PBGH Drug Formulary Study

What made you start looking into the issue of drug formularies?

We had a member who said they were working with a consultant to customize their prescription drug formulary, and I was wondering if other employers were actually doing that. There are just a handful of employers who do. At the time, I wasn’t totally convinced that was the place for an employer to go if they were looking for savings in their benefits. I wanted to talk with this consultant to find out what she was telling the member.

What did you find?

I was convinced that it’s the right thing to do. It does make sense for an employer to take charge of their formulary. There are misaligned incentives that influence how a PBM creates it.

The whole point of our study was to look at data of 15 large self-insured employers and demonstrate that those core formularies of the top three PBMs [Express Scripts, CVS Caremark and OptumRx] were full of wasteful drugs. To varying degrees, we found savings for employers ranged from 4% to 25%. Saving 25% of a company’s total PBM spend by getting rid of wasteful drugs is huge. Among those 15 employers’ data, we identified there was opportunity for about $413 on average savings per prescription, or $63 million total in annual savings.

What medications did you tease out that are on these plans that are “wasteful”?

They can include me-too drugs [ones that are similar to those already on the market, with only small changes], combination drugs [one with two or more active ingredients], brand names when there is a generic equivalent, or over-the-counter equivalents.

We only looked at drugs when there were proven therapeutic alternatives. There were only one or two specialty drugs that fit that criteria. Beyond that, specialty drugs become very clinically nuanced, and that wasn’t the purpose of the study. All the results we saw were an understatement because we were so conservative. Those are averages, and some of the savings potential is bigger.

How can the formularies be improved?

I thought at first that employers could have one formulary that is right for everybody. That was the hypothesis of the original study. We identified that there are huge savings here, that it is a huge problem. But is having one formulary the right thing? It wasn’t necessarily the right answer. For an employer to dive in and get rid of the waste is the right thing.

We created a mechanism for employers to do it collaboratively so they don’t have to hire a consultant. In phase two of this work, we have partnered with Johns Hopkins to create a guidebook because we want employers to be empowered to make the changes.

The guidebook talks about the study and gives employers the tools they need to really look at their own data. There are 44 drugs with their codes and alternative drugs. By using this, they can see what their spend is and what they would be spending on alternatives. This can give them a little peek at the opportunity within their own environment. There are more than 800 wasteful drugs that have been identified, but we picked 44 of the usual suspects—the most opportunistic examples [including Metformin, commonly prescribed to treat diabetes]. With this, they can do it themselves or give it to a consultant or PBM, so there is no excuse to do nothing.

If these medications are so readily used, they are clearly being widely prescribed by physicians, correct? Is there opportunity for change there as well?

Why are physicians prescribing these drugs? They are doing it because they don’t know, generally speaking, how much they cost. They get educated by pharmaceutical retailers who are trained not to talk about money or value—only about the clinical advantages. So doctors are prescribing what might be new or innovative. If doctors realize they are similar, they don’t know a newer drug might cost 10 times more than the other drugs. When there are therapeutic alternatives, they should be prescribing the higher-value drug.

If these medications aren’t necessary and are high cost, why do they remain in the plans?

They are on there because of misaligned incentives, but PBMs keep them because they are profitable. It’s costing patients much more and perpetuating a business model where formularies are driven based on rebates. High list prices are created to give that rebate. Then a patient might very well be paying that list price, which isn’t real, because it is based on a discounted price. No business should ever operate this way, but they can do it because it is a third-party payer system.

You put a lot of the focus on PBMs. How do they contribute to the issue?

In the spread and rebate; it’s double profiteering. There are other ways PBMs make money as well, but those are two that really influence why a formulary is made up the way it is. For instance, PBMs in Medicare Part D are negotiating with the manufacturer for rebates. Let’s say they offer a $50 rebate on a $100 drug. But if a patient is in the donut hole, they are paying $100 for the drug and CMS [the Centers for Medicare & Medicaid Services] may be getting $50 back. They say the money they are getting back helps keep the premiums low for everyone. When the GAO [U.S. Government Accountability Office] did research on this, they said if this system stops, rebate money won’t be there to lower premiums for everyone.

What has been happening with rebates is they are reducing costs, but some people are paying list price for their drugs. We have sick people subsidizing the cost for everyone. The problem with that is it’s not the way insurance is supposed to work. Healthy people should subsidize the cost for sick people, and in exchange, healthy people have insurance in case they get sick. It’s not the right way to finance an insurance-based program, and it can’t continue.

If we stop rebates, we will stop having misaligned incentives and start having lower-priced drugs; it would counterbalance. Rebates are not the only problem, but the way we have allowed intermediaries to abuse and take advantage of the system—that has become the problem.

Isn’t this really just an example of how capitalism works?

In the supermarket business, companies that stock the shelves at the market will do things to get favorable shelf space—you know, right at eye level—like provide discounts. But the difference is, in that business, they have a consumer buying a box of cereal. And a consumer is only going to pay so much for a box of cereal, so they can’t get ridiculous with the price of it. It will be controlled by the functional marketplace: a consumer making a value decision about how much they want to pay for a box of cereal.

With healthcare as a third-party system, there is not a market cap on what the consumer will pay, because they don’t pay full price. And when they do, it’s not forever [insurance may eventually kick in]. Healthcare is also different because these are treatments patients need to live. There needs to be full transparency so people can make a value judgement.

So you think the impetus is on the employer to help change the system?

Yes. Employers are starting to understand that they need to take charge. They are dependent upon intermediaries and consultants in various parts of healthcare purchasing and spending, and that’s OK. They work with intermediaries, administrators, consultants, advisors, and sometimes they are good and sometimes they are not. There is so much opportunity for those groups to make money, and they are going to make that money.

Employers can intervene and take control of this and not be so dependent upon intermediaries. They need to demand data and transparency. I had one member, an employer, say they asked their consultant about their formulary and the consultant said, “Don’t worry about it, we are handling that for you.” I said, “No, that isn’t an OK response. You need to see the information.” Transparency and informed contract terms are the best way to reduce costs so PBMs don’t make up the money elsewhere.

Can employers change the way they work with PBMs?

Maybe stop using the conventional players that aren’t doing the right thing. There are some PBMs coming into the space and trying a new business model, but big employers are sometimes afraid to go to intermediaries who are not the brand-name ones.

Remember that this is a business model that we have allowed to happen. We just need to step back and reevaluate. We have to say, “Charge us the right price for your service and don’t take money from the products you are working for.” If I were an employer, I would say that no money should come from anywhere but me. That’s the only way they can know a PBM is working on their behalf.

Are self-insured employers, or even brokers for that matter, really in a position to do this, though? This business model is well solidified.

There is a wide range of how activated they are and what bandwidth they have for making change. They have business agreements that they don’t want to be disturbed. But I have seen some employers make a huge difference in their healthcare spend.

My concern is about employers choosing not to make any kind of change. It perpetuates a bad system. I think healthcare is in crisis and we are at risk of not being able to provide the best-value healthcare because people can’t afford it. We are continuing to allow that to happen in the workplace. In a way it isn’t just about them. It’s about the U.S. healthcare system, and employers are paying for more than half of it.

It is costing their employees more. But it’s also important for employers to think bigger than the benefits they are offering and think of the entire system. Poor quality in healthcare is expensive. And the business model we currently have isn’t serving us well in this country.