A Conversation with Two Experts
n late 2023, The Wall Street Journal published the article Generic Drugs Should Be Cheap, but Insurers Are Charging Thousands of Dollars for Them (subscription only). This article examined interactions between patient health insurance prescription benefits, pharmacies, and pharmacy benefit managers (PBMs), and their collective impact on the prices that patients pay for their prescription drugs in the United States.
DIA: Wyatt, would you highlight some of the key points of this article for our listeners who may not be familiar with it?
Wyatt Gotbetter: The Wall Street Journal highlighted some interesting pricing differences on two generic drugs, one for cancers with a broad label and the other for multiple sclerosis. They pointed out that, although these drugs were generic and we presume would be relatively inexpensive for patients, there were huge price differences if you looked across different channels. For example, some patients who could access these drugs through their pharmacy benefit manager (PBM) like Caremark or Express Scripts were paying quite a bit more out-of-pocket, even with their insurance benefits, than individuals who went to the pharmacy and paid “full retail” for their prescription at the generic price or perhaps used one of these more innovative discounting services like GoodRx or Cost Plus.
The Wall Street Journal tried to highlight: Why were some people being serviced by these very large pharmacy benefit entities, using their costly insurance plans, still paying more? The article takes you through a complicated chain that explains the pharmacy benefit manager (PBM) industry. Part of what they put forth in their article is that (retail pharmacy chain) CVS, for example, might have been directing prescriptions to their own pharmacy network and charging higher prices.
This is increasingly a focus of debate and legislation across many venues and jurisdictions: “Are pharmacy benefit managers fulfilling their original mission of offering members and employers (who pay for healthcare for many of us) the lowest prices and offering consumers the lowest out-of-pocket costs?” Or are there in fact several different mechanisms, such as rebates and administrative fees, that actually result in higher costs for consumers and higher profits for the PBMs and dispensing pharmacies?
DIA: Brian, could you explain the background of the pharmacy benefit manager (PBM) in the US healthcare system and how that role has evolved?
Brian Duda: PBMs are third-party administrators of prescription drug programs. They negotiate discounts in the form of rebates with drug manufacturers, negotiate dispensing fees with pharmacies, and process prescription drug claims on behalf of insurers. PBMs emerged in the late 1980s as administrators processing prescriptions for insurers. By the 1990s, PBMs became a major force in the healthcare and prescription drug markets, expanded their services and their influence. PBMs also evolved quite extensively because of several mergers and acquisitions within healthcare insurers such as Cigna, Aetna, and United Healthcare, all intent on providing a vertically integrated healthcare system.
Today, PBMs manage pharmacy benefits for about 266 million Americans. The top three PBMs—CVS Caremark, Express Scripts, and Optum Rx—comprise about 78% of the total pharmacy market. While PBMs have been credited with reducing drug costs, improving access, and promoting innovation, they’ve also faced growing criticism for a lack of transparency, conflicts of interest, and anticompetitive practices. Some of that is also highlighted in this article.
WG: If one looks at these three large entities who have overwhelming market share, it’s important to note this point from Brian: CVS is the largest pharmacy chain in the US, but they also own health insurer Aetna. Express Scripts recently joined health insurer Cigna, and Optum is owned by health insurer United Healthcare. While these PBMs may not always exclusively serve the members of those health plans (they may work with other insurers), the very high market share that they collectively hold does give them a great deal of market power. If you look at the economics of these firms, they have either retained the majority of these rebates or not fully passed along all the discounts to the health plan sponsor. Ideally, they would be driving down the cost of drugs through negotiations to lower costs for the end user. But their business model has relied upon retaining these rebates.
PBMs also offer other important services such as developing and managing formularies, efficiently and conveniently shipping drugs to a patient’s home, or training patients in the proper use of drugs, especially those that might require self-injection. But the article also calls out why some newer business models, such as GoodRx and Cost Plus, can help consumers get drugs at an even lower cost, despite their small market share. Interestingly, in the wake of this WSJ article and political and media scrutiny of PBMs and rebating practices, both Express Scripts and Caremark have announced new benefit plans that emulate Cost Plus in that they claim to provide a transparent system of markups and fees.
DIA: In the era where you’d anticipate PBMs would keep prices under control, how is there such great disparity between (for example) CVS, Aetna, Cigna, and United Healthcare?
WG: A lot of it comes down to the complexity of benefit design. Each of us in this interview may have a relationship with the same PBM. But due to the nature of our specific health plan and benefit design, there may be differences in cost sharing: the amount we pay out-of-pocket. There may be differences in our formularies: I may have preferred access to drug A and Brian to drug B. We want to believe that’s based on a clinical determination; however, there are economic elements including administrative fees, the relationships between the manufacturer’s price and discounts in the form of rebates, and other financial incentives that account for the variations in formularies and patient access outside of clinical determination.
For example, there’s recently been a lot of focus on insulin. The US government has a lot of initiatives to lower the cost of insulin for diabetics, and it’s created some interesting dynamics with private label drugs; for example, the same products being available under different labels at different prices almost in response to this system. There has also been a lot of focus on a major biosimilar launch. Adalimumab, the molecule known as branded Humira, now has several long-awaited biosimilars in the US market which may have different prices: one that’s a higher price with a negotiated rebate, and one with a lower list price which might appeal to a different administrative mechanism.
BD: It sounds counterintuitive, but there are several reasons and incentives for PBMs to keep prices high. Receiving rebates from higher-priced branded products is one of the reasons that they’re reluctant to offer a lower cost generic. Wyatt mentioned insulin, which is really the poster child for this topic. One could go into any pharmacy and likely pay $25 for insulin without insurance. Yet a patient with insurance may pay hundreds of dollars for the same product. One manufacturer even has their own generic insulin for people without insurance; however, the rebates are high on their branded drugs. So, insurers choose to offer the branded product because it’s a larger financial benefit to them than offering a generic. This is where some incentives are negatively impacting patients and the overall cost of healthcare.
DIA: Using a hypothetical innovative new immunology drug for psoriasis or arthritis as an example, what challenges do a pharmaceutical or biotechnology sponsor face in getting this drug to their target patients after regulatory approval?
WG: Ultimately, the drug should demonstrate very strong clinical value, efficacy, and outcomes. The physicians treating these patients should appreciate the value and benefit that it brings, and they should want to prescribe the drug because they believe it’s better for their patients than alternatives. However, that may not always be so easy, because a given physician will increasingly consider the nature of that patient’s health insurance and then—specific to this discussion—the policies of their PBM. What is the formulary? Can the patient access that new drug? And if they can, is it at a preferred tier, meaning that there’s a special relationship (perhaps a lower copay or lower out-of-pocket costs) for that patient?
In most states, there are couponing cards: If a commercially insured patient has a considerable out-of-pocket cost, they can use a third-party service that allows the pharmaceutical company to assume a portion of that patient’s copay to make it more affordable. There are some states, such as Massachusetts and California, where that practice isn’t allowed based on the belief that the coupon obscures the insurance design and mechanisms designed to encourage cost controls. The insurance design, fundamentally, is to have the patient share some costs and feel that pain, if you will. I think we all share the belief that if a patient needs a given therapy, it should be affordable and very clear as to how they can avail themselves of it. The relationship between those couponing firms and the PBMs is a whole other discussion, but it’s clear that coupons can lower patient costs, and PBMs have created mechanisms called “accumulators” to essentially back this financial support out of the patient’s deductible.
However, even more fundamental than the PBM negotiation is that the manufacturer must think about their pricing model, their value, early in clinical development and start to work with payers to let them know that this new therapeutic option may be coming to market if it receives FDA approval in the US. Then the manufacturer should start to work with those PBMs and health plans to understand the role that the new drug can play in clinical treatment. Ideally, the new therapy offers improved outcomes and improved efficacy and, with them, the rationale that it deserves a place in clinical guidelines (something they must work on with clinical and medical societies) and that the price should be such that it is a fair and reasonable alternative to the standards of care available today.
BD: The most important aspect of this for a manufacturer is early educational engagement with payer decision makers on the value of the therapy. It’s critical for obtaining appropriate access for patients who need these therapies. Oftentimes, payers aren’t familiar with the disease state, specific novel drugs being launched, and the unique benefits they provide patients.
The immunosuppressant agents we’re talking about here are among the most expensive category of drugs and pose a significant burden for patients, payers, and healthcare systems. From a PBM and a payer perspective, these are often highly managed categories with access directly limited through formulary management and prior-authorization requirements. These agents require innovative and sustainable pricing and reimbursement models.
Wyatt mentioned value-based pricing. Risk-sharing agreements and outcomes-based contracts are designed to ensure affordability and accessibility. Value-based pricing and risk-sharing type of contracts are getting more sophisticated and require data to implement and manage. A manufacturer understanding this and planning well in advance is critical to success. It is important to get involved with the clinical teams early, to help everyone involved understand the data that will be needed, and include these data points in the early clinical trials.
DIA: Thank you for highlighting the complexities in this process. Would you speak to challenges that healthcare providers and insured patients face in trying to access a hypothetical innovative new immunology drug?
BD: Similarly, there is a need to educate and engage both with patients and providers for these innovative therapies, especially because they are often administered by injection or infusion. They may require special training, equipment, or facilities. They may also have different dosing schedules, side effects, and contraindications to conventional drugs that will impact adherence and compliance. Patients and providers both need a lot of education. Manufacturers of these innovative therapies need to educate and engage patients and providers as early as possible within the guidelines of the legal parameters within which we work.
The manufacturer is also likely to offer some services to help patients because of the complexity and cost of these products. These services are provided to help patients navigate the complicated reimbursement approval process. Additional services such as patient assistance programs, financial assistance programs, nurse educators, assistance with appeals, and digital tools are very popular right now. They are all likely needed to help patients navigate the complex approval process and affordability challenges, and enhance their experiences and outcomes.
WG: There is another group of players, sometimes provided by the PBM, called specialty pharmacy services or hub services. These may be independent businesses or owned by the healthcare insurer or PBM. They play an important role in verifying insurance benefits and in making sure the patient can access the drug and different types of training in self-administration and monitoring as needed. All of this assumes that the drug is on formulary and that the PBM or the insurer has engaged in a relationship with the manufacturer that provides access in a manner that’s favorable and affordable for the patient.
DIA: At what point in developing a new therapy should manufacturers consider patient affordability and access? What can developers, clinical researchers, or manufacturers do early in the product lifecycle that might help conversations with insurers or payers be easier or more fruitful in the later lifecycle and market stages of a drug?
WG: First, I want to comment on the evolution of the innovative, R&D-driven pharmaceutical industry. Ten to 20 years ago, we saw a desire to jump into the market with “me too” or copycat drugs in the statins, which have been truly life changing and improved healthcare and prevention for millions of people, as several large pharma competed to bring a better, more efficacious product to market. Pharmaceutical R&D today has pivoted from areas that are of broad appeal, maybe where there are good products but still room for improvement, to areas where there’s significant unmet need. We see R&D pipelines dominated by oncology, rare disease, and immunology. There’s certainly tremendous remaining need for patients across many types of cancers and malignancies, and rare diseases. When pharmaceutical companies consider their investments in these areas, they’re thinking about: How can they improve health? How can they improve outcomes? (We do need to note, though, that 2023 saw the emergence of the GLPs for obesity, which ignited a fierce wave of investment and acquisition to enter this blockbuster category and compete with other market leaders.)
Back to your question: Very early in product development, members of the R&D team will also think about access, health economics, and value. This team must ask: “Is someone going to pay for this? Is there a need in the market? How big is the population? What is the economic burden to society? What is the economic burden to a given health insurer?” All these things go into the calculus and planning during that R&D stage. While pharmaceutical companies are often vilified, their mission is ultimately aligned with what we all want, which is to improve human health and to work through this very complex system to make sure that patients can get access to their drugs.
BD: Affordability and patient access are certainly two of the most important considerations for a manufacturer developing a new therapy. But they may not always prioritize or address these early enough in the product lifecycle. It’s advisable for manufacturers to consider drug affordability, patient access, as early as possible—ideally, from the early clinical stages—and to adopt a more integrated and strategic approach to market access.
Just some examples of what manufacturers can do: Conduct early and frequent market research with key stakeholders including payers and PBMs, to understand the unmet needs, the value drivers, the decision criteria, and evidence requirements. You need to start early because it takes time to pull that target market evidence together. Another example is developing a clear and compelling value proposition to differentiate your strategy for the therapy based on clinical and economic benefits, patient-reported outcomes, and real-world evidence.
There is also the increasing role of the Institute for Clinical and Economic Review (ICER) and the field of health economics and outcomes research (HEOR) in these payers and PBM discussions. It’s important to consider data collection and to start these conversations early in development. Choosing the most appropriate and viable pricing and contracting models for the therapy based on its characteristics is important. Aligning clinical development and regulatory pathways together with R&D, commercial, and market access very early in the development process will hopefully lead to a much more successful discussion with payers and much more informative information on the value of the product.
DIA: Is the understanding of the true cost of drug development and of patient benefit from the insurers’ or payers’ perspective sufficient to inform their reimbursement decisions? Are there any elements that these key stakeholders could perhaps appreciate in more detail? Are the upcoming price negotiations between manufacturers and CMS (US Centers for Medicare & Medicaid Services) likely to shine more light on their points of view?
BD: The costs of drug development and patient benefit are two factors that may influence the reimbursement decisions of insurers and payers. However, there may not be a sound understanding of these factors among the different stakeholders, so there’s generally room for more dialogue and more transparency. The drug development process is complex and uncertain, fraught with risk and costly failures, and it varies depending on the type, the novel agent, and the targeted disease of the drug.
Just to give you an example: The average cost of developing a new drug among the top 20 global biopharmaceutical companies is $2.3 billion to bring a new novel product to market. However, this estimate does not reflect the true cost of development: For example, it does not account for the opportunity cost, the number of drugs that fail to come to market after going through this process, or the cost of post-marketing surveillance. Moreover, the cost of drug development may not directly relate to the value or effectiveness of the drug. Some drugs may have high development cost, other drugs may have low clinical benefits, or vice versa. It’s a very complex discussion.
The patient benefit is a measure of the impact of the drug on the patient’s health and quality of life. It can be assessed through various outcome measures like survival or symptom relief, and it varies between different drugs, diseases, and populations. In many cases, there’s likely going to be a gap or a mismatch between the cost of drug development and the patient benefit and a difference in the perceived expectations of manufacturers and payers.
The price negotiations between manufacturers and CMS as part of the Medicare drug price negotiation program may provide an opportunity to start to bridge this gap. The program allows Medicare to directly negotiate prices with some of the costliest single-source brand-name Medicare Part B and D drugs, based on factors like manufacturer-specific data, therapeutic alternatives, unmet medical need, patient input, and manufacturing costs. For the most part these discussions never happened in the US until now. Outside of the US, this conversation happens upon nearly every drug approval. But it’s new in the US and will help enhance payers’ understanding of these different factors.
This program aims to ensure that these innovative therapies are there for patients who need them at a lower drug cost for patients and taxpayers. It also encourages more transparency and accountability between manufacturers and payers. More collaboration and coordination among the different stakeholders will hopefully help the perception of the cost of drugs and their value to patients, and some of the reasons why these therapies can be fairly expensive but still provide value for patients.
DIA: Wyatt, would you like to expand upon any of the points that Brian made regarding these various perspectives and how the new Medicare drug price negotiation program may help to bring them together?
WG: CMS is the sponsor of Medicare which, until the Inflation Reduction Act of 2022, really had no administrative or executive power to negotiate drug prices. So, this is very new and of course it’s also very controversial. Some big pharmaceutical companies have said that they’re going to sue the government; others have said that they’ll comply and enter this negotiation process. It’s increasingly important to have this dialogue. Brian mentioned ICER, the nonprofit Institute for Clinical and Economic Review. Going forward, they’re going to play an even more important role as a third party between CMS and manufacturers, using their economic and analytical tools to understand the clinical benefit of drugs and the values that they deliver, and bring some rationality and transparency to this process.
Coming full circle to The Wall Street Journal article and the questions it raised about the pricing of generic drugs, I still believe that the patent system and the exploration of small molecule drugs (and now we have biosimilars in the US) is a built-in mechanism that makes drugs more affordable over time: During the patent protection period, manufacturers can recoup their investment, including the cost of failure, and then over time, drug prices will fall. I know this notion is very controversial, and the patent system is perhaps a topic for another discussion, but it strives to provide balance, to reward R&D investments, reward risk-taking, reward innovation, with a period of time in which the value of these drugs can be realized, and then for prices to fall as more products enter the market when those patents expire.