“If one PBM won’t give it to them, they’ll get it from another PBM”

Some drug industry officials have tried to shift blame for rising retail drug prices to pharmacy benefit managers,

who are hired by insurers, employers, unions and governments to negotiate prices and establish formularies. Consolidation among PBMs left just a handful of powerful players, and even the Medicare Payment Advisory Commission has lamented there is “a real complexity in how PBMs operate and where they get their revenues.”

Modern Healthcare Midwest Bureau Chief Bob Herman recently interviewed Mark Merritt, CEO of the Pharmaceutical Care Management Association, the PBM industry trade group, to get his take on the issues. The following is an edited excerpt.

Modern Healthcare: Is there is enough competition in the PBM industry?

Mark Merritt: I think there’s been consolidation across the healthcare space, starting with providers. And certainly payers have wanted to make sure that they can compete and negotiate effectively with an increasingly consolidated provider market. So you’ve seen with insurers and pharmacy benefit managers an emphasis on generating scale: scale to negotiate discounts, scale to negotiate effectively with drug manufacturers that often negotiate not just nationally, but internationally.

You need to be big enough to be able to generate the discounts and have enough market share to really give payers the leverage they need in this marketplace. Fortunately, the Federal Trade Commission regularly looks at this and has said there is abundant competition among PBMs.

MH: What’s your view right now of mergers among pharmaceutical companies?

Merritt: I won’t say it’s immaterial to us because we have to have the same business strategy regardless. But certainly, as manufacturers get larger, we need to get larger, too, to compete with them and make sure that we have enough market share to drive the value that our clients want and that patients need.

MH: But do you think there is a point where a player becomes too big, either on the pharma side or the PBM side?

Merritt: With manufacturers, they have monopoly pricing for brand drugs, at least for a period of time, so I think that’s the bigger issue that keeps prices high. We’re supportive of patent protections for drug manufacturers. But we’re also supportive of getting generics to market as fast as possible and getting biosimilars to market as fast as possible to compete with them.

MH: Drugmakers have been raising prices on their drugs by a lot over the past several years. The practice has been condemned universally. How much pressure have PBMs been applying to kind of keep prices in check?

Merritt: Certainly payers are very concerned about brand drug price increases. It’s been a significant issue. Payers are taking a closer look at their formularies to make sure that the most affordable options are on the formulary. In many cases, the formularies are being altered if payers have a sense that a drug is unreasonably priced and there are other alternatives in the market.

Competition is the key here. And the more competition there is for each high-priced product, the harder it is for manufacturers to keep the prices artificially high. The marketplaces won’t demand it.

MH: Are PBMs still seeing prices for generics going up just as much as the brandname drugs? What are PBMs doing to combat that?

Merritt: I testified before Congress numerous times on that very issue, including with Martin Shkreli of Turing, because we had been the most vocal against that practice of buying a generic or an old brand drug that doesn’t have a huge market share, that doesn’t have any competitors, and just buying the drug for the exclusive purpose of raising prices.

The two biggest abusers of that, Turing and Valeant, have both seen their stocks spiral downwards because the business model they had built and sold to investors—that they could

“These are the largest, most sophisticated health purchasers in the world that we deal with.”

“The business model they had built and sold to investors—that they could just buy drugs and raise their prices—proved to be unsustainable.”

just buy drugs and raise their prices—proved to be unsustainable. Some of our companies have found compounded drug options and other more affordable options where we can simply cut some of the extremely high-priced drugs out of the formulary because more affordable options are available.

But generally, with generics, you need solutions from the Food and Drug Administration. You need faster generic approvals.

MH: It seems like there is still an unclear notion of how PBMs make money and what negotiations are like with drug companies. Why isn’t there more transparency behind rebates and so-called spreads?

Merritt: It’s important to realize that the pharmaceutical benefits marketplace is still relatively new. Twenty-five years ago, people didn’t even have pharmacy benefits because there weren’t a whole lot of brand drugs in the market that were truly wonder drugs that solved major national health crises.

We negotiate price concessions with drug manufacturers if they want access to a formulary, and there are several competitors that have the same efficacy. Drug companies are going to have to negotiate—they’re going to have to compete against each other on price—and the ones that offer the best price concessions are the ones that are going to get the best formulary placement: preferred status on a formulary with lower copays, sometimes no copay.

Drug companies that offer less serious discounts are going to find themselves with bigger copays or sometimes not even on the formulary, depending on what the payer wants to do. So, I think when you look at rebates, a lot is made out of that, but they are the normal discounts and price concessions that every business uses. It’s just saying, “Hey, look, if you want access to this particular marketplace, you’ve got to give us a reasonable price, and if you don’t, we’re going to go to your competitors.” And that’s really all it is.

I think there’s been a mythology out there that there’s this huge demand for transparency among payers, when, in fact, these are the largest, most sophisticated health purchasers in the world that we deal with. We’re dealing with the big insurers, the big government programs. These guys get whatever they want, and if one PBM won’t give it to them, they’ll get it from another PBM.

In the end, you have to realize that none of these companies have to hire a PBM in the first place. The only reason they do is because PBMs are delivering value. And if they weren’t delivering big-time savings, then none of these Fortune 500 companies would be giving PBMs the time of day.