Q&A with Antonio Ciaccia of 3 Axis Advisors: ‘PBMs aren’t really PBMs anymore’

Can you give us some background on these pharmacy benefit manager lawsuits? Which companies have been sued and what are the allegations?

It’s more of who hasn’t been sued at this point. The largest players in the PBM marketplace have found themselves swallowed up in a number of controversies, a lot of them originating in state Medicaid programs. My home state of Ohio really started a bonfire with suits against CVS Caremark, OptumRx and Envolve, which is a PBM most people know of under the Centene banner.

In 2018, the state of Ohio found that while pharmacies were being paid very low reimbursement rates for the Medicaid managed-care program, they weren’t really seeing the savings as a state agency. An audit from then-state auditor Dave Yost found PBMs taking about $244 million in hidden spreads by paying pharmacies low, billing the state high and pocketing the difference. That was a catalyst that kind of started a tidal wave of lawsuits and litigation across the country.

Have PBMs changed their operations as a result of these lawsuits?

A lot of folks in the industry will refer to this as a game of whack-a-mole, partly because PBMs aren’t really PBMs anymore.

PBMs are insurance companies. PBMs are mail-order pharmacies. PBMs are specialty pharmacies. In the case of a company like CVS Caremark, they are a retail pharmacy.

PBMs used to exist for the sole function of facilitating the claims transaction at the pharmacy counter as well as working on the behalf of consumers to act as a necessary friction against drugmakers, wholesalers and pharmacies who, left to their own devices, would charge as much as they could get away with.

Over time, as PBMs started to get compensated from drugmakers, opening their own pharmacies and making money off the very transaction they were hired to control, that traditional role has been flipped on its head. Typical and traditional regulatory approaches to smoothing out some of the margins become quite complicated when those margins can shift upstream or downstream across the enterprise.

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Have public and private payers changed their operations as a result of these lawsuits?

We’re seeing more Medicaid programs take a proactive approach. Rather than just whittling around the edges, they are essentially blowing up their (drug) programs and starting from scratch by working with new vendors or completely redesigning the model to hold PBMs and the pharmacies that service the members in a position of more predictability and transparency.

That has extrapolated considerably to other public sector agencies. We’re also seeing more employers taking a laser focus and seeing how some of the practices that are being uncovered at the public level might be manifesting themselves in the commercial sector, where transparency is not nearly as stringent.

Can you give us some examples of how public and private payers are either blowing up their PBM operations or partnering with new players?

A perfect example is the Purchaser Business Group on Health, which made headlines last year after announcing that they were creating their own PBM, EmsanaRx. They have since launched it as a public benefit corporation. On the surface it seems like a more aligned, altruistic approach to a market entrant, one that seeks to truly do nothing but serve the client rather than its shareholders.

PBGH represents some of the largest employers in the country. That’s a perfect example of a payer saying, “We’re not going to continue to do business as usual. Not only are we going to try to do what we can from a policy standpoint, we’re going to put our money where our mouth is and push for a private market entrant to help upset the applecart.”

Simultaneously, we’re seeing a lot of headway with transparent PBMs, like Capital Rx, and we’re also seeing a lot of headway with the Mark Cuban Cost Plus Drug Company. What excites me about that is, in a world where we operate off of artificially inflated list prices, Cuban is saying, “Well, let’s just work on achieving the lowest net cost possible and deliver that to the consumer.”

What do these lawsuits tell us about PBMs’ role in determining drug prices?

They should be a wakeup call for everybody, from lawmakers and the general public to everybody that pays the bill for prescription drugs.

Vertical integration and increased market consolidation have made the role of PBMs incredibly complicated. No longer can we trust that they are here to truly work on our behalf. As we look at ways to curtail the U.S.’ unique dysfunction in drug pricing, PBMs were supposed to help put out the fire, but it could be argued that they poured gasoline on it.

We’ll never be able to really get to the goal of lower drug costs if we don’t accommodate for the incentives that exist to inflate the cost of medications.

Can you talk about some of the incentives that drive this dynamic?

First and foremost, the drug marketplace is incredibly unique in that it has an exemption to the federal Anti-Kickback Statute. If that sounds goofy, it’s because it is.

In the drug space, a drugmaker can cough up a bunch of money and pay a PBM to cover the medications on their formulary, essentially buying their way into the patient’s body. Physicians and pharmacists have a problem with that. They would argue that it’s essentially the practice of medicine at the insurance level.

Formulary design is something that should be a preserved function of insurance companies. But we must recognize the conflict of interest that it creates.

Furthermore, by obtaining that anti-kickback exemption, drugmakers compete with one another to raise the prices, as a means to increase the amount of rebates, discounts and kickbacks they send back to the insurance and PBM industry and government programs as well.

Right out of the gate we’re operating off of brand drugs with artificially inflated list prices. Those artificially inflated brand drugs give birth to artificially inflated generic drugs, which can be arbitraged across the drug channel, including at the PBM level. The big problem in this marketplace is that everybody is operating off of fictitious drug prices, and all of that translates into what the plan sponsor is billed and the patient is billed.

What advice do you have for payers either contracting with PBMs or structuring an existing PBM contract?

The word proprietary needs to be thrown into the wastepaper basket. If you and I were to walk into a grocery store and be charged $20 for a gallon of milk, we’d be rightfully upset and we would say we’re taking our wallet and purse and going home, or going to another grocery store that isn’t going to rip us off.

Unfortunately, for the thousands of drugs that exist in the marketplace, we don’t really have a good idea of what a fair price is because we’re operating off of these goofy, overinflated list prices, and the net prices are almost never disclosed to us.