Power to the payers: PBMs leave behind a trail of tiers
Illustration: Roy Scott, Getty Images
Sometime in the late 1990s or early 2000s — neither the internet nor print sources agree on a specific year — one marketer, or perhaps many, came up with the idea of offering patients a card that would give them discounts on their co-pays for Rx drugs.
The adoption of co-pay cards back when they were called “consumer cards,” “point-of-sale cards,” and “100% co-pay cards,” per a 2002 Kaiser Family Foundation report, was tied to the introduction of tiered formularies that encourage the use of low-cost generic drugs with low co-pays and seek to slow interest in higher-cost branded medicines.
Fifteen years later, it's no wonder that patients, facing high rates of sharing costs, are in favor of co-pay cards — and that payers, tasked with footing the bill, are not. Drugmakers spent $7 billion on co-pay assistance programs in 2015, up 30% from 2014, according to data from IMS Health/Amundsen Group.
“While drug co-pay coupons may appear to help consumers, that's not actually what they're designed to do,” reads a July blog post by America's Health Insurance Plans, the health insurance industry's lobbying arm. “What drug co-pay coupons really do is keep costs high for everyone.”
The popularity of these cards has exposed the increasingly high rates of patient co-pays and co-insurance. This put payers, still on the hook for covering negotiated product prices, on the defensive. To stem rising prescription drug costs, PBMs have responded in kind: They have recently begun to lean heavily on tiered formularies, prior authorization requirements, and, more recently, formulary exclusions.
“These co-payments and co-insurance rates have changed dramatically,” says Ed Schoonveld, managing principal and leader of the market access and pricing practice at ZS Associates. “Many insurers and PBMs put more cost reductions in place and [required] more paperwork to make it hard to use these expensive options.”
The widespread use of co-pay cards highlights the ongoing tension between drugmakers and payers tussling over value. To make a long story short: Payers are now in charge, and it doesn't look as though that is going to change anytime soon.
Pharmaceutical products may have once been placed on a pedestal marked “innovative” and “lifesaving,” but drugmakers are now struggling to keep even the newest, most-innovative therapies on formularies. As a result, they are turning to big data to reinforce the value story of their products as they market them to a handful of very powerful PBMs and health insurers.
“We in the U.S. have got to get to a different model of healthcare,” says Dr. Steve Miller, chief medical officer at Express Scripts, which covers 85 million people. “Right now, we're paying Ritz-Carlton prices for Motel 6 services.”
The passage of the Affordable Care Act did more than provide insurance to millions of previously uninsured patients and new incentives to encourage a move from the traditional fee-for-service model to a fee-for-value system. It also led to a wave of consolidation among industry players.
Every major part of the healthcare industry — pharmaceutical companies, insurance providers, PBMs, makers of medical devices, hospitals, physicians' groups — has undergone significant consolidation, as each sector attempts to gain the upper negotiating hand. For instance, Express Scripts, CVS Caremark, and UnitedHealth Group's OptumRx — the three largest PBMs — now control about 75% of the market, putting them in a position to demand rebates on the drugs they cover.
That same consolidation trend has altered the landscape for commercial insurers as well. Four of the five largest commercial insurance companies in the U.S. — Aetna and Humana, and Cigna and Anthem — are attempting to merge in two separate deals, a move that in July raised Justice Department concern about competition.
What the payer consolidation trend has done is create pricing transparency, said Kim Wishnow-Per, president of McCann Managed Markets. “They could see what other payers were paying,” she says. “That started to enable them to have control over the cost of drugs.”
Finding new ways to control drug costs has become increasingly important, especially now that the drug industry has cycled out of a sluggish R&D period and into one that is bursting with Phase III trials and first-in-class product launches.
There are now 7,000 drugs in clinical development worldwide, 70% of which are first-in-class medicines, according to PhRMA, the drug industry's lobbying arm. Novel therapies that treat diseases like lung cancer and hepatitis C, which were previously hard to care for, are increasingly becoming the standard of care.
When Gilead Sciences launched Sovaldi, its game-changing hepatitis-C cure, in 2013, its decision to charge $84,000 for a course of treatment — that translates to $1,000 a pill — took a simmering debate about drug prices from the pages of medical journals and turned it into a national conversation about how drugs are priced. It was then that Express Scripts famously declined to put Sovaldi on its formulary, choosing to wait for AbbVie's Viekira Pak to receive FDA approval a year later.
“That was a really remarkable moment,” Schoonveld says.
That moment also served as a warning to other drugmakers. Insurers and PBMs would no longer cover even the most-innovative drugs if they exceeded certain price points and if the outcomes didn't match the expectations of payers.
PBMs have taken that thinking one step further, starting when Express Scripts introduced exclusions from its formularies. Traditionally, PBMs gave certain drugs non-preferred status, but rarely did they exclude coverage of a drug. But in 2017 CVS Caremark, the second-largest PBM, plans to exclude 155 drugs from its formulary. Express Scripts plans to exclude 85.
“The industry needs to make it clear to a broad set of stakeholders, including payers, that they can demonstrate the value of the innovation they bring forward,” Schoonveld says. “That is more key than ever in today's environment.”
As payers have developed new strategies to crack down on high-priced drugs, pharmaceutical companies have realized that market-access expertise is crucial during a product launch. Not surprisingly, they have moved to add many such experts to their brand teams. “Companies are looking at their structure,” Wishnow-Per says. “That integration is happening, and they recognize that influence and how it affects their brand.”
Cigna has inked a new payment model deal with Novartis for Entresto, its heart-failure drug.
LET'S MAKE A DEAL
In addition, some drugmakers are starting to collaborate with payers to test new payment models. Cigna has inked 10 value-based reimbursement models, starting with what it called a performance-based model with Merck's diabetes drug Januvia in 2009. More recently, Cigna has completed deals with Novartis for Entresto, its heart-failure drug, approved in 2015; for Harvoni, Gilead's second hepatitis-C drug; and for Sanofi's Praluent and Amgen's Repatha, a pair of competing PCSK9 inhibitors that came to market within a month of each other.
Cigna, like many other insurers, has started to test new reimbursement models with healthcare providers, as well as drugmakers. According to Christopher Bradbury, SVP of integrated clinical solutions and specialty pharmacy at Cigna, the greater the alignment between “the various stakeholders in the delivery system, the better off we'll be.”
The move toward value comes as a number of new cancer drugs are expected to be approved by the FDA. The launches of Bristol-Myers Squibb's Opdivo and Merck's Keytruda, both immuno-oncology drugs, and Pfizer's breast-cancer drug Ibrance have already caught the attention of physicians seeking new ways to treat their patients. The new drugs are both powerful and pricey. Opdivo, approved last year, costs $150,000 for the first round of treatment; it generated $942 million in sales in its first year on the market. These and other new cancer drugs are “going to drive an acceleration of this value-based discussion,” Bradbury says.
Still, the pathway toward a value-based system is not well defined and will present a host of challenges for both drugmakers and payers. Experts like Schoonveld believe there are few incentives for payers to consider the long-term benefits of a drug in the current system, in which short-term economics drive decision-making.
“We are in an era of scientific discovery for therapies for previously untreated problems,” Express Scripts' Miller says. “How are we going to pay for it?”
Correction: An earlier version of this story incorrectly described the types of agreements Cigna has formed with drugmakers. They are are value-based models.