Net spending for retail prescription drug coverage increased from $250.7 billion in 2012 to $341 billion in 2016, according to a new study.
Pew Charitable Trusts followed the flow of dollars through the pharmaceutical supply chain, finding that patients are paying more for drugs through their premium dollars, pharmacy benefit managers have passed a growing share of manufacturer rebates to health plans and net pharmacy revenue has more than doubled.
The portion of commercial health insurance premiums spent on retail prescription drug coverage rose from 12.8% in 2012 to 16.5% in 2016. PBMs passed 91% of manufacturer rebates to health plans in 2016, compared to 78% in 2012. Net pharmacy revenue swelled from $30.8 billion to $76.9 billion over that span.
Recent drug pricing debates have focused on the role of PBMs as well as the widening gap between a drug's list and net price. While PBMs have passed most of their rebates to health plans, they have supplemented revenue through administrative fees, service fees and spread pricing, which is where the PBM charges a plan or employer more for a drug than it reimburses the pharmacy, according to the study.
Although rebates are consuming a greater share of pharmaceutical spending, growing from $39.7 billion in 2012 to $89.5 billion in 2016, they are slowing the growth of premiums and have partially offset the continued growth of branded drugs' list prices. Still, premiums have risen more quickly than overall retail prescription drug spending, researchers found.
"We also see the share of spending retained by PBMs is pretty similar to what plans and wholesalers retain, which don't typically get as much attention," said Allan Coukell, Pew's senior director of health programs. "It's also interesting to note that pharmacies retain the second largest share behind manufacturers at 23% of total spending."
Of the $341 billion spent on retail prescription drug coverage in 2016, the government's share was $139.8 billion, patients paid $103.8 billion and the employers' share was $97.5 billion.
Drug manufacturers retained most of that money, keeping $204.6 billion. Pharmacies pocketed $76.9 billion, PBMs retained $22.4 billion, health plans took $19.6 billion and wholesalers kept $17.6 billion.
While the total cost of coverage has increased, patient out-of-pocket spending has remained stable in recent years, thanks in part to increased insurance coverage and policies with out-of-pocket spending limits as well as manufacturer assistance, such as the Part D coverage gap discount and copay coupons.
The continued growth in both list prices and rebate volume has contributed to a larger spread between the list and net prices of brand pharmaceuticals, which boosts PBMs' profits. Brand drug list prices, which are typically the basis for patient coinsurance and deductibles, rose sharply, the study noted.
Despite the higher rates of rebate pass-through, PBMs kept roughly the same volume of rebates (in dollar terms) in 2016 as in 2012 because of overall growth in rebate volume, according to the study. Growth in alternate PBM revenue streams, such as spread pricing and administrative fees, offset a $2.2 billion reduction in retained rebate volume between 2014 and 2016, and increased the overall share of retail prescription drug spending retained by PBMs from 4.6% in 2012 to 6.6% in 2016.
The Trump administration is calling for more transparency from PBMs in a proposed rule that would eliminate anti-kickback statute safe harbor protections for drug rebates. While this study doesn't speak directly to that, CMS' own analysis shows the proposal would increase Medicare spending and manufacturer revenue, Coukell said.
"That is not a measure that produces savings to the system or reduces drug spending," he said.
Pharmacies also benefited from higher list prices, data show. Total reimbursement to pharmacies for retail prescription drugs increased from $270.8 billion in 2012 to $408.6 billion in 2016. Similarly, total pharmacy gross margins as a percentage of drug reimbursements to pharmacies rose to 19% in 2016, up from 11% in 2012.
After accounting for all types of price concessions, including negotiated rebates, discounts mandated by law and patient assistance, pharmaceutical manufacturers' net revenue on retail prescription drugs grew an average of 3.6% annually from 2012 to 2016.
Current proposals that tie patients' out-of-pocket costs to the lowest acquisition price rather than the list price would reduce co-pays but it would also increase premiums, Coukell said.
"It's important to note that changing the aspect of the cost at pharmacy counter doesn't change the trajectory of overall drug spending," he said.
Pew compiled government and third-party datasets to track health insurance premiums allocated to PBMs, patient cost-sharing, manufacturer direct assistance and direct pharmacy reimbursement by federal payers. Researchers compiled rebate data through a survey orchestrated by the Berkeley Research Group that estimates rebates as a share of claims, through data provided by The Boards of Trustees for Medicare as well as the Medicaid and CHIP Payment and Access Commission.
The study did not consider drugs administered in a physician's office or hospital setting or over-the-counter drugs purchased without a prescription. The amount retained by each stakeholder generally reflects revenue received for the sale of a drug less the direct cost of that drug, and does not consider other operational or financing costs such as rent, sales expenses, general overhead or taxes.