Expect More From... Aligned Interests!

This week we are continuing our conversation as to why our drug prices are higher than other countries. One of the six primary reasons is that our system has created misaligned interests. Because the healthcare system is built on capitalist principles, everyone in the system is looking for their opportunity to maximize revenue.  One of the areas in which this has become most prevalent is in the PBM’s sources of revenue.  As pharmacy benefit industry has been pushing for more and more transparency, coupled with the requirement to pass through all revenue generated by the PBM, the PBM industry has been looking for ways to continue their revenue, while meeting these requirements. This constant push and pull can feel like each side is playing a game of checkers.

In September 2023, Nephron Research published a study on the “Trends in Profitability and Compensation of PBMs & PBM Contracting Entities”.  Nephron found that “while the value of rebates paid to PBMs continues to grow, fees and specialty pharmacy now drive a greater share of PBM profits”. It is estimated that PBMs are generating 39% of their revenue from their specialty pharmacy.  How is this the case?

There are three things at play driving this increase in specialty pharmacy revenue:

1. First, you need to understand the ownership structure of a traditional PBM.  Even though specialty pharmacies are typically associated with a PBM, they are not technically owned by the PBM.  For example, Optum Health owns Optum Specialty Pharmacy and OptumRx.  OptumRx contracts with Optum Specialty Pharmacy to provide fulfillment, just like they do when they contract with a local retail pharmacy.  Optum Specialty Pharmacy contracts with the PBM at an AWP discount that is not a representation of the cost in which the pharmacy purchased the drug.  Therefore, Optum Specialty is retaining the difference in cost between what they purchased the drug for and what they are being reimbursed by the PBM for.  Optum PBM does not claim this a spread because they are billing the client the same amount they are paying the pharmacy.  The Optum entity, though, is benefiting from the amount the pharmacy is retaining. In many of these types of arrangements, employers are not given a choice on who is their specialty pharmacy provider.    

2. Secondly, manufacturers pay rebates in many different ways.  In addition to rebates being paid by manufacturers for preferred formulary placement, rebates are also paid to specialty pharmacies for “services” the pharmacies provide.  Examples of these services include copay assistance enrollment and adherence management.  Drug manufacturers want to ensure patients stay on their drugs, so they are willing to pay pharmacies to patient’s compliance with their medications.  These types of rebates are not usually passed onto employers, and the specialty pharmacy keeps these rebates as revenue.

3. Lastly, specialty generics are becoming big business.  This is similar to the first issue but is exasperated as more biosimilars are being released.  In the J&J lawsuit that was filed by its employees earlier this month, “the suit cites a charge of more than $10,000 for a 90-day prescription of generic drug teriflunomide, used to treat multiple sclerosis, that would have cost as little as $28 from online pharmacy Cost Plus Drugs.” Even though Mark Cuban is a great negotiator, I doubt he was able to negotiate a better deal with the manufacturer than CVS Specialty.  In this situation, CVS Specialty is probably buying the drug for $28 and keeping the difference as profit.  As long as specialty generics are priced as brands, we are going to continue to see more and more examples like this.
   

We just wanted to highlight the revenue that specialty pharmacies are driving through PBM entities as an example of the perverse incentives our industry has created.  There are many more.  Just know that the traditional PBM is not going to give up one source of revenue without making up that loss with another source of revenue.  It is important to ask questions about how your entire PBM’s entity and its constituent companies are making money, not just the portion of the entity you are contracting with.