New PBM players banking on drug pricing transparency for success

Two new pharmacy benefit managers (PBMs) are looking to disrupt the industry: Mark Cuban’s Cost Plus Drug Company and the Purchaser Business Group on Health (PBGH), a nonprofit coalition. Both companies are looking to promote drug pricing transparency, which larger PBMs like CVS and United HealthCare have been reluctant to do. Converse views and legislative efforts around drug pricing have continued to elevate over the past few decades.

In November 2021, Congress actively debated the Build Back Better Act, which included the potential to allow Medicare negotiating power over drug pricing in a limited set of products. The advent of vertical integration by larger PBMs, the balance between innovation and cost in pharmaceutical development, and the political pressure to reduce drug spending will be factors into the success of these two companies.

PBM disruptors

The Cost Plus Drug Company and PBGH have markedly different business models to lower drug prices. The Cost Plus Drug Company offers generic drugs with a fixed 15% profit after disclosing all costs from manufacturing, wholesale distribution, and online pharmacy services. Cost Plus Drug limits production to generics, leaving out higher-cost specialty drugs.

On the other hand, The Purchaser Business Group on Health (PBGH) has created EmsanaRx, targeting employer groups to provide more transparent and flexible PBM offerings. They purport to pry open the “black box” of the large PBM models to give employer groups more decision-making power through transparency. EsmanaRx states that they will remove any cost-shifting from rebates or discounts and an open model with a known, controllable fixed fee. They will provide the full spectrum of drugs from generics to specialty. In the case of Cost Plus Drug Company, the focus on generics may attract less attention from PBMs. But EsmanaRx’s focus on employer groups could be a game-changer.

Small PBM challenges

PBMs manage pharmaceuticals on behalf of multiple stakeholders. By their large scale, they can negotiate drug prices that are lower by driving market share for pharmaceutical companies. Herein lies the issue for start-up PBMs. The largest PBMs have the advantage of size and negotiating power, and access to an extensive portfolio of specialty, brand, and generic medications. The top three PBMs, CVS, Express Scripts and OptumRx, processed 77% of prescription claims in 2020, and they have trended towards vertical integration with insurers and specialty pharmacies. OptumRx earns 60% of business from its parent company, UnitedHealthcare.

It’s unclear if these integrations will reduce costs or further increase profits and reduce access. For example, a recent AIDS Healthcare Foundation’s (AHF) planned protest of OptumRx argued that Optum Rx was restricting access to independent pharmacies. By proposing new transparent business models, small PBMs amplify the political and social pressure on larger PBMs to report their fees and rebates. At the same time, they may have difficulty surviving in the current climate if they cannot attain enough market share.

It can also be challenging to be a small PBM because of scale and regulatory hurdles. In 2019, Centene moved away from CVS to focus on its internal PBM, Envolve Pharmacy Solutions, and an external partner, RxAdvance. Centene partnered with RxAdvance to harness a more innovative and transparent system. However, their foray into the PBM industry was fraught with legal issues, and Centene settled two lawsuits in no-fault agreements with Mississippi and Ohio. Recently they have put out a bid for PBM services and have stated they are exiting the PBM business.

New legislation and transparency

PBMs do not disclose their discounts, or rebates, for purposes of negotiation. They do not distribute these rebates directly to the consumer, and as a result, stakeholders often scrutinize and investigate PBM actions, including multiple attempts by Congress to regulate PBM practices. Rebates have been part of drug negotiations between pharmaceutical companies and insurers since at least the ‘90s and have allowed pharmaceuticals to move market share through more significant rebates.

During the Trump administration, Scott Gottlieb, former FDA Commissioner, proposed removing the safe harbor for rebates under the Anti-Kickback Statute during his 2018 Keynote Address to the 2018 FDLI Annual Conference. Congress initially wrote the Rebate Rule to reduce drug prices and out-of-pocket spending and ensure that insurers pass any discounts onto the patient at the point of sale. PBMs vehemently contested this rule, arguing that this change would not lower costs but would raise premiums.

In January 2021, the PBM industry applauded the Biden administration when the administration decided to delay the implementation of the Rebate Rule. Then, on November 3rd, Congress revised the Build Back Better Act, and with the recent passage of the infrastructure bill, Congress may discuss it as early as mid-November.

Two aspects of the bill affect PBMs. First, the bill will repeal the Rebate Rule to offset its costs. At the same time, there will be additional oversight of PBMs. The law would require insurers and PBMs to provide plan sponsors a biannual report on drugs dispensed, costs, member out-of-pocket spending, and several other data elements. However, now that Congress may eliminate the Rebate Rule and there is some movement towards transparency in the PBM space, small PBMs must deliver the same type of discounts and market share that the larger PBMs provide to succeed.

What does this mean for drug pricing transparency and relevant stakeholders?

Drug pricing reform is controversial because such legislation is likely to affect at least one stakeholder’s budget. Here are some possible scenarios for response to the rise of PBM disruptors:

1. Larger PBMs may not find the smaller companies to be much of a threat, particularly with the removal of the Rebate Rule. They will rely on their ability to provide more value at a lower cost.
2. Pharma may be incentivized to negotiate with smaller PBMs despite the smaller volume to focus Congress’s attention on rebates and transparency and away from pharmaceutical drug pricing reform, which is now a significant focus of the Build Back Better Act.

Stakeholders may focus on medications unaffected by legislation or small PBMs. Since drug pricing reform legislation focuses on high-cost drugs that have lost exclusivity and smaller PBMs concentrate more on generics, many brand-name drugs remain unaffected.

It will be interesting to see how incentives change and the resulting potential unintended consequences with all these moving pieces.

Cynthia Miller is vice president, medical director, at PRECISIONvalue. Reta Mourad is vice president, acess experience team.