Pharmacy Benefits Uncut

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If you’re like most employers, your PBM establishes and manages your drug formulary on your behalf. It may provide options for you to choose from such as a standard formulary, a managed formulary or a value formulary, but at the end of the day it decides which drugs are included, not you.

On the surface this might seem like the easiest, most efficient option because heck, you don’t have the knowledge or bandwidth in house to take on this task. And your PBM tells you they’re making evidence-based formulary listing decisions based on expert recommendations of their Pharmacy and Therapeutics Committee.

So what could go wrong with this arrangement? A lot, it turns out.

Let’s take a look at why relying on your PBM to manage your formulary might be driving up your drug spend rather than helping you achieve value for your pharmacy dollars.

What is a drug formulary?

Before we dive into how your PBM might be manipulating your formulary to pad its bottom line, let’s discuss what a drug formulary is and what its purpose should be.

Simply put, a drug formulary is a list of drugs reimbursed by a plan sponsor. It should incentivize the use of cost-effective drug therapies, that is the lowest cost, most clinically effective drugs. Drugs on a formulary are often organized into different levels, or "tiers," with each tier have a different co-payment or reimbursement level, the goal being to encourage the use of these lower-cost, clinically effective drugs instead of more expensive, less effective drugs yet still provide access to these treatments when needed. Drugs placed in the lower tiers (like Tier 1) usually receive the highest level of reimbursement, while drugs in higher tiers (like Tier 2 or 3) are reimbursed at a lower level, require higher out-of-pocket costs for plan members, and may be subject to prior authorization or step therapy requirements.

Formulary listing decisions should be made by a Pharmacy and Therapeutics Committee composed of physicians, pharmacists, nurses, health economists, and clinical experts with in-depth knowledge of specific disease states or therapeutic areas. This committee should consider evidence on a drug’s clinical effectiveness and cost-effectiveness along with other factors such as safety, adherence concerns, and health equity.

All sounds very reasonable, fair, and systematic, right? But behind this facade, PBMs often manipulate formularies to boost their profits driving up costs for both you and your plan members.

Let’s take a look at how they do this.

Rebates and the Pay-to-Play Scheme

The most powerful lever PBMs have at their disposal to manipulate your formulary is rebates. These are payments from manufacturers to PBMs to ensure favorable formulary placement of their products.

Here's how it works:

A pharmaceutical manufacturer wants its drug on the lowest formulary tier to encourage use and avoid prior authorization requirements.

So the PBM negotiates a rebate with the manufacturer, with a more favorable tier placement commanding a larger rebate. Along with this comes the greater likelihood that doctors will prescribe the drug for plan members, thereby increasing profits for both the manufacturer and the PBM since the PBM retains a portion of this rebate.

This creates a perverse incentive for PBMs whereby manufacturer rebates rather than evidence-based considerations are used to guide formulary listing decisions.

Now let’s look at the downstream consequences of this rebate-driven formulary system.

Formulary Exclusions

High rebates are most commonly associated with high-cost branded drugs, while lower-cost generic drugs are often not associated with rebates. This leads PBMs to exclude these lower-cost options from your formulary in favour of high-cost, high-rebate alternatives, even though generic drugs are often equally effective. This practice ultimately leads to higher costs for you, the plan sponsor, as well as your plan members who incur higher copays based on higher list prices.

The Big 3 PBMs now exclude hundreds of drugs from their formularies, providing potent negotiating power over manufacturers, forcing them to offer larger and larger rebates to prevent their products from being removed from a formulary.

Formulary Tier Manipulation

Rebates also incentivize PBMs to move drugs between formulary tiers to promote the use of drugs with larger rebates by placing them on lower tiers with fewer prescribing restrictions and reduced copays while placing alternatives that may be cheaper and more effective on higher tiers, thereby restricting their use. Here again, the PBM’s bottom line, rather than what’s in the best interest of you and your plan members is underpinning these decisions.

Limitations on Biosimilar Penetration

Curbing access to lower cost biosimilars is yet another way rebates influence formulary listing decisions. Again the preference for high-cost, high-rebate drugs is what’s limiting plan members’ access to these therapies, which in many cases could yield savings of 50% of more compared to their reference biologics.

As such, biosimilar uptake in the employer-sponsored market has been less than ideal: for many biologics with corresponding biosimilars, these biosimilars make up less than one third of drug usage with most patients remaining on the much more expensive reference biologics. Given that biologics make up almost 50% of US drug spending, that’s a lot of savings being left on the table.

Even when biosimilars are included on a formulary, they may not necessarily reduce plan members’ out-of-pocket costs, yet again because of the PBM’s preference for high-cost, high-rebate drugs, which extends to their decisions about which biosimilars to include in your formulary.

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How to Take Control of Your Formulary

Ideally decoupling your formulary decisions from your PBM, is the best way to ensure these decisions are made based on evidence, rather than on what’s most profitable for your PBM. Working with a vendor specializing in formulary management is the best way to do this.

Recognizing that carving out your formulary is a big task and may not be possible, here are a few things you can do to make sure your formulary is working for you and your plan members rather than your PBM’s bottom line:

1. The most important thing you can do is understand that rebates work in your PBM’s favor, not yours. Break your addiction to rebates and focus on obtaining the lowest net cost for drugs wherever possible. If you can pull this off, you’ll essentially wrest from your PBM the power to put their profits ahead of your plan members.

2. Require your PBM to inform you of all changes to your formulary and the rationale behind them. Is there evidence credibly demonstrating that a newer, more expensive therapy does indeed lead to better health outcomes? Or did the PBM simply negotiate a bigger rebate for this new product?

3. Make sure you have access to all your data and analyze it independently. Determine whether your drug utilization patterns are consistent with the goal of providing your plan members with the most clinically effective therapies at the lowest possible cost.

4. Ask lots of questions. In many cases your PBM is assuming you don’t know what they’re doing behind the scenes and how their profit-driven system works. Oftentimes a simple question can lead to big results. For example, asking why the lowest net cost biosimilar isn’t included on your formulary might be all it takes for your PBM to make a change.

Optimizing your formulary is about engineering it so that it serves you and your plan members, rather than your PBM. It starts with understanding that often your PBM’s interests and your interests are misaligned when it comes to your formulary. And once you know how this game is being played, you have to power to change it.

And that's all for today.

See you in two weeks,

Nina.

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Pharmacy Benefits Uncut is produced by Healthcare Decision Making, a consultancy that helps small and medium sized employers optimize their pharmacy benefits plan. We offer a comprehensive range of services focused on three areas: PBM procurement, ongoing management of your pharmacy benefits plan, and self-policing and oversight of your pharmacy spend. To learn more about how Healthcare Decision Making can help you, email Nina Lathia at nina.lathia@healthcaredecisionmaking.com

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