Reuters/Carlos Barria
Vice President Mike Pence laughs as U.S. President Donald Trump holds a baseball bat as they attend a Made in America product showcase event at the White House in Washington, U.S.
- Wall Street analysts have been reading the tea leaves before President Trump's healthcare speech Friday, and some think pharmacy benefit managers (PBMs) could be in trouble.
- PBMs manage the lists of what drugs your healthcare provider will and will not pay for. They're supposed to keep costs down.
- But Trump officials have been saying that one of the main ways PBMs claim to do this, by taking rebates from drug manufacturers, actually creates incentives the drives prices up.
Wall Street thinks President Donald Trump could announce measures that will take a jackhammer to an incredibly profitable business in the healthcare industry, pharmacy benefit managers (PBMs).
These little known companies manage lists for healthcare programs - that is to say they are the gatekeeper between you and the prescription drugs your program (public or private) allows you to buy. Three companies - CVS Caremark, Express Scripts, and OptumRx - control around 70% of the market. They are supposed to block too-expensive drugs and keep prices down.
They do this, in part, by negotiating with drug manufacturers for a rebate on the price of a drug. Some of that rebate goes back to your program (and maybe you), and some of it goes back to the PBM. It depends on your program's (entirely confidential) contract with the company.
Critics say this system actually incentivizes manufacturers to price drugs higher so PBMs can take a bigger cut for themselves. That in turn incentivizes the PBMs to let your program buy more expensive drugs.
That is what Wall Street thinks Trump is going to take a whack at on Friday - this big fat rebate system. Analysts at Goldman Sachs told clients they're taking their cues from a report the President's Council of Economic Advisers wrote back in February.
"The overall Part D benefit structure creates perverse incentives for plan sponsors and pharmacy benefit managers (PBMs) to generate formularies that favor high-price, high-rebate drugs that speeds patients through the early phases of the benefit structure where plans are most liable for costs," the report said.
Break the wheel
Adding more to the speculation that rebates are in trouble, Trump administration officials have been out making speeches about the evils of this rebate system.
"FDA Commissioner Scott Gottlieb... suggested that rebates are one of the dynamics driving "higher and higher list prices" and that "high list prices enable lucrative returns across the drug supply chain as the spread between list and net price is carved up and shared among participants," Goldman noted in its report.
Just this week Centers for Medicare and Medicaid (CMS) Administrator Seema Verma also gave a speech weighing in on the matter:
"...PBMs are serving two customers - being paid both by manufacturers for getting on formularies and by plans for managing their drug benefit. This makes it unclear who they're actually aligned with.
The higher a manufacturer's list price, the larger a rebate will be, since rebates are calculated as a percentage of list price. And the higher the rebate, the more money that plans and PBMs get. The bottom line is that all of the incentives are lined up for manufacturers to set higher and higher prices."
It's difficult to tell how much money PBMs are making from rebates based on company balance sheets, and last year the US Securities and Exchange Commission wrote a letter asking Express Scripts a bunch of questions about this opacity.
It looked at the company's accounting and noticed that it was lumping revenue from all sorts of other fees that PBMs charge to clients and drug manufacturers in with rebates, blurring the picture of who is paying PBMs for what.
"It is unclear why you believe accounts receivable from pharmaceutical manufacturers are a component of customer receivables considering that pharmaceutical manufacturers do not appear to be your customers," it said (emphasis ours).
Trust in anti-trust
Another passage to consider from the President's Council of Economic Advisers report when you're thinking about PBMs: "Policies to decrease concentration in the PBM market and other segments of the supply chain... can increase competition and further reduce the price of drugs paid by consumers (Sood et al. 2017)."
Express Scripts, the largest and only stand alone PBM brought in $100.1 billion in revenue in 2017.
CVS Caremark, which is owned by CVS, did $130.6 billion in sales over the same period. That was 62% of the parent company's total revenue (an increase of about 10% over the previous 5 years). CVS's retail pharmacies only pulled in 37.8%.
OptumRx, which is owned by insurer UnitedHealth, pulled in $63.7 billion in 2017, 25% of the company's revenue. Other players in the market are dwarfed by comparison, and some states have started to notice that the lack of choice gives PBMs too much power.
Legislators in Arkansas caught CVS Caremark reimbursing mom and pop pharmacies at a lower rate than it was reimbursing CVS pharmacies through the state's Medicaid program and quickly passed legislation curbing the behavior earlier this year.
Elsewhere, Ohio legislators noticed the same behavior in their state, where CVS Caremark manages lists for four out of five Medicaid managed care programs. In both states struggling mom and pop pharmacists got letters from CVS offering to buy their pharmacy.
Last month, Antonio Ciaccia of the Ohio Pharmacists Association told Business Insider that during the three years CVS has been engaging in this behavior it has gained 68 pharmacies in the state. Its competitor Walgreens added only two locations over the same period.
"We are done messing around in Ohio," he said. "This system is completely broken ... It is layered and layered with conflicts of interest. I don't care who the PBM is."
Right now CVS is awaiting approval to merge with insurer Aetna, giving the company even more control over the supply chain between you and the drugs you're buying. At the same time, Express Scripts is trying to merge with another insurer, Cigna.
You may want to pay attention to Friday's speech if you're betting on any of that.