Pharmacy Benefit Managers
As Bargaining Agents
Lawrence W. Abrams Ph.D.
[email protected]
831-254-7325
Power Point Presentation
WEAI 80th Conference
San Francisco, July 6, 2005
Medicare Part D
 Subsidized insurance covering outpatient Rx.
 Largest expansion of entitlement programs in US in
decades
 Run by private sector entities called
 Pharmacy Benefit Managers (PBMs)
Misconceptions about PBMs due to
price theory
 PBMs receive rebates for “moving markets”
 Government (Medicaid) is a better rebate negotiator
that PBMs
Alternative view of PBMs based on
bargaining theory
 PBMs are a countervailing force extracting economic
surplus from Big Pharma
 Rebate averages are a poor measure of bargaining
power
 PBMs get less than government (Medicaid), but give
up less
Who is the better bargaining agent:
PBMs or the Feds?
 Recent Medco disclosure (November 28, 2004)
• Brand rebate average of 10.7%
 Recent CBO disclosure (June 21, 2005)
• Medicaid FFS basic brand rebate average of 19.6%
• Plus 11.7% inflation protection.
• Total Medicaid brand rebate average of 31.3%
Variability of rebate rates
 The formulary is a set of therapeutic classes
 A therapeutic class can be viewed as a market
• competitive
• monopolistic
• oligopolistic
 Bargaining theory predicts that rebates are paid only
in oligopolistic therapeutic classes
Rebates for what?
 PBM potential conflict of interest
 Drug Spend = (Usage)*(Utilization)*(Unit prices)
 Unit prices , but brand Utilization, drug spend 
Rebates for what?
NOT
 brand for generic Rx switch
• “breach of fiduciary duty”
• “sin of commission”
• detectable without PBM full disclosure of rebates
“Jury Still Out”
 abstaining from generic for brand Rx switch
• “not playing to win, but playing not to lose”
• “sin of omission”
• near impossible to detect – PBM full disclosure would not help.
Rebates for what?
 Not for “moving markets”
Table 2: Form ulary Tier 2 Preference
Proton Pum p Inhibitors
AcipHex
Prevacid Protonix Nexium
National Form ularies Big 3 PBMs
Caremark Rx Primary/ Pref erred Drug List ( 4/2005)
X
Medco Pref erred Prescription Formulary (2004-5)
X
X
2005 Express Scripts National Pref erred Formulary
X
X
X
Plan Form ularies of Clients of Big 3
Humana Rx3 Drug List 2005 (Caremark Rx)
AmeriGroup Medication Formulary 2005 (Caremark Rx)
QL
Coventry Non-Pref erred Alternative List 2005 (CaremarkRx)
PA
Oxf ord Health Plans PDL 2005 (Medco)
UnitedHealthcare 2005 PDL - 3 Tier (Medco)
Mutual of Omaha PDL Tier 2 (Express Scripts)
KEY:
X - Tier 2 Pref erred / No Restrictions
Pref erred w ith f ollow ing restrictions
SC - Step Care
PA - Prior Authorization
QL - Quantity Limits
QL
PA/QL
PA
PA
QL
QL
QL
X
Rebates for what?




Rebates are for abstaining from
discretionary
brand for brand Rx switching
in oligopolistic therapeutic classes
 Rebates are the fixed component of a two-part tariff
• “pay to play”
• barrier to “enantiomeric” entry by “me-too” drugs
Who is the better bargaining agent:
PBMs or the Feds?
Oligopoly
"Best Price"
Medicaid Fee-For-Service
Other
Theapeutic Classes
Therapeutic Classes
36% of Brand Spend
64% of Brand Spend
36%
64%
Rebate as % of AMP
Rebate as % of AMP
Rebate Rates Received…..
Weighted Average
Basic Rebate Rate
19.7%
27.9%
15.1%
Inflation Protection
11.7%
11.7%
11.7%
Rate + Inflation Protection
31.3%
39.6%
26.8%
In Consideration for…….
Giving up discretionary brand-brand therapeutic interchange
Giving up discretionary generic-brand therapeutic interchange
Medicaid MCO (Medco as PBM)
Oligopoly
Rebate Rates Received…..
Weighted Average
Basic Rebate Rate
In Consideration for…….
10.7%
Other
Theapeutic Classes
Therapeutic Classes
Rebate as % of Costs
Rebate as % of Costs
29.7%
0.0%
Giving up discretionary brand-brand therapeutic interchange
Medicaid FFS versus Medicaid MCO
Lewin study comparing drug benefit plans:
Available at www.ahcahp.org/publications/Working Papers/drug study.pdf
 Government (Medicaid FFS) delivers higher rebate rates –
by 15 percentage points
but
PBMs (Medicaid MCO) deliver lower overall drug spend –
by 10-15 percentage points
because of
• Higher generic utilization rates – MCO - 59%, FFS - 50%
• Lower usage rates – MCO lower by 15-20 percentage points