How Does PBM Involvement in the Supply Chain Impact Drug Costs?

When looking at the cost of healthcare in the United States, many individuals consider pharmaceutical companies accountable for increasing out-of-pocket spending on prescription drugs. However, there are numerous entities involved with the pharmaceutical supply chain that can bear some responsibility for high drug costs.

A typical supply chain includes: the initial pharmaceutical manufacturer, wholesale distributors, retail, mail-order, and specialty pharmacies, and the patient, with price negotiations and processing at the discretion of pharmacy benefit managers (PBMs). Ultimately, the pharmacies dispense the medication to patients, who are responsible for a co-payment based on the list price.

Due to the complex nature of the pharmaceutical supply chain, it is ever-evolving, and can even vary from drug to drug, which creates an additional layer of difficulty for potential reform proposals.

With drug costs at the forefront of many Americans’ minds, stakeholders within the supply chain have come under scrutiny, specifically manufacturers and PBMs. Recent reports have criticized PBMs for charging pharmacies direct and indirect remuneration (DIR) fees, which are delivered weeks to months after the initial transaction.

“When we talk about supply chain, we have to acknowledge the distortions that are in the marketplace. We had a recent Berkley Research Group study showing that manufacturers are retaining less than half of all spending on prescription drugs,” Lindsay Bealor Greenleaf, director at ADVI Health told Specialty Pharmacy Times. “We also had a recent CMS report showing that DIR fees are growing much faster than Part D costs. So, we’re starting off with a distorted marketplace. The biggest issue is patients aren’t really benefitting as much from this process as people might think.”

PBMs and their advocacy organizations have long advocated for incorporating these organizations into the pharmaceutical supply chain because they can help drive down spending for patients.

“You have pharmacy benefit managers telling you that their involvement in the supply chain and demands for rebates from manufacturers are helping keep costs down for patients, but what they’re not specifying is it might be helping keep premiums down,” Greenleaf said. “Patients still have to pay co-pays at the point of sale. These co-pays are based off a list price that’s been artificially inflated because of involvement by middlemen, like pharmacy benefit managers, that are demanding these rebates. In the end, patients are not better off, as their co-pays are based off those list prices.”

Specialty, community, retail, and mail-order pharmacies have all been impacted by DIR fees, with some facing significant financial burdens after receiving enormous retroactive bills. Pharmacy stakeholders have called for increased regulations on PBMs to prevent retroactive fees.

Bipartisan legislators have responded by introducing the Improving Transparency and Accuracy in Medicare Part D Drug Spending Act, which would effectively end DIR fees. Many pharmacy advocacy organizations, including the National Community Pharmacists Association, endorsed the bill, saying it would drive down prescription drug costs if passed.

“This is on the heels of the CMS report about DIR fees. This bill would prevent PBMs and Part D plans from retroactively reducing payments to pharmacies through DIR fees,” Greenleaf told SPT. “That’s important because the beneficiary’s co-pay is based on a list price before those rebates and pharmacy concessions. This bill is attempting to get at distortions that are caused by this complex supply chain.”

However, pharmaceutical manufacturers have also long been scrutinized due to rising costs. Recently, Mylan came under fire over the pricing of the EpiPen, which increased in price more than 500% in 10 years.

“When talking about drug costs, we have to take a hard look at the role played by everyone in the supply chain. That’s why I think it’s important to remember this recent Berkeley Research Group study showing that manufacturers are retaining less than half of all spending on prescription drugs,” Greenleaf said. “That right there tells you there are a lot of players involved here, and we need to take a holistic look at all of this when talking about reforms that need to be made.”

In the Berkeley report, investigators found that pharmaceutical manufacturers only realized 39% of initial gross drug expenditures, which means that 61% of profits are going elsewhere.

The complex nature of the supply chain can lead to confusion, and allow some to believe that pharmaceutical manufacturers are the only player that impacts drug costs because they set the list price.

Pennsylvania state Assemblyman Tony DeLuca (D-Allegheny) recently introduced state legislation that would require pharmaceutical manufacturers to provide costs associated with prescription drugs that cost more than $5000 per year/per treatment, and for drugs that have a price increase of 25% or more for a given year. However, this legislation does not account for other players in the supply chain who may impact pricing.

“To point to a list price, and just look at that on its own, you aren’t acknowledging the role played by PBMs and stakeholders in artificially inflating that list price,” Greenleaf told SPT. “I think it would be wrong to pursue any policy that simply targets something in isolation.”

To initiate a reform of the pharmaceutical supply chain, all stakeholders must be put under the microscope to determine what is working, and what is driving up costs. Legislators and stakeholders must collaborate to create a supply chain that truly reduces costs for patients. However, substantial changes will likely take an extended period of time.

“With any policy changes, it’s important to have all stakeholders at the table, and to really vet any policy that’s being debated, and flesh out unintended consequences that could arise. I think that’s an important part of the process,” Greenleaf concluded. “To have all stakeholders involved is critical because this is such a complex supply chain. You can’t rush these types of things. I think it will be a thoughtful, deliberate process, which usually doesn’t equate to a quick process.”