Although PBMs are taking increasing heat for spread pricing — or charging payers more for a drug than pharmacies are reimbursed — they aren’t the only players in the drug supply chain that engage in the practice, a new study points out. And one of the study’s authors says its findings suggest that patients may be better off if generic drugs are simply removed from insurance coverage entirely.
The study, published in JAMA Health Forum on Oct. 20, examined data associated with 45 high-utilization Medicare Part D-covered generic drugs.
“Spread pricing is more of an issue for generic drug pricing than for branded drug pricing,” explains Ge Bai, Ph.D., one of the study’s authors and a professor at Johns Hopkins University’s schools of business and public health.
The federal government spent $11.8 billion (or $22.50, on average, per claim) on the studied drugs in 2021, researchers found. Out of that $22.50, $9.18 (or 40.8%) represented PBM gross profit; $3.87 (17.2%) was pharmacy gross profit; $2.71 (12.0%) was wholesaler gross profit; and $6.73 (29.9%) represented manufacturer revenue.
“The magnitude of the spreads for PBMs, pharmacies, and wholesalers is more than I expected,” Bai tells AIS Health, a division of MMIT. Together, those “spreads” accounted for approximately 70% of Part D program spending, she notes. “In other words, supply chain players take 70% of dollars,” and PBMs alone take 40%.
Congress Aims to Outlaw Practice
Spread pricing on the part of PBMs has been the target of numerous federal policy proposals in recent months that seek to restrict the practice. The Senate Finance Committee in mid-June introduced a measure that would effectively ban spread pricing in Medicare Part D by “delinking” PBM compensation from drug list prices and utilization. Another bill, which the Senate Health, Education, Labor and Pensions Committee advanced in May, would ban spread pricing in the employer group health insurance market. And the House’s Lower Costs, More Transparency Act would ban spread pricing in Medicaid.
The Pharmaceutical Care Management Association (PCMA), which represents the industry’s largest PBMs, is pushing back on attempts to ban spread pricing. In a white paper published in October — titled “Employers Choose Spread Pricing for a Reason” — the trade group noted that 34% of employers, 33% of labor unions and 26% of health plans “choose this risk-mitigation pricing model.” With spread pricing, payers and PBMs agree on a set reimbursement amount for each drug regardless of which pharmacy fills the prescription, so PBMs assume any financial risk should patients choose to fill prescriptions at costlier pharmacies, PCMA noted.
Yet the country’s dominant PBMs appear to already be preparing for the possibility of significant industry reforms, suggested a recent report funded by the Pharmaceutical Research and Manufacturers of America. The report, produced by Nephron Research, found that rebates and price protection will account for 13% of PBM gross profits in 2023, representing only a slight dip compared to 2020’s 14% but a significant drop compared to 2016 (25%) and 2012 (46%). The share of PBM gross profits tied to spread pricing has been more variable; it was 11% in 2023, 12% in 2020, 17% in 2016 and 9% in 2012.
The JAMA study’s authors appear to acknowledge those shifting PBM business models in the conclusion of their research letter.
“Policy efforts prohibiting spread pricing practices of PBMs may lower claim-level revenue retained by PBMs for generic drugs,” they wrote. “However, absent sufficient market competition, PBMs may raise administrative fees to sustain revenue. Therefore, it remains unclear how much spread pricing reform focused on PBMs alone would lower drug spending or strengthen the generic pharmaceutical supply chain.”
Switching to Cash Pay Could Yield Savings
When asked what a better policy solution would be, Bai tells AIS Health that “taking generic drugs off insurance coverage would fundamentally resolve PBMs’ spread pricing issue and allow patients and sponsors to obtain savings.”
Already, the cash prices patients pay for generic drugs can in some cases be cheaper than their cost sharing responsibilities when using their private insurance plans, Bai points out.
“As another example, Amazon Pharmacy has $5/month plan for common generic drugs. Why? Because insurance-added administrative complexity costs much more than the payment to drug manufacturers (recall that we found PBM spread pricing is $9.18 while the manufacturer gets $6.74),” Bai says. “In other words, the spread pricing from PBMs is already higher than the revenue received by drug manufacturers. Therefore, paying cash will benefit patients and plan sponsors through lower premiums.”
Matthew Feidler, a senior fellow at The Brookings Institution’s Schaeffer Initiative on Health Policy, says he agrees with the study authors’ conclusion “that regulating spread pricing is unlikely to save much money for consumers.” He reasons that “PBMs will be able to get money out of their clients [in] other ways, such as through higher administrative fees.”
As for Bai’s policy suggestion of removing generic drugs from insurance, Fiedler predicts that such a move would have both pros and cons.
On the plus side, it “would eliminate administrative costs generated by the PBM or insurers’ role in the pharmacy transaction, which could produce savings,” he tells AIS Health.
“On the other hand, it could increase burdens on consumers to shop around for a good price; if they’re not good at it, that could increase prices and, in any case, could add hassle costs for consumers. In many cases, it would likely also result in many patients paying more at the point of sale (since their insurance would no longer pay part of the bill), which could expose patients to greater financial risk.
“Higher financial burdens on patients could also have implications for adherence and, in turn, for health outcomes or downstream costs,” Fiedler continues. “I have not done a careful analysis on how all of these various effects all nets out, but if I had to bet, I would bet that the costs of removing these drugs from insurance would outweigh the benefits.”
This article was reprinted from AIS Health’s biweekly publication Radar on Drug Benefits.