” PBMs functions by carving-in benefit management while contracting out for the capital intensive functions of claims processing and mail order fulfillment.20  If SXC Health Solutions’ were to be acquired by a traditional health care claims processor like Emdeon or Allscripts, its freedom to support up-start entities  might be compromised.

The follow is a list of who we think is vanguard of consumer-directed pharmacy benefits.

 

The Role of New Intermediaries in Pharmacy Benefits

 

There is a sense among high level management consulting firms that consumer-directed healthcare presents an opportunity for new intermediaries to emerge.  Consider the following quote from an insightful paper by consultants at Booz Allen Hamilton on “Healthcare’s Retail Solution”:19

The players that have traditionally held intermediary roles — employers, government, and health plans — do not inspire trust in consumers, nor do they answer all the consumers’ needs. The new intermediaries will identify consumer needs and steer the supply side to answer them. Further, they will catalyze change as suppliers’ inadequacies become more obvious.

In this section, we will present the case that consumer-directed pharmacy benefits represent a good entry point for new healthcare intermediaries and outline how they might function.

Healthcare intermediaries come between healthcare providers — hospitals, physician groups, and pharmacies – and employees covered by healthcare plans.  Traditionally, consumers have been covered by defined benefits plans whose management requires expertise in insurance.  Consumer-directed healthcare is headed toward defined contribution plans with a catastrophic insurance overlay.  

Thus, traditional insurance companies lose much of their competitive advantage when it comes to managing consumer-directed plans.  Also, healthcare intermediaries were once thought to need sufficient scale in order to negotiate lower prices with providers.  But, consumers have bulked at restrictive preferred provider networks and so size is not longer viewed as a competitive advantage for healthcare intermediaries.

Consumer-directed healthcare puts a premium on the display of information necessary to make good healthcare choices.  Information gathering, dissemination and the ranking of options is exactly what the giants of the Internet – Google, Microsoft, Yahoo, and Amazon –do best. These are prime candidates for new healthcare intermediaries.

There are several reasons why pharmacy benefits present the best entry point for new healthcare intermediaries:  

  1. Quality is not an issue. No need for controversial evaluations.
  2. Size is not an issue.  No need for scale to outperform the “conflicted” countervailing power of the Big 3 PBMs.  Just open up a space for the free market to work.
  3. Price transparency is not an issue. Just link up with “outsider” pharmacies that are ready and willing to compete on price.
  4. .Drug treatment options are relatively simple compared to medical treatment options.

The mission would be to merge information about treatment options with prices offered by online pharmacies.  Currently, the only treatment option offered by online pharmacies is generic substitution.  This presents a tremendous opportunity for new intermediaries “to cross the chasm” and offer consumers information about therapeutic interchange – treatment options involving the substitution of generic drugs, OTC drugs, and herbal drugs deemed therapeutically equivalent to costly brand drugs.

There is a good reason why this “chasm” currently exists. New healthcare intermediaries should carefully consider the consequences of presenting consumers with displays of drugs which are deemed therapeutic equivalents to patent-protected brand drugs. All kinds of safeguards should be built into the website.  Disclaimers about consulting with your physician should be posted prominently.  All postings should be delayed until reviewed by responsible parties.

We actually believe that it would be prudent to have a dual system of ranking of treatment options. The purchasing section should link pharmacy order entry systems to treatment options chosen by an elite PBM-like P&T Committee.  

It should concentrate on displays of generic prescription and OTC drugs that therapeutic equivalents to “me-too” brand drugs in a few selected therapeutic classes: Statins, Proton Pump Inhibitors, Cox II inhibitors, and 2nd generation antihistamines.  

A separate section not directly linked to order entry systems should concentrate on wellness and treatment options not normally treated with prescription drugs like colds, minor aches and pains, weight-loss, mild insomnia, menopause, and premenstrual cramps.  This is where active participation of individuals in social networks might actually produce better results than passive reception of advice from some elite group.  

The dual ranking system plus specialized internet search could all be tied together by a user-create “scrapbook” of health data, a module reportedly under development by Google.20  The diagram below summarized our view on the links between modules of a new intermediary website.

 At one time we believed that to outperform the Big 3 PBMs, new healthcare intermediaries has to take an active role in negotiating prices with pharmacies and rebates with Pharma.  Knowing that the Internet companies might become new healthcare intermediaries, we envisioned that such companies would automate negotiations using reverse auctions.  

We now think that simply creating a space for those who want to compete on price will generate enough savings to be noticeable. But, breaking up the Big 3 PBM stranglehold on generic drug pricing creates a one shot, short term gain.  Eventually, new intermediaries will have to become countervailing powers to the drug supply chain and use devices like reverse auctions or preferred provider networks to make a long lasting impact on the trend in prescription drug costs.

Footnotes:

(1)  The Mayo Clinic recommendation for proton pump inhibitors is available at

http://www.mayoclinic.com/health/gerd/DS00967/DSECTION=8

(2) The Consumer Reports recommendation for proton pump inhibitors is available at http://www.consumerreportsbestbuydrugs.org/drugreport_DR_Prop.shtml

(3) “Healthcare Information Matters,” November 30, 2006 posted by Adam Bosworth, VP Google  Available at http://googleblog.blogspot.com/2006/11/health-care-information-matters.html

(4) “Microsoft to Buy Health Information Search Engine,” New York Times, February 27, 2007

http://www.nytimes.com/2007/02/27/technology/27soft.html?ex=1330232400&en=58bf4631d54e82a7&ei=5089&partner=rssyahoo&emc=rss

(5)  “Healthcare 2.0 ?” January 23, 2007 Available at http://www.innosight.com/blog/index.php?/archives/81-Healthcare-2.0.

(6) Quote by Steven Case in CDHC Magazine.  Available at http://www.cdhcsolutionsmag.com/archives/2007/07-MayJun/CDHC_MayJun07-RevolHealth.pdf

(7)  Medco Press Release, May 23, 2007, Available at http://phx.corporate-ir.net/phoenix.zhtml?c=131268&p=irol-newsArticle&ID=1005952&highlight=

(8) LW Abrams, “Pharmacy Benefit Managers as Conflicted Countervailing Powers,” January 2007;  LW Abrams, “The CVS-Caremark Merger and the Coming Preferred Provider War,” December 2006, Available at http://www.nu-retail.com

(9)   LW Abrams, “Exclusionary Practices in the Mail Order Pharmacy Market,” September 2005, Available at http://www.nu-retail.com

(10)  LW Abrams, “The CVS-Caremark Merger and the Coming Preferred Provider War,” December 2006. LW Abrams, “Walgreen’s Transparency Issue,” November 2003.

(11) Health 2.0 Wiki, Websites Displaying Healthcare Price Transparency, Available at http://health20.org/wiki/Transparency

(12) Price Disclaimers

http://www.walgreens.com/library/finddrug/druginfosearch.jsp;jsessionid=EKYFZR33JTBGECSJY2ZHNDQKJHDTE3MK

http://www.rxsolutions.com/a/discountrx/discountrx.asp

http://www.wellpartner.com/main/PriceCheck.jsp

https://www.myrxhealth.com/MyRxHealth/DrugCostEstimateAction.do?ACTOR=VISITOR&SSOSESSION=null&id=4513&name=Lipitor&gpi=

http://www.costco.com/Pharmacy/frameset.asp?trg=HCFrame.asp&hcban=Banner.asp&hctar=finddrugs.asp&catid=678&fromscript=1&Article=pricing%20information&log=

http://www.drugstore.com/pharmacy/prices/drugprice.asp?ndc=00093715256&trx=1Z5006

(13) LW Abrams, “The Effect of Corporate Structure on Formulary Design: The Case of Large Insurance Companies, “Poster Presentation Paper, ISPOR 10th Annual International Meeting, May 2005.  Available at http://www.nu-retail.com

(14) LW Abrams, “Show Me the Display! A Review of an ESI Study of Consumer-Directed Pharmacy Benefits,” July 2007. Available at http://www.nu-retail.com

(15) Paul Ginsberg, “Shopping for Price in Medical Care, “Health Affairs 26, no. 1  (2007) w 208-w216

http://content.healthaffairs.org/cgi/reprint/26/2/w208?ijkey=wkln/qLZb4plc&keytype=ref&siteid=healthaff

Hal Varian, “When Commerce Moves Online, Competition Can Work in Strange Ways, New York Times. August 24, 2000 Available at http://www.ischool.berkeley.edu/~hal/people/hal/NYTimes/2000-08-24.html

(16) Express Scripts, “Geographic Variation in Generic Fill Rate, Available at http://www.expressscripts.com/ourcompany/news/outcomesresearch/onlinepublications/study/regionalgenericvariation.pdf

(17) Express Scripts, “Press Release: Study Reveals $20 Billion in Untapped Generic Drug

Savings, “ October 25, 2005. Available at

http://biz.yahoo.com/prnews/051025/cgtu012a.html?.v=1

(18) LW Abrams, “Quantifying Medco’s Business Model,”  September 2005  Available at http://www.nu-retail.com

(19) The Consumer Reports survey is available at http://www.consumerreportsbestbuydrugs.org/

(20) LW Abrams, “Systems Xcellence Should Continue to Benefit from PBM Disintegration”, May 24, 2007. SeekingAlpha Available at “http://healthcare.seekingalpha.com/article/36413

(21) David Knott, Gary Ahlquist, and Rick Edmunds, “Healthcare’s Retail Solution, strategy + business, May 15, 2007 Available at ”http://www.strategy-business.com/resiliencereport/resilience/rr00046

(22) VC Ratings, “Google Preparing Health Portal” July 7, 2007. Available at

http://vcratings.thedealblogs.com/2006/07/google_preparing_health_portal.php

© Lawrence W. Abrams 2007                           


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

Summary

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.

 

Pharmacy Benefit Managers and Formulary Choice

The pharmacy benefit manager (PBM) business model relies heavily today on rebates received from drug companies in return for placement on a formulary –a list of drugs covered by a prescription benefit plan.

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 preferred drugs — to being closed — a single preferred drug.  We are just beginning to figure out the causes of this change, but the basic idea is this:

The more a PBM 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 therapeutic classes in formularies and correspondingly more drugs on excluded lists.

Adam Fein of the Drug Channel blog has done a great job at tracking this trend. Below is his latest graph:

 

Antitrust Issues In Exclusive Formulary Contracts

Following the generally accepted theories of the late legal scholar and Supreme Court nominee Robert Bork, vertical restraints such as exclusive dealing in formulary contracts are presumptively welfare-enhancing and procompetitive because it would not be rational for a buyer to exclude the lowest cost supplier.  

Exclusionary formulary contracts between Pharma and PBMs present an interesting variant to Bork’s antitrust theories as the PBM business model is not “rational” in the traditional economics sense of maximizing revenue minus costs.  

While PBMs are resellers of brand drugs, their gross profits on brand Rx are derived only from a retained rebate percentages.  CVS has stated publically  that it retains on average 10% of gross rebates negotiated and received in return for formulary placement.

In contrast to generic Rx fills by retail drugstores, PBMs do NOT markup, or earn a “spread margin” on, brand Rx ingredient costs however measured where ever filled.  A 2005 study conducted by the FTC into possible PBM conflicts of interest confirmed this business model.

The PBM business model setups up a possible misalignment of interests between plan sponsor preferences for the lowest net cost drug in a therapeutic class and PBM preferences for the drug with the highest rebate retention DOLLARS.  

With PBMs, you have to take out Bork’s “presumptive” qualifier to his dictum that vertical constraints are presumptively procompetitive because the PBM business model is not rational in the traditional economics sense.  

With antitrust cases involving PBM exclusive dealing in formulary contracts, you can’t presume anything and the rule of reason apply.  

There have been two recent lawsuits claiming that exclusive dealing in formulary contracts are anti-competitive and violate antitrust laws starting with Section 3 of Clayton Act covering exclusive dealing:

Following Bork, we believe that both of these lawsuits are weak as it is likely that the plaintiffs (the excluded) are NOT the low cost suppliers.  This likelihood is due to the fact  the plaintiffs listed their new-to-market drugs at, or slightly below, the list price of the incumbent drugs.

 Had they started out with a list prices at least 70%-80% lower than the list price of the incumbent, they might have been in a position to show that they were the lowest cost supplier of a therapeutic class and merited inclusion in the formulary. Furthermore, they would have been in a position to expose PBMs’ misaligned business model.

Unlike the two cases mentioned above,  AbbVie’s aggressive list pricing of its new-to-market HCV drug Mavyret creates a real possibility of an anti-competitive and antitrust (Section 3 Clayton Act) case of exclusive dealing due to a lack of rebate retention despite Mavyret being the lowest cost drug available in the HCV therapeutic class.

 

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 produce fewer side effects than first generation combo drugs requiring painful stomach injections of interferon.  Also, Sovaldi / Harvoni only requires pill 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 prescription drugs at $10 Billion a year, after AbbVie’s top selling biotech drug Humira at $13 Billion a year used to treat a variety of autoimmune diseases.

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

The two largest PBMs CVS Caremark and Express Scripts (ESRX) have a history of making the HCV therapeutic class a “winner-take-all” proposition, persuading competing companies to choose a high list price to be in a position to offer a “deep discount” rebate to gain exclusivity in the HCV therapeutic class.  

Below is a summary of the 2017 formulary choices of CVS and ESRX for the HCV therapeutic class:  

 

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

On August 3, 2017, the FDA approved a new HCV drug called Mavyret from AbbVie. According the Speciality Pharmacy Times, this new drug had 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 of $26,400  that left little to no room for PBM rebates while still coming in at 15% below the NET price of Harvoni implying a 78% as the gross rebate percentage.

We have argued in another paper that AbbVie’s pricing for Mavyret is disruptive to the PBM business model.  It forces CVS and Express Scripts to consider a drug for inclusion in their national formularies that is aligned with their clients interests — lower net costs than Harvoni — but not aligned with their own interest of squeezing out all the rebates they can from specialty drugs.

 

Express Scripts’ Choice for the HCV Therapeutic Class

On September 15, 2017 Express Scripts announced its 2018 choices for the HCV therapeutic class.  It chose to add Mavyret as a preferred drug.  But, surprisingly, it also chose to open up completely the HCV class by adding Gilead’s existing HCV drugs.   The new Gilead combo drug Vosevi was also added with a step-therapy proviso.

Below is a comparison of Express Scripts’ closed formulary for 2017 versus its open formulary for 2018.

 

CVS Caremark’s Choice for the HCV Therapeutic Class

In August 2017, CVS Health released a white paper reiterating the criteria it uses for formulary choices and exclusion lists.

“We remove drugs only when clinically-appropriate, lower-cost (often generic) alternatives are available.

CVS stated that it expected to remove 17 products from its 2018 Standard Control Formulary, but noted that  

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

On September 28, 2018, we noted in a blog post that CVS was two weeks late in making its decision on Mavyret. We also tweeted about it to CVS.

On October 1, 2017 CVS released its drug exclusion list for 2018 with no mention of its decision on Mavyret.  Replicating its 2017 choices, CVS preferred the Gilead drugs and excluded the rest.  

Sometime after October 1, 2017 and before October 10 201,7 CVS released an “undated” Advanced Control Formulary for 2018 that indicated that it finally did decide to exclude Mayvet:

It is interesting to consider the question of why CVS chose to keep the the HCV class closed while ESRX choose to open it up.  Obviously, CVS received more from Gilead for exclusive placement of Harvoni than ESRX received in return for opening the theapeutic class and subjecting Harvoni to competition.  

A less obvious reason is that, because of CVS’s sagging “front store” drugstore convenience business, CVS has to rely on retained rebates from specialty drugs more than the pure play PBM ESRX.  This forces CVS to squeeze all the rebates it can from specialty drug companies by offering exclusivity on its formulary.  

On the other hand, ESRX’s gross profits from rebate retention do not have to subsidize low to negative gross profits from the “front stores” of vertically integrated retail drugstore chain.  ESRX can afford to be more “open” about formulary design than CVS. 

 

Was CVS’s Exclusion of Mavyret Anti-Competitive?

Based on list prices reported by Speciality Pharmacy Times and CVS’ own reported average rebate retention rate of 10%, we estimate that Gilead would have to had to offer CVS Caremark an 83% rebate off list in order for Harvoni to come in at a lower net price than Mavyret’s list price.  

If our estimate of 83% was what actually transpired, then both Gilead and CVS would have a solid case that this exclusive dealing rebate contract was procompetitive and in the best interest of plan sponsors and consumers.

 

On the other hand, our 83% estimate seems to an outlier for rebates negotiations today.

Merck has published data on average gross rebate percentages given to PBMs and others.  For 2016, Merck’s average gross rebate percent stood at 40.9%, far below our estimate of 83% that Gilead would have had to pay CVS to undercut AbbVie’s list pricing for Mavyret.   The Merck data cast doubt on the likelihood that Gilead would given anywhere near 83% rebate.

If the gross rebate was slightly less, say 75%, then Mavyret would be the low cost drug.

In this case, the Bork presumption of the pro-competitiveness of vertical restraints breaks down. Here a “rational” PBM buyer would exclude the low cost supplier because of a misaligned business model based on retained rebates. A buyer with a normal reseller business model would NOT have excluded Mavyret.

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.

While there is no prize for second place here, we all benefit from AbbVie’s competitive effort.  It’s aggressive pricing has forced PBMs to consider a low cost specialty drug that offers no rebate potential.  If Gilead’s Harvoni was in fact the low cost drug, then AbbVie forced Gilead to pay an outlier gross rebate percentage of around 83% to gain exclusivity and plan sponsors using CVS as their PBM all benefited.

In addition, AbbVie’s aggressive pricing was likely a factor in Merck and Johnson & Johnson  deciding to halt wasteful R&D spending on “me-to” HCV drugs.  Merck said that it would be writing off a full $2.9 Billion in HVC R&D “due to competition.”   

Finally, while AbbVie’s aggressive list pricing might not have been enough to undercut Gilead’s outsized rebate offer, we believe AbbVie might have planted the seed in other specialty drug companies, especially ones with biosimilars in development,  that you cannot beat out incumbents by matching their high list prices and out rebating them for formulary placement.  

 


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.

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?


Merck Data Discredits PBM-Sponsored Study of Brand Drug Price Inflation

Summary

We present data supplied by the drug company Merck that discredits a study sponsored by the pharmacy benefit manager (PBM) trade association showing no correlation between PBM rebate rates and brand drug price inflation.

Introduction

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 have 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:

  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 of PBMs 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 at 10% on average.

In order to show how PBMs can overcome these constraints,  we have deconstructed data supplied by the drug company Merck (see below) that depicts a growing a divergence between their list prices for brand drugs (gross) and the prices they receive after deductions of rebates paid to PBMs (net).

This growing divergence has come to be known as   “gross-to-net rebate 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:

Our deconstruction of the Merck data lays 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 grow gross profit DOLLARS over time while fixing the rebate retention rate at 10%.

We can use the same Merck-supplied data to plot annual % increases in list prices (line 1 above) against the annual negotiated rebates and discounts as a % of the list prices (line 3 above).  The result shows a significant positive correlation coefficient ratio of .653

PBMs Under Attack for Causing Drug Price Inflation

In January, 2017 newly elected President Donald Trump attacked drug companies in press conference for “getting away with murder” by raising drug prices at double-digit rates in recent years.

Since the Trump rant,  there have been articles in the New York Time, the Los Angeles Times and other publication where both retail pharmacists and drug companies are quoted as saying it is PBMs that drive drug price inflation.  Here is a quote from the New York Time article,

“Want to reduce prescription drug costs?” the pharmacists argued during their visits. “Pay attention to the middlemen.”

The PBM-Sponsored Study

The PBM trade group association Pharmaceutical Care Management Association (PCMA) commissioned a study by the health care consulting company Visante to provide data relevant to the issue of the causes of recent drug price inflation.  

In April 2017, the PCMA announced in a press release that results of the Visante study were available on-line.  The key result:

“There is no correlation between the prices drug companies set and the rebates they negotiate with PBMs”

The press release also provided a quote by PCMA President and CEO Mark Merritt:

“This study debunks the notion that the prices drugmakers set are contingent on the rebates they negotiate with PBMs…”

Below is a screenshot of the graph depicting the finding of “no correlation”

Reconciling Differences in Results: A Question of Sample Chosen

The Merck data shows a significant positive correlation between annual brand drug list price inflation and annual rebates rates that Merck has negotiated with PBMs.  The PBM-sponsored study shows no correlation.

Obviously, a key reconciling difference revolves around the sample chosen.  

The Merck results are heavily weighted by three brand drugs.  Merck has reported In its 2017 annual 10-K report that about one-third of its drug sales comes from three brand drugs: (1) the diabetes drug Januvia; (2) the cholesterol drug combinations Zetia/Vytorin; and (3) the cervical cancer prevention vaccine Gardasil.  

In terms of rank among the top 200 selling brand drugs, Januvia ranked #19, Zetia #38, and Gardasil #56 according to a 2015 listing.

Each of these drugs are what we call highly “rebatable” — in therapeutic classes where there are a number of other brand that are therapeutically equivalent.  

Merck competes vigorously with other drug companies for preferred status on formularies which list drugs approved by PBMs for coverage.  Competition insures that winning bids are high for placement in these therapeutic classes.  Merck has to “pay to play” and covers higher and higher rebate percentages paid to PBMs with list price inflation.

To achieve such high rankings,  it means that Merck must be winning placement for its top selling drugs with each of the Big 3 PBMs who control collectively 73% of the market.

While Merck’s sample size is small compared to the PBM-sponsored study, Merck’s data represents the essence of what has been going on between Pharma and Big 3 PBMs since 2010.

The sample size of the PBM-sponsored study is much larger. It contained a

“sample of the top 200 self-administered, patent protected, brand-name drugs, 24 drugs were excluded because of incomplete data for the study time period, leaving a remaining sample of 176 drugs for analysis”.

First, the initial sample size of 176 was aggregated in 23 therapeutic classes with the averages used in plots.  No mention is made as to whether the 23 data points represent simple or averages weighted by revenue.  In any case, samples of averages smooth out differences in the raw data.

Second, the larger sample size could contain significant number of drugs that just are not “rebatable” — in “aging” therapeutic classes with a 4+ brand drugs that are therapeutically equivalent (“me-too drugs”) plus a number of off-patent, low cost generic drugs.

In short, we believe that the sample used in the PBM-sponsored study is a smoothed-out representation of the outcomes of negotiations between drug companies with “rebatable” brand drugs and the Big 3 PBMs.

 


Pharmacy Benefit Managers

CURRENT PAPERS ON PBMs

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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PBM Drug Rebates

All papers downloadable .pdf

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

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

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

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

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

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

 


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)