Companies you’ve never heard of are making a killing off high drug prices

It’s easy to see why EpiPen has become the focus of America’s fury over drug prices. It treats potentially deadly allergic reactions — for example, in a child who is stung by a bee — and its price has spiked by over 500% in a few years.

While it’s easy to jump all over drugmakers, like EpiPen’s maker, Mylan, other actors in the healthcare system ought to draw as much scrutiny.

One group of companies, called pharmaceutical benefit managers, or PBMs, serve as middlemen, and they touch every part of the purchase of a prescription drug.

And now there’s a growing realisation, from Washington to Wall Street, that PBMs have been a big beneficiary of soaring drug prices burdening Americans — profits of the largest companies have doubled in recent years — even as they pitch their services as critical to controlling costs.

It’s what one Wall Street analyst described as a “perverse incentive” in the business. A recent Morgan Stanley analysis showed that PBMs’ earnings would take a direct hit if drug companies began to slow down on price hikes.

The biggest of these companies is Express Scripts, but PBM services are also provided by CVS Health, UnitedHealth Group, and several smaller companies. Because of their complexity and opacity, they have managed to dodge the kind of intense scrutiny that drugmakers are facing.

But that’s changing, and it’s bad news for the industry. PBMs are being sued by some customers for double dealing, and they’re now also starting to draw the attention of Congress. Perhaps the biggest threat of all: They’re facing a backlash from America’s largest employers, some of which are working on a way to rewire the system.

Below, we’re going to try to explain how PBMs work for the more than 260 million Americans they serve, and because unlike the other big companies it is mostly a PBM, we’re going to use Express Scripts to do this.

The ultimate middleman

Pharmaceutical benefit managers started simply enough. In the 1960s, they served a need. As more Americans started taking prescription drugs, insurance companies were overwhelmed processing claims. PBMs offered to do it for them. PBMs pioneered plastic prescription cards and mail-order drug delivery.

They promised Americans they’d negotiate to keep drug prices down. They promised insurers they’d make processing prescriptions a lot cheaper and easier. And they promised drug companies they would favour certain drugs in exchange for rebates and price breaks.

They’re paid fees by the insurers and employers who use their services. But they’re also taking a cut of every sale. That alone isn’t a problem. American business is full of middlemen, and nothing the PBMs do is illegal.

But where the PBMs are starting to get into trouble is that they’re making bundles by keeping each player they deal with — pharmacies, insurers, drugmakers — partly in the dark. And those bundles, you could argue, are coming at the expense of the people who pay for healthcare.

Obama doctors Obamacare
Yes, Obamacare too. Win McNamee/Getty Images

Here’s how a PBM like Express Scripts controls information and pricing.

Let’s say a doctor prescribes you a heartburn drug. Its list price is $300, but the only people who pay that are those without insurance. Because you have insurance, you go to your local pharmacy and pay a $20 co-pay. For you, that’s it. Your insurer might be paying $180 for the drug as part of a large-scale agreement it came to years ago via the PBM. The pharmacy that dispenses it may get only $160 for it. That $20 difference is a spread, and that goes to your PBM as profit. That’s on top of fees your insurer is paying the PBM to administer its prescription-drug program.

That’s the simplest way this goes down.

All the while, the pharmacy has no idea how much your insurer is paying for the drug, and your insurer isn’t exactly sure how much the pharmacy is getting for dispensing the medicine. The drug company, meanwhile, isn’t even getting close to the $300 list price that makes everyone so angry.

Then things get really murky.

If the price of the drug has increased, the PBM can be paid a rebate for the excess, which it pockets. The insurer, which is paying for the drug, won’t know.

“These rebate amounts are less likely to be explicitly shared with a client,” analysts at AllianceBernstein, an investment firm, wrote in a recent note on Express Scripts.

The note was written to answer the question of whether PBMs are “containing pharmacy costs or driving them.” AllianceBernstein’s answer was to put an “underperform” rating on Express Scripts’ stock, warning of the risk to investors as people start to figure all this out.

‘What we don’t want is transparency’

In the middle of the EpiPen news cycle, CNBC interviewed Steve Miller, the chief medical officer of Express Scripts.

“If she wanted to lower the price tomorrow she could,” Miller said of Mylan’s CEO, Heather Bresch.

He continued (emphasis added):

“We love transparency for our patients. Our patients should know exactly what they’re going to pay when they go to the pharmacy counter. We love transparency for our clients — they can come in, they can audit their contracts, they know exactly what they’re going to be required to pay … What we don’t want is transparency for our competitors.”

Did you catch that?

Express Scripts will tell clients how much they should pay, but it is trying hard not to tell anyone how much things cost. The problem is that when people find out, they seem to get very angry.

‘Don’t you find it odd?’

In February, at a congressional hearing about drug prices, Mark Merritt, the PBMs’ lobbyist in Washington, was grilled by Republican Rep. Earl “Buddy” Carter of Georgia.

Carter owns a few small pharmacies, and he was getting very angry about the lists, called formularies, that PBMs develop for their clients. A formulary is a list of drugs that patients will be reimbursed for on a given plan.

PBMs also create maximum allowable cost (MAC) lists, which tell the drug companies and pharmacies how much they will pay for a medication. The prices on each list can be different, but only the PBM knows the difference.

“They have one list here that they’re going to reimburse the dispenser at. They have another list that they’re going to charge the insurance company that they’re representing,” Carter said at the hearing. “Don’t you find that somewhat awkward? Don’t you find that to be a situation where the PBM could distort the market greatly?”

Merritt said he did not.

Carter also said that PBMs have caught the ire of states because they were not updating their MAC lists frequently enough. That means that even if a drug’s cost increases for a pharmacy, the PBM still won’t pay more to buy the drug for its clients.

Merritt insisted that it was not accurate.

Carter countered:

“If that’s the case, don’t you find it somewhat odd that [the Centres for Medicare and Medicaid Services] found it necessary to mandate … that these MAC lists be updated every seven days, and that 26 states have passed laws requiring PBMs to update their MAC lists? … I notice that the profits of the PBMs have increased enormously over the past few years — in fact, almost doubled. I find that very disturbing, particularly when you’re talking about spread pricing.”

In a statement to Business Insider, Express Scripts said, “We update [MAC lists] on a regular basis … as need be.” It would not elaborate further.


Side hustles

Further complicating the issue with drug companies, PBMs have entered into businesses beyond just managing lists and buying drugs. Many have their own specialty pharmacies, which are mail-order pharmacies that manage drugs that are hard to distribute. Express Scripts, for example, has a specialty pharmacy called Accredo Health.

Carter says he has adjudicated claims for customers in his pharmacy, had them rejected, and then seen the PBM call the customer right away to tell them to use its specialty pharmacy.

“A mail-order pharmacy that is owned by the PBM — now, don’t you find that conflict of interest? Don’t you find it a conflict of interest when a PBM not only owns the pharmacy but they’re reimbursing here?” he asked.

What he means is that the PBM helps to manage the drugs on the formulary and negotiates the price of the drug that it could be buying from itself.

Express Scripts also has a business that manages patient-assistance programs called United BioSource. Drug companies use these assistance programs to help patients get around co-pays and often point to them when drug costs go up really fast. Express Scripts picks up a management fee for doling out this cash.

While all this complex stuff is going on in the background, the patient’s price is being held steady. In his CNBC interview, Miller bragged that patients saw their EpiPen co-pay increase from $73.03 to just $73.50.

“We’re really trying to protect our plans,” he said.

What it really does, though, is protect all the players from patient outrage, because rising drug prices mean rising rebates and increasing profits for the PBM.

In a research note, Morgan Stanley analysts walked through what would happen with a single product: Allergan’s chronic dry-eye treatment, Restasis.

The price of Restasis has increased by double digits annually in recent years, and so has the income generated from rebates related to it. If Allergan were to cut back on price hikes, like it just pledged to, those earnings would drop by 15%.

Of course, clients such as insurers don’t know exactly how much drugs cost the PBM once it has negotiated its own rebate with a drug company; clients just know how much they’re paying a PBM.

Are you seeing a trend here? Whether it’s from drug companies like Mylan or PBMs, real prices are just hard to come by. And because their hands are in all corners of the business — the lists that get you to customers, the assistance programs that get customers to pay, the pharmacies that can sell you the drugs — that suits PBMs just fine.

This is your brain — this is your brain on a PBM

With a market cap of $45.7 billion, Express Scripts is the largest of the PBMs and was created as a PBM, not an insurer or a pharmacy like its two primary competitors, UnitedHealth and CVS Health. The three control most of the PBM industry.

Based in St. Louis, Express Scripts exploded in 2011 when it announced it would purchase Medco Health Solutions for $29.1 billion. In 2010, before that deal, the company’s revenue was $44.97 billion. In 2015, it was $101.75 billion.

We asked Express Scripts if it thought there were any conflicts of interest in the way its business is structured, conflicts that may prompt the company to add a drug to a formulary or stock it in its pharmacy (Accredo Health), for example.

Time and time again, the company said that clients make choices and Express Scripts just gives advice.

Here are a few of the answers we got:

Linette Lopez: If the price of a drug increases, doesn’t payment to your company increase as well?

Express Scripts: All individual client contracts are geared toward driving down the cost of healthcare while creating the best possible outcomes for patients. Express Scripts’ performance is contingent on our ability save our clients money while ensuring that patients have access to the right medications at the best possible price with the greatest level of care.

Lopez: Does Accredo sell drugs that it also provides patient-assistance programs for?

Express Scripts: Pharmaceutical manufacturers choose their PAP providers as well as their distribution channels. There are drugs dispensed by Accredo that have PAPs operated by [United BioSource]. For some products, we determine eligibility and dispense the product, and for others the manufacturer contracts with Accredo to handle only dispensing.

Lopez: For what drug companies does United BioSource administer patient-assistance programs?

Express Scripts: [United BioSource] works with a number of manufacturers to implement PAPs to ensure that uninsured and underinsured patients who meet the qualifications of the program get access to the drugs they need. The number of companies is proprietary.

Express scripts revenue

Dealing in the dark

What these answers reveal is that yes, sometimes Express Scripts gets paid for managing patient-assistance programs for drugs it also sells through its own pharmacy. So not only is the situation Carter described possible, patients won’t even know what’s going on because the patient assistance program will mask all the cost for them.

And no, you cannot find out whom Express Scripts managing patient-assistance programs for.

And, by the way, no, Express Scripts does not “find it odd” (as Carter said) that it manages those two lists — one for what drug companies can charge and one for what clients have to pay.

“The client chooses how they would prefer to contract with us or any PBM for its service,” the company told Business Insider. “Spread pricing is aligned with the payer’s desire to control costs and our ability to do so. Through spread pricing, we offer lower rates and leverage our ability to secure better discounts from retail pharmacies over the life of the contract.”

Many clients do not agree with this.

Earlier this year, some of America’s biggest employers — including American Express, Macy’s, Coca-Cola — created an organisation called the Health Transformation Alliance with the aim of breaking with “existing marketplace practices that are costly, wasteful, and inefficient, all of which have resulted in employees paying higher premiums, copayments, and deductibles every year.” And they have PBMs in their sights.

Here’s Barron’s magazine on one way they will do this:

“They’d do this by rewriting their pharmacy-benefit contracts to eliminate the undisclosed drug-price markups that supply much of the PBM industry’s profits. Instead, the PBMs would mainly receive administrative fees, which would be significantly lower.”

There’s more. Express Scripts gets a significant chunk of its revenue from two clients: the Department of Defence and Anthem Insurance.

But Anthem is suing Express Scripts for breaching its 10-year contract with the company, alleging that it “failed to negotiate new pricing concessions in good faith.” It’s seeking $15 billion in legal damages.

A number of Anthem clients are also suing both Express Scripts and Anthem for the money they spent on overpriced healthcare.

In California, clients are suing Express Scripts for failing “to comply with statutory obligations to provide the state’s clients with the results of a biannual survey of retail drug prices.”

Express Scripts sent us its response to the Anthem case. Basically, it argues that it had a deal, and it accuses Anthem of being the one to violate the agreement.

The response is replete with redactions meant to protect the terms of its contract with the insurer. It’s these redactions, these facts concealed by omissions, that AllianceBernstein believes puts the PBM industry in peril.

“We believe retail spread benefits from a lack of transparency and press/political investigation has the potential to reduce spread. We believe greater awareness of rebate levels or price protection rebates would increase necessary sharing with clients,” the analysts wrote.

In other words, once America finds out how this business works, it’s not going to like how this business works.

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