The pharmacy benefit company industry isn’t the black box mystery that I have heard some claim. There is a lot of information available by a variety of authors – from non-profits to government agencies and academics – about the ins and outs of the industry, some of which I have discussed in this blog. Dr. Lawton Robert Burns, a professor at the University of Pennsylvania Wharton School and an expert on the medical and prescription drug supply chains, took a deep dive into pharmacy benefit companies and shed light on the role of PBMs. Dr. Burns concluded what I have long argued: “PBMs promote competition in healthcare and help to reduce prices.” So, let’s break down how Dr. Burns describes the role of pharmacy benefit companies.
Dr. Burns explains three important ways that pharmacy benefit companies lower costs and improve quality: deploying contracting tools, leveraging efficiencies through bargaining power, and formulary development. Pharmacy benefit companies’ contracting tools include negotiating discounts and rebates from drug companies, creating pharmacy networks (which creates competition where pharmacies offer better rates in exchange for increased patient volume), and risk mitigation for payers through “spread” pricing. Pharmacy benefit companies have long been using these tools to reduce drug costs for patients, health plans, and employers. They have also provided “integrated pharmacy services” to employers and other health plan sponsors that includes claims administration and adjudication, mail-order pharmacy, and clinical oversight – all to improve quality for patients and reduce costs for payers.
In addition to lowering costs, Dr. Burns notes that pharmacy benefit companies use their contracting tools, bargaining power, and formulary process to promote competition within the prescription drug supply chain.
Pharmacy benefit companies use their collective scale to negotiate with drug companies. They then are able to exchange the volume created through scale for lower unit prices on prescription drugs. So essentially, they use the scale of bargaining on behalf of millions of people – like bulk purchasing without the actual purchase – as a way to negotiate discounts, in this case in the form of rebates, from drug companies.
The formulary development process can drive competition among drug companies for preferred formulary placement. Pharmacy benefit companies develop formularies using their Pharmacy and Therapeutics (P&T) committees by first considering clinical factors to identify drugs that are therapeutically equivalent, and other drugs that lack competition and must be included on formularies. When drugs have competitors, it allows pharmacy benefit companies to leverage competition among drug companies by exchanging formulary placement for price concessions.
Dr. Burns makes it clear that pharmacy benefit companies do not price or sell drugs and are not health care providers. However, they do serve the public’s welfare by controlling the rise in health care costs and maintaining patients’ health quality through their role as intermediaries in the drug supply chain. In a Wharton Business Daily podcast, he says that Members of Congress, looking for someone to blame for high drug costs, are scapegoating PBMs, when the problem lies elsewhere.
Read more of Dr. Burns’ views on PBMs in his published book entitled “The Healthcare Value Chain: Demystifying the Role of GPOs and PBMs,” which takes a deep look inside the prescription drug supply chain and the critical role pharmacy benefit companies play in securing savings for patients.
Listen to his interview with the Wharton Business Daily HERE.
Read his full op-ed in The Hill HERE.
Dr. Burns is not affiliated with PCMA.