The prescription pricing system I’m not allowed to talk about.

It’s been a while since I’ve written about anything that matters, but this is something that’s incredibly important. There’s been a lot of talk about the rising cost of drugs in America, and we’re so eager to place the blame at the feet of pharmaceutical companies that we’re completely ignoring the role that PBMs play in all of this. Pharmacists like me have been shouting “Why isn’t anyone talking about the PBMs?!” But it’s hard for non-pharmacy people to talk about something they’ve never heard of. PBMs operate in the shadows, and that’s just the way they like it.

Today we’re going to get down in the weeds and talk way too much about the real reason your drugs cost so much. I’m going to provide you with as much information as I can without risking any repercussions from my employer (I do, in fact, need to keep my day job). Graphs and other visuals in this post are not my own, but I have independently verified their accuracy – references are at the bottom. I realize that this will be way more than most people care to know, but knowledge is power and we need all of it we can get to change our broken healthcare system.

PBMs, or Pharmacy Benefit Managers, are what we typically think of as “prescription insurance.” They’re not really “insurance” on their own, but they like to pretend that they are. They use the same words as health insurance – copay, deductible, prior authorization, etc. But what a PBM actually does is act as a middleman. Your health insurance includes coverage for prescription drugs, but they don’t actually deal with pharmacies directly. A PBM takes money from your insurance company and handles the negotiations and payments on their behalf.

Most people understand how health insurance works, at least in a general sense. Your insurance company enters into a contract with either you as an individual, or with your employer. If you pay a certain amount each month, the insurance company will negotiate with healthcare providers on your behalf, pay a portion of your medical expenses (if you’ve met your deductible), and you will only need to pay a small portion of your medical bills out of pocket. If you look at your bill, you’ll clearly see how much the doctor or hospital charged, what the insurance company paid, the lower price they negotiated on your behalf, and what you’re expected to pay. We might not understand why a hospital charges $12 for a single ibuprofen tablet, but we at least understand how it’s being paid for when we see our bill. PBMs are different. A lot different.

PBMs began to pop up in the ’70s, and really started to take off in the late ’80s and early ’90s. Before that time, prescription drugs were relatively inexpensive, and there weren’t very many medications on the market (at least not like we have now). As time went on, insurance companies found it more and more difficult and costly to keep up with the pharmaceutical boom, and someone had the bright idea to approach an insurance company and offer to deal with the pharmacies and drug companies on their behalf. How kind of them.

I don’t want to underplay it too much – drugs are definitely expensive, and PBMs do a lot of work that should help lower the cost of medications. They develop and maintain a formulary, contract with pharmacies, negotiate discounts and get rebates from drug manufacturers, and process and pay for prescription drug claims on behalf of insurance companies. That’s no small feat, and they should absolutely be compensated for the work that they do. The idea is that a PBM will have better luck negotiating lower drug costs than the insurance companies themselves can do, and that savings is supposed to be passed back to the insurance company, which should then pass that savings on to the consumer in the form of lower copays/deductibles/premiums. Isn’t that just the funniest thing you ever heard? Yeah. It doesn’t work.

Insurance plans are relatively transparent about where the money goes. You can see it right on your bill, and they’ll explain it to you in detail if you call them. However, PBMs (the middlemen) are not open and transparent about how your medications are paid for. In fact, when a pharmacy contracts with a PBM, part of that contract says that pharmacy employees are prohibited from telling patients any details about pricing and/or payments received from the insurance company. That’s right, folks. I know how much the wholesaler charges the pharmacy, I know how much the pharmacy bills the PBM, and I know how much the PBM pays the pharmacy. I’m not allowed to tell you any of the details. I’m. Not. Allowed.

So please explain to me how people are supposed to be financially smart about their healthcare decisions. You can’t “shop around” for the best price on a medication when the entire pricing system is a secret. There’s no competition in the market when nobody knows what anyone else is charging or paying.

Let me give you a specific example, without giving you more information than I’m allowed. I’m going to make it clear what details I’m not legally allowed to share just to point out the ridiculousness of the whole thing. One of my medications (I can’t say which) costs $452 without insurance. I haven’t met my deductible yet, meaning I’m paying out of pocket, so my kind and generous PBM (I can’t tell you which one) has negotiated a lower price for me and I only paid $89 today. Thank you, PBM! I feel #blessed to have insurance.

But this medication cost my pharmacy (I can’t say which one) $5.61 to purchase from our wholesaler (I can’t tell you which one). I’m paying $90 for $5 worth of medication. Cool. But get this – the random dollar amount that has been set as the “recommended list price” (also called AWP, or “average wholesale price” – it’s a made-up number without any basis in reality) for this medication is $566. What?

While it seems like the pharmacy is ripping me off here, I also filled someone’s prescription the other day that cost us $3.04 to purchase from our wholesaler, the patient had a $5 copay, and the insurance paid us $-4.85. Yes, you read that right, they didn’t give us any money, WE had to pay THEM as.. what?.. an offering to the PBM gods? Oh, and the AWP for this drug was $474, with a “cash pay” price of $305, because that makes sense. Losing money isn’t super common (pharmacies are for-profit businesses), but it does happen. Our contracts with PBMs say that we can’t turn people away if we’re losing money on a prescription, even if we’re losing a lot. The whole system is effed.

Obviously, every company has overhead expenses, employees to pay, and needs to make a profit. This is America, after all. If we’re not profiting off someone’s misery, we’re doing it wrong. But PBMs have actually created the drug pricing system we have today, and I would argue that they are a major reason why drugs are so expensive.

When you buy something like a TV, it’s made by a manufacturer, sold to a wholesaler, sold to a store, and sold to the customer. The price goes up a bit with every transaction. That makes sense, right? Drugs are also products that go through this same process, so the price should also increase a bit with each transaction, right? Wrong. Or, rather, it would be right if not for PBMs. Let’s follow the money.

Americans spend a lot on prescription drugs, and costs have risen exponentially over the past 20 years. I couldn’t find any graphs with the current numbers, but I still like the visuals. I’ll let you know the current numbers (for the year 2020) as we go.

The Real Price of Medications | U.S. PIRG
Wowzers, what the heck happened?

In 2020, Americans spent $393 billion on prescription medications. Most sources will give the “average amount spent on prescriptions” (by insurance, the government, patients, and charities) of $1200/person, with out-of-pocket costs averaging $168/person. It’s doable for most people when spread out over a whole year. But, given that only 40% of Americans actually take prescriptions, this number doesn’t give you a good picture of what’s really going on. The ACTUAL amount spent yearly by people who take prescription medications is $3004, with an average out-of-pocket cost of $420 per year. Not sure how that stacks up? Americans spend more than twice as much on prescriptions as people in other countries. And most other countries don’t have any out-of-pocket costs. It’s not because we’re taking better drugs – they’re literally the same medications. We just pay more.

The numbers have gone up a bit since 2017 (see above), but the percentages of who’s paying have stayed roughly the same.

You’ll notice that the fine print in the above chart says that these numbers are taking rebates into account. This is important to note, because nobody knows how much money is saved by rebates. Why? Because PBMs don’t want you to know. We’re all in the dark on how much money is actually spent on prescriptions in America, but we think these numbers might be a close estimate. Maybe.

So that’s a bummer and all, but that’s just the way it is, right? Prescriptions are expensive, we pay for them to stay alive, end of story. But it didn’t use to be like this. Because of inflation, we expect prices to go up a bit every year. That’s expected, we get it, it’s how things work. But the cost of prescription drugs has risen so much more than inflation that it’s getting seriously out of hand. And there’s no reason for it! Well, except for PBMs (I’m imagining a PBM as a type of mustache-twirling Snidely Whiplash character). And we just let it happen, because what can we do? This is America, and prices can go up up up as high as people are willing to pay.

Branded drug pricing has well outpaced general inflation in every year over the past decade.
The orange line shows the inflation increase from year to year, the blue bars show the inflation of prescription drug prices. Trust me – it’s only gotten worse since 2015.

Okay, so we can all agree that prices have gone up, and it’s becoming unsustainable. But how do PBMs actually play into this? Don’t manufacturers, insurance companies and pharmacies share a lot of the blame here? Absolutely. But I’d argue that the different components of the pharmaceutical industry don’t exist in isolation. What one company does affects all the others. PBMs are the first domino to fall, and their actions directly affect how every other business in the industry operates, to our detriment. Let’s see why.

First off, let’s establish something important. Medication doesn’t have a set cost. It’s a bit like gasoline. The prices change from one day to another, from this gas station to the one across the street, and from region to region. But, unlike gasoline, nobody knows what anyone else is paying for prescription drugs. Makes competition in a supposedly capitalist market impossible, right? Yup.

On top of that, prices are affected by rebates and discounts given by manufacturers to wholesalers, pharmacies and PBMs. And these rebates aren’t insignificant. In 2015, more than 1/3 of a brand medication’s “list price” was discounted in some way. It’s like how Hobby Lobby says “Furniture is always 30% off the advertised price!” Like, okay, but then why don’t you just put the actual price on the sticker? If something is always on sale, then just change the price to that. Except that rebates are a secret. A manufacturer might give a 20% rebate to my insurance company, a 50% rebate to your insurance company, and might make another company pay full price. And nobody knows who’s getting what discount, or if other companies are getting them at all. Remember how I said earlier that Americans spend $393 billion each year on prescriptions? It’s estimated that rebates and discounts on prescription drugs (remember, we’re just guessing here) exceeded $100 billion last year. That’s crazy.

For real, though. This is just for brand name drugs. The spread between the “list price” and the actual price is substantially bigger for generic medications.

You can see in the above chart that while drug prices are certainly rising, rebates and discounts are rising faster. What does that mean? It means that PBMs are receiving more rebates and discounts every year, and they’re clearly not passing that savings on to their customers.

So where does the money go? Drugs travel how you’d expect: manufacturer –> wholesaler –> pharmacy –> patient. The money should flow the opposite way, right? The patient pays the pharmacy, the pharmacy pays the wholesaler, the wholesaler pays the manufacturer. Nope. Here’s what actually happens:

Not following? There are too many “dollar flow” arrows here, right? This is where it gets interesting. (and there should actually be a green arrow going from “patient” to “health plan,” but that’s okay)

First, a patient (or their employer) chooses an insurance company. The insurance company hires a PBM, and pays them to negotiate lower drug prices on their behalf. The PBM then acts as a “funnel” to transmit payments from the insurance company to the pharmacy. With me so far? Everything is working how it should. But here’s where the PBMs work their magic. Somehow, all the “payment” arrows wind up pointing to them.

The health plan pays the PBM. The pharmacy pays the PBM for the “privilege” of getting paid (I know it doesn’t make sense, but we do actually pay a set fee for every claim we bill, even if that claim is later reversed and the patient doesn’t get their prescription). Discounts and rebates that the PBM negotiates don’t get passed on to the patient, they get secretly refunded directly to the PBM. The PBM is supposed to report back what discounts and rebates they’ve received and pass it on to the insurance company (minus a small fee for their trouble), but they don’t – at least not as much as they’re supposed to. When health plans DO receive their share of the rebate or discount, they’re supposed to use it to lower premiums, copays and deductibles for their members. They don’t (at least not as much as they should). Get the picture? Why is anyone surprised that when a for-profit business is allowed to operate in complete secrecy, they do what’s in THEIR best interest rather than that of their customers? I’m serious about that – secrecy is in their contracts. They don’t have to tell anyone anything, and the companies they work with aren’t allowed to tell anything to anybody either.

So that all makes sense, and it’s upsetting but not surprising. But here’s another issue. Remember how I mentioned “AWP” (average wholesale price) in passing? Originally, the “average wholesale price” was exactly what its name suggests. It was the average amount that a drug would cost to purchase from a wholesaler. Nobody knows when it changed, but it’s well known in the pharmacy business that AWP is a meaningless number. Supposedly it would be accurate if rebates and discounts didn’t exist and everything were left to the free market and manufacturers could charge what they wanted and what patients were willing to pay, but that’s not the world we live in. As a result, you might find that the AWP for a certain drug is $100, but the actual price from the wholesaler is $1. Or the AWP is $100, they charge the pharmacy $90, and then they give the PBM a $60 rebate. So why does that matter? Who cares what the AWP is when it’s not the actual price of the drug? Deductibles. Deductibles are why this grossly inflated number is important. Because until you meet your deductible (and again once you hit the “donut hole” if you’re on Medicare Part D), the cost that you pay is based on the AWP. It doesn’t matter that the drug actually cost the pharmacy $1, or if the manufacturer gave a $60 rebate. What matters is that the AWP is $100, and the insurance company is going to graciously negotiate a reduced copay for you of $95. How nice of them!

PBMs also have the power to create a formulary, which is a list of the drugs they will cover without requiring a special explanation from your doctor about why that exact medicine is required (also called a “prior authorization”). Some PBMs also have “tiers,” which means that drugs in one tier are preferred and have a lower copay for the patient, and drugs in a different tier are still covered, but at a higher copay. The point of this (the reason they give, anyway) is to encourage you to take less expensive medication whenever that’s an option. If a lower cost drug does the same thing as a higher cost drug, it makes sense that the insurance company would try to steer you toward the less expensive option. Sounds great. If everybody takes less expensive medications, then healthcare in general is less expensive for everyone.

Exceeeept…. lots of manufacturers want their drugs to be on a PBM’s formulary. They can (and do) buy their way onto a formulary. They buy their way into a better tier. They literally pay a PBM to make patients more likely to take a more expensive medication. And the PBM doesn’t care one way or the other, because they’re just funneling that money from the insurance company to the pharmacy, so if they get a nice kickback from a drug company then they’re going to take it. 100%. And they don’t have to pass any of it along to the health plan or the patient because it’s a secret. As long as nobody finds out how much they’re pocketing, they’re in the clear. This is not hypothetical, it’s fact.

I’ll add a disclaimer that PBMs report retaining an average of only 10% to 15% of the rebates they negotiate, and they pass the rest of the savings off to health plans. This, obviously, is all self-reported and unverifiable due to the complex arrangements and secrecy agreements. But maybe they’re right. How much of that rebate is being retained by the health plan? A good chunk. How much is actually saving you money? Pennies on the dollar.

Oh, and have you ever gotten a letter in the mail from your PBM saying something like “Drug XYZ is changing to a different tier next month! Call your doctor now and switch to drug ABC to continue paying a lower copay!” Yeah. Manufacturers offer additional rebates to PBMs when the number of prescriptions sold for a given drug exceeds a predetermined threshold. Tell me again how that’s supposed to save Americans money rather than lining the pockets of PBMs? Mm-hmm.

Oh, and get this – a standard clause in a PBM/manufacturer contract requires the manufacturer to pay an additional “processing fee” when they send a rebate. Raking in all that dough is hard work. It’s like if your employer payed you to drive to the bank to deposit your paycheck. Sounds nice.

I know I’m making it out to sound like PBMs are solely responsible for our effed up prescription system, but they’re just the catalyst that lead to the mess we have now. Because manufacturers have to pay off PBMs to be included on their formularies, they jack up the prices of their drugs. Because they jack up the prices, wholesalers don’t want to buy the drugs (wholesalers have a pretty low profit margin in the big scheme of things). To make purchasing their drugs more appealing, manufacturers actually pay wholesalers to buy their medications. Please, explain to me how on god’s green earth that makes any sense!? It’s called a “distribution service fee,” and it’s what the wholesaler charges the manufacturer for the “service” of buying their drugs (including the cost of inventory storage and distribution to pharmacies). What?

Pharmacies make secret (obviously) contracts with wholesalers to keep their pharmacies stocked with drugs, and they get some sort of undisclosed discount from what the wholesaler is charging everyone else. But.. do they? Who knows, because it’s all secret.

You’d think it wouldn’t be too hard to find out where all the money is going, right? Most PBMs are publicly traded companies, they file taxes, and all that jazz. But with the growing number and scale of “administrative fees” and “service fees,” it’s increasingly complex (nigh on impossible) for medical plans, patients, the government, or your average Joe Schmoe to assess whether the fees/rebates/discounts are being passed through to reduce overall medical costs, or if they’re contributing to increasing costs. What I can say is that The National Pharmaceutical Council recently conducted a study of employers’ perceptions of the value that PBMs provide. Over 65% said that PBMs lack transparency in how they make money, and around 50% felt that rebates contribute to misaligned incentives that put PBMs’ business interests before those of their patients. Another way of putting it: 2/3 of employers think their PBM is doing something fishy, and 1/2 think that PBMs are ripping them off.

I found a couple of excellent examples of where, exactly, the money goes when you buy a prescription. Keep in mind that both of these scenarios assume that the system works exactly as intended, the PBM is being 100% transparent and honest with the health plan, and all rebates and discounts (minus the agreed upon administration fees) are being passed back to the health plan so that premiums and copays can decrease. This is assuming the PBMs are NOT skimming off the top, or requiring that patients purchase a more expensive medication because it gives the PBM a better rebate.

This is the ideal situation for a patient who has met their deductible and is purchasing a $100 medication that has an AWP (made-up nonsense price) of $120. This is what happens when the system is working as intended. The insurance company is losing money, and the PBM is making money.
This is the ideal situation for a patient who has NOT reached their deductible yet, and is buying a $400 prescription with an AWP of $480. This is how it’s really supposed to work, without any deception or secrecy (at least between the health plan and PBM – this would never work if the patient knew what was going on).

That second example just makes me mad. And I guarantee you that this is an accurate example. The PBM will tell you that they’ve negotiated a lower copay for you. See? The AWP (the “retail price”) of the medication is $480, and they’ve negotiated a lower copay for you so that you only need to pay $408. Because you’re still working toward your deductible, the insurance company isn’t going to help you pay for your drugs. Thankfully, they’re still negotiating on your behalf to bring down the cost a bit. But did you notice that the insurance and PBM combined are MAKING $292.75 OFF OF YOUR PURCHASE?? If the manufacturer is willing to settle for $88, the wholesaler only wants $2, and the pharmacy is fine with making $25.25, then WHY ARE YOU PAYING $408??? If PBMs had a face I would punch it.

As prices increase because of this ridiculous system we’ve developed, insurance companies have raised deductibles, premiums and copays. I know mine has. Did you notice that the insurance company and PBM make WAY more money before you reach your deductible? Yeah. That’s intentional. So tell me again how manufacturers and/or pharmacies are responsible for outrageous prices and copays? Mm-hmm.

And now PBMs are merging like crazy to decrease competition. There are only 3 PBMs (Express Scripts, Optum, Caremark) that handle over 75% of prescription claims. Express Scripts merged with two other major PBMs in recent years, taking out some major competitors (Medco and Cigna). Optum is owned by the insurance company UnitedHealthcare, and is gradually acquiring a slew of physician groups and clinics throughout the country. Caremark is owned by the pharmacy chain CVS, and has recently acquired Aetna (another major PBM). All of these mergers and acquisitions have majorly reduced the competition, and it’s giving these companies an opportunity to double-dip. People talk a lot about “big pharma,” but in 2017 (the most recent reliable data I could find), the largest PBMs had a higher revenue than the largest pharmaceutical companies. For example, Express Scripts reported revenue of $100 billion, while the pharmaceutical giant Pfizer had a revenue of $52 billion.

In an ideal world, with full transparency and healthy competition, PBMs would be performing a valuable service. Using their larger purchasing power to negotiate lower costs for prescription drugs is a good thing. But as it exists today, the system isn’t designed to prioritize savings for patients. A big reason for this is that PBMs aren’t incentivized to negotiate for lower prices, but for higher rebates. Manufacturers have two options in our current system: lower the cost of their medication across the board, or raise the price of their drugs while increasing the rebate they provide to PBMs. Either way they make the same profit per prescription, but the latter option ensures that they get good positions on a formulary and more people take their medication. Guess which one they’re going to pick.

An excellent study from 2018 (link at the bottom) tracked AWP prices against net prices for insulin (the “cash price” they base your deductible on, versus how much the manufacturer actually makes). From 2002 to 2013, the cash price for insulin nearly tripled. If you take insulin, you probably felt it hard. However, the money the drug companies actually made on insulin during this same time period either increased modestly, or actually went down. So if you’re paying more, and the manufacturer isn’t getting more, where is that money going? Ding ding ding! PBMs.

The people are starting to get wise to PBMs, but it’s not enough. In March, my state (Wisconsin) established a law intended to hold PBMs accountable for rising prescription drug prices (Act 9). It sounds great, but I’ve read the bill and it’s not going to change anything. The bill claims to “protect patients from the powerful middlemen in the prescription supply chain by shining the bright light of transparency on their actions.” That was in the Governor’s press release – sounds great, but no. The only thing I saw in the bill that looked helpful was restricting a PBM’s claw back ability. Previously, a PBM could, at any time, zoink money back from a pharmacy for a claim they’ve already paid for. Claw backs were a major problem, because the PBM didn’t even need to give a good reason. They could just change their mind about something they paid for without needing to prove why they think a claim was paid incorrectly. Now, they at least have to give notice and give the pharmacy a chance to appeal first.

Manufacturer rebates are also (supposedly) going to become transparent, but not really. Starting in June, all PBMs will need to submit reports showing the aggregate rebate amount that they’ve received and retained from all pharmaceutical manufacturers for prescriptions sold in Wisconsin. Sounds great, except that they’re reporting this information annually to the Office of the Commissioner of Insurance (the government) rather than the actual patients who were affected, and they don’t have to break it down by drug or anything. So, yes, we’ll know how much they’re stealing from us every year, but you’ll have no idea if YOUR drug prices were affected.

This new law also prohibits PBM gag clauses on pharmacists! Yay! But, no, because I read the verbiage used in the law and it specifically says that a PBM can’t stop me from telling you what drug would be cheaper. That was never part of our gag order to begin with. So, yes, they’re doing something, but not anything that needed to be done.

It also limits how much a PBM can charge a patient for their medications! Yay! But, no, because it actually says that the PBM can’t charge a copay that’s greater than what the pharmacy would charge a patient who didn’t have insurance. They’re “fixing” a problem that doesn’t exist. So, there’s that.

I just want the bullshit to end, but it’s never going to so long as healthcare is a for-profit business. We can’t rely on PBMs to do what’s right, so we need to do everything we can to educate the public about what the problems are in our current system so that we can, some day, make it right. Are you with me?


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