Month: March 2021

Pharmacy Benefit Managers: Kind of a Mystery to Me

Let’s see if I can make sense of pharmacy benefit managers (PBMs), the companies that seem to have a reputation as shady price-increasing middlemen in prescription drugs. This is part of my effort to better understand prescription drug prices and what’s wrong with that market.

First, consider the flow of a medicine from start to end.

The obvious start is that drug manufacturers make the medicine. And then that medicine has to get to pharmacies. Pharmacies do not want to contract with every single drug manufacturer directly, so instead they use wholesalers, who do that contracting for them and buy the drugs from the manufacturers and store them, and then those wholesalers are able to quickly supply all the drugs a pharmacy could want for a small markup. I don’t know the details on whether pharmacies can shop around for the best deal on a drug from different wholesalers or if they just contract with a single one, but, regardless, now the pharmacy has its drugs, and this part of the supply chain seems to work properly.

Next, the patient. They buy the drugs from the pharmacy. If they’re going through insurance, the pharmacy inputs into their computer the medication details and the patient’s insurance information and then out of the black box comes an out-of-pocket price for the patient to pay to obtain the medication and a price for the insurer to pay (and that bill gets sent directly to the insurer). That’s the end of the line for the medicine.

But the tricky part is that final transaction, how the prices are determined in that black box. This is where the mystery and intrigue and confusion come in.

Let’s talk about PBMs.

Originally, the precursors of today’s PBMs were simply companies that helped insurers process medication claims after patients would buy them. I’m not sure exactly how they morphed into today’s version of a PBM, but based on what I’ve been reading, my guess is that it went something like this . . .

Insurers (especially smaller self-insured employers) wanted someone with expertise in all things medications to create a formulary for them–surely a very complicated process–and since these precursor PBMs were already processing all the drug claims anyway, they were an obvious choice to ask to take on the new role of creating and managing formularies.

Next, since these precursor PBMs were now making formularies for several different insurers, they inadvertently had amassed significant power over many patients’ out-of-pocket prescription prices (and, therefore, patients’ prescription choices). So when drug prices started to climb higher, these precursor PBMs wanted to stay competitive and offer formularies with all the best medicines for the cheapest, so they got into the game of negotiating directly with drug manufacturers. And that is probably the point where they became modern-day PBMs. The three PBMs with the largest market share today are Express Scripts, CVS CareMark, and UnitedHealth’s OptumRx

But if the drug manufacturer is selling their drugs to pharmacies via wholesalers, what are PBMs and drug manufacturer negotiating over?

Kickbacks for PBMs to get more patients to buy their medications. That’s really what it boils down to. Although the payments from drug manufacturers to PBMs can take various forms, the simplest one is that the drug manufacturer pays a PBM a nice sum for the PBM to include their drugs on the PBM’s formulary. The PBM then passes some of this money on to the patients by lowering their copay for those drugs.

There are a lot of hidden details in these PBM-drug manufacturer negotiations. It’s an area rife with hidden numbers. The main question is, How much do PBMs actually get paid (including all the different forms of kickbacks) from the drug manufacturers? Nobody knows. There have been government attempts to force them to disclose this, but the laws only require them to report on certain kickbacks, and it’s probably not too difficult for them to look really good by shifting the majority of their kickbacks to different categories that are not reported.

My other question is, How do insurers choose a PBM? This should be a fairly answerable question with the right contacts. Is this a fairly transparent market, where insurers can go to each PBM and ask how much the total cost will be of the drugs their patients will get, plus the fees paid to the PBM? Based on the sheer complexity and number of variables involved, I doubt the PBM selection is easy and transparent. This means PBMs can get away with not only hiding how much they are getting paid by drug manufacturers, but also not passing much of that money on to the patients and insurers. And nobody will ever know truly how much these middlemen are adding to our skyrocketing drug prices.

NEJM’s Fundamentals of U.S. Health Policy, Part 5: Getting Rid of Health Inequities

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Let’s talk about health inequities. This is the topic of the 5th (of 7) paper in the New England Journal’s health policy fundamentals series. This one is written by Michele K. Evans, M.D.

My research emphasis is on systemwide financial incentives to improve value, which means I do not talk on here very much about the nitty gritty of health disparities. I do, however, regularly comment on the big-picture aspects of health disparities, usually by saying that it’s important for society to determine how much care citizens should be guaranteed and then to go about getting that to them in ways that don’t undermine the financial incentives in the system.

Having a clear idea of what we mean when we throw terms like “health inequities” and “health disparities” is a good place to start, and I love the definition that Dr. Evans provides:

Health inequities are “inequalities that are deemed to be unfair, unjust, avoidable, or unnecessary, that can be reduced or remedied through policy action.”

So not every inequality is bad. And of the ones that are, not all of them can be reduced or remedied through policy action. There are facts of genetics and demographics and even socioeconomics that lead to appropriate inequalities or that lead to inappropriate inequalities that there is no way to fix through policy. So, the ones that are bad and are amenable to policy solutions are what we are calling “inequities,” and they are what we are interested in. (By the way, in case you hadn’t noticed, this topic falls squarely into the wealth redistribution spectrum.)

After the definition, she goes on to write about several aspects and causes of inequity, notable inclusions being the unresolved carryforward effects of our nation’s history of racism and slavery, intergenerational poverty, White supremacy, and our unwillingness “to respect Indigenous Americans’ rightful claim to their native lands.”

What currently has the most profound effect on health inequities? Probably access to stable health insurance coverage. The unfortunate fact that our American healthcare system uses employers to provide health insurance makes this worse because minorities have higher unemployment and underemployment.

Dr. Evans also goes over some data on the underrepresentation of minorities in health professions, and then she makes this somewhat perplexing (to me at least) statement:

“Underrepresentation [of minorities in medicine] further intensifies health disparities by limiting the pool of culturally competent clinicians who can offer appropriate leadership in both academia and patient care.”

I guess by “culturally competent,” she is meaning someone who is a member of or who at least has a deep understanding of minority cultures.

She then gets more political, and this is interesting to me, so please allow a brief detour . . .

I have noticed that in perspective articles like this in NEJM and other medical journals, outright “liberal” statements are given boldly and unapologetically; on the other hand, outright “conservative” statements are eschewed in favor of couching in general values and academic speak. I think this is a reflection of academic medicine’s general political persuasion, which extends to judging which positions are socially acceptable and unacceptable. It makes me sad that both sides are apparently not equally able to give their opinions directly and powerfully because they both have essential contributions and ideas and conceptions of values that must be understood if we want to make a truly thoughtful decision about how to address health inequities. And, if this commentary is making you wonder about my personal political biases, I’ve disclosed them before here.

Anyway, Dr. Evans gets more political: She refers to the Declaration of Independence and the Constitution and says they incorporate the ideals of a social contract, which she defines by saying “the state exists to serve the people’s will.” But then she writes, “Fracturing of this social contract has reinforced inequality, inequity, and poor access.” Is our social contract fractured? Is having health inequities somehow the same as our government not reflecting the people’s will? She seems to think so. Regardless, we do need some serious changes to our political system, and this book should be required reading for any political reformer.

Finally, Dr. Evans gives some recommendations: Provide adequate income and educational supports to lift all children from poverty, stage a frontal attack on racial and gender pay gaps and on occupational segregation, and recognize health care as a human right.

There you go. This was a great primer on what you can expect to hear from most researchers and health policy folk on the topic of health inequities!

Why Does GoodRx Exist, and How Does It Work

Stacks of GoodRx cards sent to me at my place of employment

Last week, I wrote about pharmacy benefit managers (PBMs), which are the companies that insurers contract with to help them create and manage their drug formularies. These PBMs also have significant power in the market as the ones who, to a fair extent, influence which prescriptions patients get because they control the patient’s copay for each medicine, so they take advantage of that by getting kickbacks from manufacturers to make those manufacturers’ drugs cheaper for patients.

And now PBMs come into play again this week as we look at GoodRx. The most useful source I found when reading about GoodRx is right on the company’s website, an FAQ for pharmacy staff. Also, this review of their public filings was very helpful.

First, what is GoodRx? It’s a company that offers a free prescription card that patients can use to get discounts on their medications, and you can check what the discounted price will be at pharmacies in your area. (They’ve since branched out now into subscription programs and telehealth, but I’ll focus on their original line of business here.) GoodRx prescription discount cards don’t work in addition to insurance; rather, you either buy the medication through your insurance plan or you pay without insurance and use a GoodRx card to get a better price.

I have no financial interest in GoodRx, but it seems like a no-brainer for anyone who is about to buy a medication through insurance to ask how much their copay will be and then pull up the GoodRx app right then and there to see if any local pharmacies can offer the med cheaper through GoodRx (and, according to a couple journalists who tried that, they got a cheaper price through GoodRx about 40% of the time for the most commonly prescribed medications). Just remember though that the money spent on medications when using GoodRx does not count toward your deductible.

It makes sense that there would be a website/app that lists the prices of medications at multiple pharmacies so patients can price shop, but what’s with these discount card prices being lower than the cash prices?

Pharmacies, in their contracts with PBMs, will not get paid more than their list price. So, to avoid missing out on money that PBMs would be perfectly willing to pay them, they make sure to set their list price (i.e., cash price) higher than what any contracted price with a PBM will be. So you should expect cash prices to always be higher than the price you’ll get by going through your insurer, although I’m sure this rule is broken sometimes. Because it’s American healthcare.

On the GoodRx website/app, the prices shown are not cash prices though. They’re the actual prices that pharmacies have contracted with PBMs. These prices vary significantly from pharmacy-PBM contract to pharmacy-PBM contract, mostly because of the complexity and sheer number of different medications that they are negotiating over, which means they cannot possibly negotiate over every individual medication, so instead they negotiate over groups of medications. This means some medications in that group will end up being cheaper than they would otherwise be, and others in that group will end up being more expensive.

This is summed up nicely in a quote by GoodRx co-founder, Doug Hirsch: “We said, let’s see if we can gather all these prices and see if we can exploit the variation in these contracts.”

But this means pharmacies are stuck selling medications to tons of people at prices that they accidentally undervalued in a negotiation with a single PBM. Sure, short of adding a gag clause to their contract, they can’t stop the PBM from sharing that price with GoodRx, but why in the world would pharmacies ever agree to let tons of other patients not even covered by that PBM walk out with a medicine for that same undervalued price?

They actually don’t have a choice. PBMs require in their contracts with pharmacies to accept the GoodRx discount card price. GoodRx does try to make pharmacies feel better about it by saying that “once patients are in the pharmacy, they are also more likely to purchase non-prescription items at the store.” Ok great, so the medication turns into a forced loss leader.

There’s one more big piece to this puzzle. Why would PBMs go along with GoodRx in the first place? Think about it from their perspective. They are angering pharmacies by forcing acceptance of GoodRx as part of their contracts, and they are the ones sharing all their contracted prices with GoodRx and then left looking bad after patients find out their PBM didn’t get the best negotiated price on a large minority of medications. In short, what’s in it for the PBMs?

Money. I suspect the PBM is getting a cut of every transaction that uses GoodRx because the PBM is the one adjudicating the claim. They’re also giving a cut of it to GoodRx as a reward for bringing them the extra claim.

PBMs and GoodRx both seem to win, as do patients if they’re finding lower prices. So if GoodRx is actually decreasing prescription spending, where is the money coming from? There’s only one party left. Pharmacies must be the ones taking the loss. I wonder if that loss-leader argument actually makes pharmacies more than they are losing on this whole venture. My suspicion is that it’s hard to prove one way or the other, but I doubt it.

NEJM’s Fundamentals of U.S. Health Policy, Part 4: What Will It Take to Improve Quality?

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Continuing on with The New England Journal of Medicine’s Fundamentals of U.S. Health Policy series, we now get a primer on healthcare quality.

I think Dr. McGlynn starts with a great framing of the problem: After nearly two decades of experimentation with several of the best ideas about how to improve quality, there has not been much progress. Sure, new innovations (drugs, devices, procedures, etc.) have increased what we can do, but our overall ability to deliver evidence-based care to Americans is not really improving. She shows a great graph looking at our progress at getting people’s blood pressure under control. The percent of people whose blood pressure is well controlled has not, on average, gone up much in the last 18 years.

In other (blunt) words, we suck at care delivery innovation.

Why? Well, her answer looks at it from the structure-process-outcomes framework, which she describes and then proposes some solutions. My answer is two words: financial incentives. I won’t re-explain it here, but this post is a good start.

The structure-process-outcomes framework is a useful one, so let’s talk about it for a second. Those are the three major dimensions that can help to define quality, according to Avedis Donabedian.

Structure refers to things like clinic personnel (such as after-hours doctor access and care managers to check on high-risk patients), access to records that provide lists of patients with certain needs (like how many uncontrolled diabetics haven’t had an appointment for more than three months), and also basic facilities and management things. Getting the right structure is important because it provides the foundation for the other two dimensions.

Process refers to things we do, such as prescribing beta blockers and ACE/ARBs to patients with systolic heart failure, and ordering age-appropriate cancer screenings.

Outcomes refers to how the patients actually fare. How many have well-controlled blood pressure and diabetes, how often heart failure and COPD patients get hospitalized for exacerbations, etc.

We can measure any of those three things, and often we try to link them to reimbursement. Although, as Dr. McGlynn pointed out at the start, it hasn’t worked.

As a side note, trying to link reimbursement to the outcomes dimension is especially unpopular amongst providers because they can do everything right and prescribe all the right meds and schedule all the necessary follow-up appointments, but they can’t control whether the patient actually takes the medications and follows up, which means providers are often getting penalized for things that they don’t have control over.

Anyway, now you’re familiar with one of the foundational frameworks that has been used to approach quality improvement in healthcare.

Dr. McGlynn’s proposed solutions are very academic: focus more on social determinants of health since they often have a bigger impact on health than do medical treatments, start measuring things differently (stop measuring discrete events because that worsens fragmentation, use the more clinically meaningful EHR data for measurement rather than insurance claims data), and do a better job linking healthcare systems with appropriately resourced public health and community-based services. I believe all of them are important and will be helpful but not transformational like the solutions illuminated by the Healthcare Incentives Framework.

Lastly, I want to push back against one of her conclusions. She talks about how there has been little relationship found thus far between methods of financing and quality, and then she says, “Financial incentives alone cannot fix fragmented and reactive systems or create the operating systems required to enable reliable delivery of high-quality care.” And while I agree that financial incentives alone cannot fix our healthcare quality, I feel like she’s implying that it’s not the core mechanism of change and is instead just another lever we should consider using. I could be misreading that though. But whether I am misreading her or not, thinking of financial incentives as just another lever among many to improve healthcare quality is a generally held sentiment among healthcare experts. It’s another symptom of how healthcare experts misinterpret data and come to incorrect conclusions.

I’ve done the best I can on this blog to show that such a sentiment is incorrect. I’ve tried to explain that financial incentives are the core mechanism we have to induce change in the healthcare system, just as they are the core mechanism that makes every other industry function the way they do. And even though healthcare is different from other industries in many ways, those differences do not fundamentally alter the role of financial incentives in healthcare.

And that is why my answer to the question, “What will it take to improve quality?” is to systematically fix financial incentives first and then watch the quality-improving innovation emerge and expand.

The Political Philosophy of Pricing

Let’s get into a little bit of political philosophy. Here’s my logic flow that sets the context for this discussion. This is my first crack at laying this out, so I hope it is easy to follow:

  1. An efficient economy is desirable because it raises the general standard of living, which can help more people escape from the limiting effects of poverty.
  2. An efficient economy is one that enables resources to be put to the best use.
  3. Prices are central to helping resources be put to their best use. Only market-generated prices can accurately convey the true and current value of something, as explained by all the following points.
  4. The market-generated price of something is determined by (1) the cost of all the inputs and (2) people’s willingness to pay.
    1. The cost of all the inputs is determined by the price at which those inputs are being sold by suppliers. And those suppliers are setting their prices according to the same two factors (the cost of their inputs and people’s willingness to pay).
    2. People’s willingness to pay is an aggregation of the different potential buyers how much that input is worth to each of them, which depends on if there are substitutes and, if so, the relative price and quality of those substitutes for their specific use case.
  5. The numerous supplier-buyer diads, taken together, form a supply chain, and at each link in the chain there are prices being set in accordance with those same two factors.
  6. New uses for resources are constantly being developed, and the availability and procurement cost of resources are also constantly changing, all of which have ripple effects on the prices of all other resources in the economy as mediated by changes in those two factors that determine market-generated prices.

I’m sure that logic flow will need to be clarified and changed, but it is a start at least. And the conclusion of it, at least as it relates to administrative pricing, is that there is no way a group of experts could ever acquire enough information to accurately determine the proper efficient-economy price for a single product at any point in time, let alone constantly adjust that price over time to take into account the ever-changing factors in every locality.

The way Friedrich Hayek said it in his seminal paper, The Use of Knowledge in Society, is that “the knowledge of the circumstance of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” And, therefore, “Prices can act to coordinate the separate actions of different people.”

He gives an example of this using the tin market, showing what would happen when suddenly there arises a new use for tin:

“All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.”

I do not think people argue that administrative pricing is as efficient as relying on market-generated prices. But from this it should be clear that those two prices are going to end up being wildly different from each other most of the time, and the challenge is to quantify the efficiency cost to the economy of that and then to weigh it against the estimated benefits of using administrative pricing.

Or, in cases where administrative pricing is being proposed in an attempt to curb our capitalistic society’s wealth inequalities, why not just use other methods to redistribute wealth and avoid administrative pricing’s efficiency costs on our economy altogether? This is what I’ve described in my examples of an optimal single-payer healthcare system and an optimal government-run healthcare system.