This last week, I spoke with someone who works at an insurer. When I asked if it’s relatively easy for them to identify the pharmacy benefit manager (PBM) that’s offering the best deal, they said that it is, with caveats.
Quick sidenote: I’m finding kind people to answer my probing questions about PBMs, but I’ve also faced a fair amount of hesitancy in general. I think it’s because they worry what is going to happen with the information they are giving. I’m committed to being as transparent and unbiased as possible about the information I receive, and I’m equally committed to not disclosing any of my sources. So I guess that means I cannot prove the reliability of the information I’m sharing, but it’s worth it as long as I maintain access to good sources to help me understand this stuff!
Remember that for a market to be competitive it needs (1) multiple competitors, (2) the customers need to be able to identify the value (price and quality) of each competitor, and (3) the customers need incentives to choose the highest-value option.
The PBM market fulfills all these criteria pretty well. There are plenty of competitors (three big ones, several midsize ones, and lots of smaller ones). So, when an insurer submits a request for proposal (RFP), they will get multiple offers. Identifying the value of the proposals received is doable, if a bit tricky, as discussed below. And the insurer has incentives to choose the highest-value option–getting a great comprehensive formulary with the desirable meds makes for happy members, and lowering the costs goes to their bottom line (assuming there are no annoying medical loss requirement issues).
Let’s talk about the challenges that come into play when they try to identify the highest-value option. It’s actually pretty straightforward–these are incredibly complex contracts, to the point that regular healthcare consultants are not deeply specialized enough. And PBMs leverage that by trying to define things in ways that save them money. To the extent that, if an insurer wants to identify the best PBM proposal, they will probably need a consultant that specializes in helping insurers contract with PBMs. They need the help of someone who knows all the PBMs’ tricks.
I won’t even get into all the complexities of those contracts, partly because I don’t know many of them and partly because those details don’t change the big-picture incentives I’m talking about.
But the good news is that, with the right knowledge/assistance, insurers are able to make value-sensitive decisions in the PBM market! In fact, apparently many insurers submit an RFP every few years to make sure what they’re getting from their current PBM is still competitive, otherwise they’re probably leaving money on the table.
In response to some of my recent posts on pharmacy benefit managers (PBMs), as well as my overall interest lately in understanding the drug market better, someone asked what a value-based PBM would look like. Interesting question!
When analyzing healthcare from a “value versus volume” perspective, realizing exactly what we mean by that is an important starting point.
Consider what we mean when we say that healthcare providers are “rewarded for volume.” This is usually interpreted to mean healthcare providers are paid in a fee-for-service way–they deliver a service, they get paid. Which means they make more money when they deliver more services, so the incentive is to deliver as many services as possible.
And when we say that providers are “rewarded for value,” this is usually referring to some form of capitation, which means they get paid per head (that’s where the capit part of capitation comes from). In other words, providers would, for example, get paid a monthly fee for every patient whose care they are responsible for. Which means they make more money when they deliver fewer services (which, theoretically, happens when they are doing the right things to prevent their patients from getting sick).
These two methods of reimbursement are seen as “good” and “bad.” Capitation and its variations have good incentives (to prevent illness) and fee for service has bad incentives.
But they’re not opposites, like two sides of a coin or something. They are actually two different ends of a single spectrum. That spectrum is the “breadth of products/services sold as a single unit” spectrum. (I should come up with a better name for it.)
At one end of the spectrum, you have people buying very narrowly defined things. Like if a hospital really did send you a bill for every single nursing task and bandage and bag of saline and tablet of acetaminophen you received while you were there. This is the essence of fee for service–buying narrowly defined things. A doctor visit here, a procedure there.
The other end of the spectrum is buying very broadly defined things. Like paying a healthcare organization an annual fee for covering every single healthcare need that you could possibly have during that year, all inclusive. Every surgery and cancer treatment and emergency department visit etc. would be included.
I’ve written about all this before (way back in 2013!), but the way to figure out where on the spectrum the service should sit (i.e., how broadly defined the product/service should be) is to think about it from the patient’s perspective to see what “job” they want done that it’s fulfilling for them.
The easy example is if someone needs a hip replacement, let’s say they’ve tried all the conservative measures and now their job is simply to get their hip replaced and then recover/rehab from that. So why would they pay separately for the surgeon’s time, the OR time, the anesthesiologist’s time, the medications administered, the hardware used, the physical therapy appointments, the pre-op and post-op appointments, etc., when they could just pay a single lump sum to get their job fulfilled?
When we buy a plane ticket, we don’t pay a separate bill for the airplane depreciation, the fuel, the pilot’s time, the flight attendant’s time, the snack, etc., right? No, we just pay for the single plane ticket that includes all the products and services that go into getting us from point A to point B.
Using that principle of identifying the job to be done and then defining the service as broadly as is necessary to allow the patient to pay a single price for getting that job fulfilled will allow anyone to determine where on the “breadth of products/services sold as a single unit” spectrum anything in the world should sit.
So what about the drug market?
Much of the time, we know pretty well how long we’ll be on a medication. If it’s an asthma med, such as an inhaled corticosteroid, usually the patient will be on it for years or decades, so just knowing how much it costs per month is probably the right breadth of services.
Or, if it’s not a chronic medication, such as a cure for hepatitis C, figuring out the total cost of your direct-acting antiviral regimen is pretty easy if you at least know how much each pill will cost you and how many days (weeks) your treatment course will last.
My point is that the drug market, even though you’re typically buying either a short course of pills or a monthly allotment of them, is already “value based” because the breadth of products is attuned to the job you have for the medication (“keep my asthma at bay for 1 month,” or, “cure my hepatitis C”).
How do PBMs fit into all this?
Well, they’re middlemen. As far as I can tell, even though they’re the ones making the formularies, they aren’t really doing anything to actively shift the breadth of products sold one way or another, which is good because it already seems to be sitting on the spectrum in a good place.
Is there a role for including medications in capitated arrangements so that patients’ diabetes and hypertension and heart failure meds are all included in their annual or monthly fee? I guess that’s possible–it would encourage providers to choose cheaper meds, and it would decrease financially motivated medication nonadherence. So maybe PBMs would be involved in coordinating those efforts.
Ultimately, the big improvements that will change the drug market aren’t so much going to come from optimizations in the volume versus value space, but rather they will come from increasing competition and value-sensitive decisions. And maybe from limiting the degree to which PBMs distort the market? But I’m still figuring that one out.
In the “I’m still Confused by PBMs” article, I went through the step by step process of PBMs coming into existence, which they did by filling a need in the market for companies to help consumers pay the correct copay right up front when they buy a medicine.
This time, I want to think more about how they went from that simple software solution (integrating an insurer’s formulary into the pharmacy’s software system so that it can spit out the right out-of-pocket price on the cash register when a patient buys a medicine) to being seen by many as the “shady middlemen.”
The starting point is the position they found themselves in the market. They were responsible for creating formularies for several different insurers. Their goal, assuming the PBM industry is competitive, is to help insurers have the most generous formulary for the cheapest.
I bet at some point, some young upstart working for a PBM had an idea . . .
Young upstart: “If we want to offer a cheaper formulary than our competitor, why don’t we try to negotiate directly with drug manufacturers to lower the costs of the drugs?”
Old manager, feeling superior: “But how are we going to do that? You don’t understand that drug manufacturers only negotiate with pharmacy wholesalers. The wholesalers are the only party to which manufacturers sell their drugs. Nobody else buys directly from the manufacturers, so no one else can negotiate with manufacturers.” And then, with a taunting eyebrow raise, “Unless you are suggesting something radical, like that we start backward integrating to act as drug wholesalers as well?”
Young upstart, undaunted: “Not at all. How about this. Why don’t we pay a visit to a drug manufacturer that is selling a medication that has several competitors in the same drug category and make them an offer they can’t refuse. We could tell them we’ll put their medication in the lowest copay tier and all the other medications in that same category will still be in the middle copay tier. They will sell way more of their medicine and make a lot more money. But, in return, they have to pay us a “rebate” for every transaction of their medication that we process. They still make more money because they’re selling so much more of their medication, and we get some of it.”
Old manager, interest piqued: “And how is this going to allow us to offer a cheaper formulary than our competitors?”
Young upstart, gaining momentum: “We’ll simply charge less for insurers to use our formulary. Sure, they’ll have to pay a slightly larger share of the total cost of that specific medicine, but the lower price we offer them will more than make up for that. And the best part is, everyone wins! The drug manufacturer wins by increasing profit, the patient wins by paying a lower copay, the insurer wins by getting a cheaper overall formulary, and we win because we keep some of the rebate!”
Old manager, ever skeptical: “If everyone wins, then where is the money coming from?”
Young upstart: “The money comes from the other drug manufacturers, whose market share goes down. That profit that they’re losing is being divvied up among (1) us, (2) the drug manufacturer we’re contracting with, and (3) the insurers using our cheaper formularies, some of which will be passed on to patients.”
Old manager: “Ok, that makes sense, but this sounds too good to be true. You haven’t mentioned pharmacies yet–how would this impact them?”
Young upstart: “I was hoping you’d ask. This won’t impact pharmacies at all. They won’t even know about this transaction between us and the drug manufacturer. As far as they’re concerned, all they see is that they’re still getting paid the negotiated price for the medication, it’s just that patients are paying less and the insurer is paying more.”
Old manager, nodding: “So the patient pays less but the insurer pays more. Yet the insurer is saving money overall because our formulary is cheaper enough to more than compensate for that.”
Young upstart: “Exactly.”
And that is what I imagine to be the start of PBMs negotiating “kickbacks” with drug manufacturers. It was all in the name of PBMs being able to offer lower-priced formularies to insurers by orchestrating a way to help some drug manufacturers sell more drugs and get rebates/kickbacks/volume discounts in return.
This surely boosted the profitability of the PBMs that started doing it, which, when others heard about it, started doing the same thing.
Eventually, every drug manufacturer started paying some kind of rebate to PBMs, which means it became a zero sum endeavor overall for manufacturers because the net effect of having a higher market share through a specific PBM but a lower market through the others that made deals with their competitors means that they end up with essentially the same market share, the only difference being that now they are paying money to PBMs to avoid losing that market share.
Shady middlemen indeed. But I can’t blame them for doing it–this is what capitalism and competition is all about. It’s just a market failure that this specific strategy turns out to be a cost-increaser in the market.
Ever since the start of residency, the Journal of the American Medical Association (JAMA) has been delivered to my mailbox without me ever subscribing to it. They keep threatening to stop sending them if I don’t pay for a subscription, but I keep finding the journals in my mailbox. Usually I will glance at the titles of the articles and read the ones I find interesting. That is why, this week, I am writing about what I read in the viewpoint article, Reducing Low-Value Care and Improving Health Care Value, by Drs. Allison Oakes and Thomas Radomski.
They start the article by talking about how there’s a lot of low-value care delivered in U.S. healthcare, even in the absence of financial incentives for delivering more care. They cite some studies from places like the VA system and the Alberta, Canada, system (my home province!), showing how they, too, deliver lots of low-value care. This is their great encapsulation of that important insight: “The provision of low-value care when financial incentives are not present suggests that there are other motivating forces that contribute to overuse. . . .”
Next, they talk about regional variation, saying that from one region to another, there are “systemic differences in care delivery.” But how could doctors act so differently from one region to another? Their answer, at least in part, is that “organizational culture influences patterns of low-value service use. Individual organizations have distinct overuse profiles.” I like that phrase: distinct overuse profiles.
And it’s true. Very true. I’ve worked in the midwest, the northwest, and the mountain west, and I see it. For example, almost no one ordered blood ammonia levels at one hospital, and at another it’s an almost expected part of any workup of confusion, even if the patient has no liver history.
Another example: Just today a colleague was telling me about how if she ever ordered a certain kind of fluids (LR), she would get multiple phone calls checking to see if she’d really meant to order that. Evidence is fairly convincing these days that LR is usually better than normal saline, but that hadn’t caught on at her old hospital. At her new hospital, there’s literally a pop-up warning for anyone who tries to order normal saline that says, “LR is better.” And it offers to switch the order to LR for you.
Another example: At my current hospital, I very frequently see a urinalysis ordered on patients who presented to the ED without any complaints that would make me suspect a UTI. And since urinalyses are commonly falsely positive, those questionable urinalysis orders frequently lead to questionable antibiotic administrations. At other hospitals, the ED physicians’ culture is to have a much higher threshold for ordering urinalyses, and even when they are ordered, the likelihood of treating “asymptomatic bacteruria” is much lower.
Another example: The likelihood of the radiologist reading a chest x-ray as having an opacity that could be pneumonia seems to be different from hospital to hospital. And even if the patient hasn’t had any other symptoms of pneumonia, if they have any sort of respiratory complaint and the chest x-ray report says possible opacity “consider pneumonia,” it seems they always end up getting admitted for pneumonia and started on antibiotics.
These are just a few examples of how the practice of clinical medicine is so different from facility to facility in 1,000 tiny ways. And I understand why it happens.
In residency, your practice patterns are being strongly shaped by what your attendings do. But they’re also shaped, to a large degree, by the personal studying you’re doing and by presentations given at noon conferences and morning reports, where the presenter has spent a lot of time reviewing the newest evidence on the topic. There is a ton of active learning, and your connection to the newest evidence is fairly strong. Although, possibly as a side-effect of this, you also seem to add rare diagnoses to your differential more often, and this probably leads to more low-yield testing.
After residency, working as a regular attending not affiliated with a residency program, the focus is very different. The overall goal of practicing medicine is the same–delivering great care for patients–but there isn’t nearly as much active talk about ways your group might be practicing low-value care. (Instead, ensuring adequate coding and documentation dominates the discussion topics.) The connection to the newest evidence is a lot weaker. And there seems to be more of a focus on avoiding malpractice, which leads to having a lower threshold for ordering tests and scans for common diseases, which also counts as low-yield testing when the diagnosis in question is unlikely in that given scenario.
Individual physicians will still learn new things through personal study, but it’s an uphill battle to justify doing something different than your colleagues. So as you take over your colleagues’ lists of patients when you come on service, and as you take over newly admitted patients from the night before, you are frequently seeing and slowly being influenced by how others in your group are practicing medicine. The practice patterns naturally homogenize. I was once asked by a colleague to send an email to my hospitalist group about the evidence backing up something that I was doing because it was different than the other hospitalists.
This is how particular practice patterns spread and homogenize throughout an organization. Combine those effects with the other active pushes for practice pattern changes that come through leadership communications and EMR integrations (like the “LR is better” pop-up warning), and distinct overuse profiles start to make a lot of sense.
All these cultural factors that lead to systemic but regionally different low-value care delivery will need more than simply top-down Medicare reimbursement changes.
I stand by my solution that, if value-sensitive decisions in healthcare became more widespread, the financial incentives for decreasing low-value care would not only change the macro incentives, but they would be strong enough to induce healthcare managers/clinical leaders to go about finding creative and effective ways to make the organizational changes necessary overcome the cultural factors I’ve talked about in this post.
Last week was the first week in a long time that I haven’t had a Tuesday blog post. Sometimes life happens, and that’s ok. My interest and passion for fixing healthcare continues unabated.
Every time I try to remember the important details about pharmacy benefit managers (PBMs) since writing about them a couple months ago, I have to go back to that post and re-read it. This is annoying to me, and it’s a hint that I haven’t grasped them well enough yet. So this post is me trying to process PBMs more thoroughly.
I haven’t yet talked to anyone who works at a PBM (working on that–let me know if any of you readers have any contacts at one!), but pending that additional information, here is what I understand based on all my research.
But first, a meta thought.
Maybe you haven’t noticed in my writings, but I try to describe the problem needing a solution before I discuss that solution. When a solution is presented in the context of a clear explanation of the problem that preceded it, the solution becomes intuitive why it was created rather than coming across as “interesting and comprehensible yet still kind of a mystery as to its purpose or how it fits into the bigger picture.”
I believe most healthcare writers fail to coherently explain the problem before they start describing reforms, and it makes healthcare seem way more complicated than it is.
So, what is the context that created a need for PBMs? My understanding is this . . .
When a patient buys a prescription, the price of that medication is the result of a negotiation between the pharmacy and the insurer (unless, of course, the pharmacy and insurer have no agreement, in which case the total price is whatever the pharmacy has set it at). And that negotiated price gets split into two–the patient pays part and the insurer pays part.
At some point along the way, pharmacies and insurers must have decided that it’s undesirable for patients to pay the full price up front and also it’s undesirable for insurers to pay the full price up front.
Think about it. Patients would hate having to pay the full price up front and then get some of that reimbursed by their insurer weeks later. And patients would also hate to pay nothing up front only to get a bill from their insurer weeks later asking them to pay some crazy amount they never would have agreed to. Additionally, either one of those scenarios would create a post-transaction reconciliation nightmare.
The obvious solution would be to get pharmacies to charge patients the correct copayment right up front.
This would require insurers’ formularies and copayment policies to somehow get integrated into pharmacies’ software systems to calculate the price for the patient right then and there when they ring up the medication. This cannot possibly be a straightforward process, especially when miscalculations can cause people to lose tons of money and get very angry. Maybe large insurers have the resources to hire the right people and build the right process knowledge and software, but wouldn’t it be great if companies existed to do this sort of thing for them so they could focus on their core business?
Suddenly, hiring a separate company–let’s call it a “pharmacy benefit manager”–to do this for them makes a whole lot of sense.
Better yet, a large insurer, acting as an entrepreneur, could see this need in the market and create a spin-off subsidiary that could do that job for them and also do that job for a bunch of other smaller insurers. Boost that revenue, right?
Okay, that helped me to process many of the steps I’d skipped the first time I tried processing this topic. I tried to cover too much ground before. I will continue spending a little more time on these topics. I pity the fool who doesn’t find all of this fascinating!
Clear Thinking on Healthcare 