Ok I’ve got a couple more posts I wrote on pharmacy benefit managers (PBMs) to complete my efforts to work through what they are and how they work . . .
What do you think to yourself when you are at the supermarket and you see a toddler throwing a tantrum—clearly because he wants a chocolate bar—and then the mom, exasperated and embarrassed, finally agrees to buy him one just to shut him up?
Do you think, “What a bratty child! I’m glad she finally got him to be quiet.”
Or do you (correctly) think, “I can’t believe she just gave in to that! She’s teaching him that if he wants something, he should throw a tantrum until he gets it. That’s probably why he still throws tantrums.”
This child’s behavior makes sense. Not that it’s desirable behaviour! But you have to give him credit for rationally responding to bad incentives–he’s found a way to get what he wants, and he’s leveraging that.
Applying this to pharmacy benefit managers (PBMs), they definitely have some undesirable behaviours, but they also have bad incentives. I’m not here to be a PBM apologist, but I’m also not here to misdiagnose the source of the issues. If we understand the incentives and then work to get them changed, the behaviours will change accordingly.
So, how are we giving PBMs the proverbial chocolate bar?
The normal incentive of a business is to maximize profit. In a well-functioning market, businesses achieve that by delivering better value (Value = Quality / Price) to customers than their competitors. Problems arise when customers are unable to determine the value of their various options. This is where the bad behaviour sneaks in: the company can get away with charging more or delivering less than a well-functioning market would dictate, and the customers don’t know.
In a prior post, I talked a little bit about how the PBM market is competitive as long as insurers have enough knowledge and expertise at their disposal to accurately identify the true quality and cost of their PBM options. My guess is that insurers often do not have this knowledge and expertise at their disposal, either in house or by not contracting with a consultant who really knows their stuff. Or maybe sometimes the issue is that insurers remain with a PBM for too long, so they are no longer getting a competitive deal. Either way, it leads to insurers (i.e., the customers) not being actively aware of the value of their various options, and PBMs are acting accordingly.
Example: A friend of mine used to run a private health insurance company, and he told me they were getting 5% of rebates from their PBM. He asked for more, and the PBM responded by giving him double! There was lots more on the table apparently.
Another example: An auditor frequently hired by insurers to audit their PBMs’ performance said that, in more than 400 audits, “we have never found a single situation where something wasn’t wrong.”
How bad are PBMs acting? Or, in other words, how much are they taking advantage of this contracting complexity/lack of transparency?
You would expect it to show up in their profits. The trouble is, PBM profitability is incredibly difficult to ascertain. But here’s an elegant visual estimation of how many dollars each link in the supply chain takes from a $100 drug expenditure. PBMs are estimated to account for about $7 of those $100. I think the important point isn’t the amount so much as that $7 is more than it could be.
In summary, insurers often are not getting the best deals from PBMs. The business relationship with their PBM is governed by an incredibly complex contract, and this complexity leads to insurers not knowing what they are leaving on the table. So PBMs surreptitiously scoop it off the table and into their pockets. They are responding totally rationally to bad incentives.
In my mind, the implied solution here is either to (1) legislate/standardize these insurer-PBM contracts so that they’re simpler or (2) encourage insurers to be much more proactive about making sure they’re getting the best deal possible from their PBM (which would probably cost a lot of money in consulting fees or in developing that knowledge in house).
One more related point: When insurers have medical loss ratio policies governing how much money they have to spend on care vs. non-care expenses (the “medical loss” is the amount of premiums received that they spend on care for patients), they are going to be less aggressive in trying to pursue cost containment, which would include worrying less about the excess money going to their PBM.