Talk to any employer about their healthcare and workers’ comp expenditures, and it probably won’t be long before the conversation turns to prescription drugs. It’s an industry worth over $350 billion in annual sales here in the U.S., and according to the 2016 CMR Pharmaceutical R&D Factbook, global sales surpassed $1 trillion in 2015. Another $50 billion goes into research and development here in the U.S. every year.

The pharmaceutical industry is increasingly complex, and healthcare reform, specialty drugs, rebates, major mergers and acquisitions, and pharmacy benefit managers (PBMs) have all played a role in dramatically changing the landscape in recent years.

It’s also an industry that isn’t winning any popularity contests, with growing accusations of price gouging. In 2015, Martin Shkreli became the poster child for pharmaceutical greed when he acquired the rights to Daraprim, a 50-year-old drug that treats patients suffering from deadly parasites, and raised the price by about 5,000 percent overnight. Other small drug makers have done the same, and the outrage has been understandable.

Formularies, PBMs, and drug wars

With prescription drug costs on the rise, employers have been forced to get more proactive about managing these costs in recent years, using more aggressive utilization management strategies, shifting more costs onto employees, and hiring third party PBMs.

These PBMs have been on the frontlines in the battle against drug companies and egregious drug price increases. And the big players in the PBM arena such as CVS Health and Express Scripts have a powerful weapon at their disposal: formularies. Each year, these major prescription insurers publish official lists, known as formularies, of approved medications they’ll cover.

Since these PBMs handle pharmacy benefits for thousands of insurance companies and private corporations, they have the power of volume on their side. For a drug manufacturer, having a flagship drug removed from one of these lists means huge losses. So for PBMs, wielding the threat of kicking a drug off their covered lists is a powerful way to drive discounts. And that’s precisely what they’re doing. CVS says its formulary management will save its customers $9 billion over the next five years.

Other ways PBMs are fighting for lower drug prices:

  • Embracing biosimilars and follow-on biologics to replace higher cost drugs
  • Using Indication-Based Formularies to more precisely manage treatment based on indication, diagnosis, and value of the therapy for each individual patient
  • Addressing “limited source generics,” products that have limited generic manufacturers, resulting in a much higher cost in the market

But beware – all PBMs are not the same

Manufacturers pay billions in rebates to PBMs, but according to the Pharmacy Benefit Management Institute’s (PBMI) 2015-2016 Prescription Drug Benefit Cost and Plan Design Report, only three-quarters of employers directly receive a piece of manufacturer rebates. Some employers get 100 percent, while others get a portion, sometimes with a guaranteed minimum amount. A coalition of large employers including American Express, IBM, and Coca-Cola is pushing for increased transparency on drug price arbitration in their contracts. With PBM’s quarterly profits often growing 20 percent or more, many feel too much of the savings ends up in stockholders’ pockets, while patients continue to pay higher copays.

For employers, keeping prescription drug costs down requires a winning hand

That takes a combination of the right strategies and the right partners – and your insurance broker may be the most valuable partner you have. Having a broker that can help you find the best PBM is invaluable, and if that broker is there to help your employees when formularies exclude the drugs they use, that’s an added advantage.  If you don’t have that kind of partner in your broker, contact BeaconPath today.

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