A review of prescription drug formularies last year revealed that a $10,000 brand drug for prostate cancer was preferred on a formulary, while its $450 generic was not covered at all or covered only on the specialty tier.
How can that be?
Simple: In our current system, many formulary construction decisions are based on the contracts between pharmacy benefit managers (PBMs) and drug companies. The system is complex in its execution yet remarkably simple in its basic premise: that the drug company pays the PBM for formulary placement. Usually, that payment is tied to the list price of the drug. The higher the list price, the greater the income potential for the PBM.
Exactly how much greater is challenging to ascertain because of the opacity of these contracts, in which drug companies promise rebates to PBMs in exchange for preferred formulary placement. However, on average, according to research from the University of Southern California, “a $1 increase in rebates is associated with a $1.17 increase in list price.” In other words, PBMs — the entities tasked with lowering drug prices — can make more money when drug prices are higher. It does not take a payment policy expert to recognize the perverse incentive.
A drug’s formulary position is critical because it determines whether a patient can access it. When a drug is placed on the specialty tier, it is subject to access barriers through burdensome management protocols. Thus, through no fault of their own, patients are stuck in a circular pattern of pricing insanity: the payments from drug companies to PBMs may result in cheaper options being relegated to an inaccessible formulary tier, while those same payments also result in higher list prices, against which patient co-insurances are assessed. Patients are left holding the dual bag of reduced access and higher out-of-pocket prescription costs.
Members of Congress of all political stripes have gotten wise to this scheme. In the Senate, New Jersey Democrat Bob Menendez and Tennessee Republican Marsha Blackburn have introduced legislation to sever the link between PBM compensation and a drug’s pricing in Medicare Part D. If a PBM wants to participate in Part D, it will have to accept flat fee compensation.
On the House side, Rep. Buddy Carter, Republican of Georgia, has long advocated bringing to heel the out-of-control PBM industry. Not coincidentally, Carter ran a pharmacy for 30 years before running for Congress. As a pharmacist, he undoubtedly experienced the tender mercies of the PBMs, which may explain his tireless pursuit of reform on behalf of independent pharmacies and patients.
Recently, Rep. Lisa Blunt Rochester, Democrat of Delaware, joined Carter to introduce legislation that would, among other policy reforms, delink the list price of drugs from PBM compensation in Part D.
When policymakers of such wide-ranging political views unite on a targeted reform, it says something about the urgent need for that reform. As physicians who treat patients needing expensive medications, we are eager to see drug prices delinked from PBM compensation. Correcting this fundamental market distortion will bring us closer to a system where formularies are designed for patients rather than for profit.
