A recent report by the Government Accountability Office (GAO) found prescription drug costs continue to rise faster than overall health care inflation – renewing lingering questions about the return public and private payers are getting for the billions of dollars they pay to major pharmacy benefit managers (PBMs) to lower drug costs.
GAO surveyed the “usual and customary” price of 100 commonly used prescription drugs between 2006 through the first quarter of 2010. They found that their cost increased at an average rate of 6.6 percent per year. That’s nearly twice the 3.8 percent annual medical consumer price index (CPI) for the same period.
Of that 100 drug sample, 55 were brand-name medications and 45 were generics. GAO found that the price of these brands increased 8.3 percent annually – more than double the medical CPI. By contrast, the cost of generics DECREASED by 2.6 percent on average each year.
“These soaring price increases seem to defy explanation,” U.S. Rep. Henry Waxman, D-Calif., Ranking Member of the Energy and Commerce Committee, said in response. Waxman also called for an investigation into rising prescription drug prices and a hearing on options for reducing costs.
For lawmakers and others seeking drug cost savings, a great place to start is with the billion-dollar middlemen known as pharmacy benefit managers, or PBMs. Most employers, government entities and other health plan sponsors hire PBMs to administer their plan’s drug benefit and usually with the assumption that they will lower drug costs. The new GAO report, coupled with several industry realities, suggest at least three ways in which the opposite is true:
- PBMs favor brand name drugs over generics. The appropriate use of generic drugs saves money, the GAO report affirms. Indeed, the agency found that, when consumer shifts in medication use (e.g., from brand to equivalent generic) were taken into account, the average annual cost increase was reduced to 2.6 percent. Community pharmacists consistently dispense generics more often than PBM-owned mail order pharmacies, possibly due to PBM pursuit of brand manufacturer rebates. In fact, the areas where costs are rising the fastest are also the categories in which PBMs exert the greatest control over plan design (brand name drugs and specialty drugs).
- PBMs face an inherent conflict of interest. The major PBMs, such as CVS Caremark, Express Scripts and Medco, also operate proprietary mail order pharmacies, and resist assuming a fiduciary responsibility to put the interests of clients (health plan sponsors) above profits. This can also lead PBMs to favor mail order and advocate restricting patients’ access to community pharmacies when better, less disruptive cost-savings strategies exist.
- Drug costs and PBM profits are both on the rise in lockstep. Over the previous decade, GAO found that drug prices consistently increased faster than the price of inflation. During much of the same period, some major PBMs enjoyed a five-fold increase in profits. By contrast, and to the surprise of many health plan sponsors, reimbursement rates for community pharmacists have been in decline for decades.
Increasingly, public and private payers are realizing improved savings through greater PBM transparency. Community pharmacists can also work with plan sponsors to increase the appropriate use of generic drugs. In terms of volume of drugs dispensed, retail pharmacies dispense low-cost generic drugs at a rate that is 10 percentage points higher than mail pharmacies. IMS Health found that for every 1% increase in generics utilization, health plans can realize 2.5% in savings.