How a requirement to be smart about employee benefits could loosen PBMs' grip on drug prices

How a requirement to be smart about employee benefits could loosen PBMs' grip on drug prices

Ann Lewandowski knows all about Pharmacy Benefit Managers (PBMs), the companies that shape the U.S. drug market. As a policy advocate at drugmaker Johnson & Johnson, her job was to educate patient and physician groups about the role of PBMs in high drug prices.

Knowing this, Lewandowski filed a potentially groundbreaking lawsuit in February. Instead of targeting the PBMs, however, she turned to a large company that uses PBMs - her own employer, Johnson & Johnson.

Lewandowski alleges in her lawsuit that Johnson & Johnson failed in its obligation to ensure fair drug prices for its more than 50,000 U.S. employees through its contract with PBM Express Scripts, a unit of insurance giant Cigna that fired her in April.

By choosing an Express Scripts plan, she claimed, J&J cost employees "millions of dollars in higher prescription drug payments, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth."

Lewandowski, 40, of the Madison, Wisconsin, area relies on an expensive drug for multiple sclerosis. She filed the lawsuit, she said, because she had "difficulty reconciling the policy positions" she reported as a J&J employee "with the actions I experienced as a health plan user."

In recent years, the shady business practices of PBMs have attracted considerable attention. The Federal Trade Commission is conducting a lengthy investigation into the three largest companies and sued them in September, saying they were driving up insulin prices. Bipartisan bills in Congress would stop them. And companies like Mark Cuban's Cost Plus Drugs and smaller, "transparent PBMs" have sought to wean drug companies and health plans from their dependence on the large PBMs.

But Lewandowski's lawsuit touches on a thorny issue that was overlooked until recently: language in the 2021 budget law that overhauled the Employee Retirement Income Security Act of 1974, known as ERISA. The original law focused on stopping fraudulent retirement plans.

Their lawsuit is based on Congress' language that the legal requirement for prudent corporate governance covers both health and retirement benefits. By offering their employees a health insurance plan, employers "are not doing you a favor. They are keeping your money and investing it in your health," said Barak Richman, a health law professor at George Washington University.

A similar lawsuit was filed against Wells Fargo in July, and additional lawsuits are in the pipeline.

PBMs demand discounts and rebates from drug manufacturers, causing the manufacturers to charge higher list prices, which can drive up the price patients pay at the pharmacy. At the same time, retail pharmacies say PBMs are driving them out of business by paying them less than PBMs charge health plans — a practice known as spread pricing. Patients typically have no idea what they will pay for a drug, and neither do their employers, as many PBMs' contracts contain confidentiality clauses.

Dissatisfaction with the status quo and fear of liability are driving employers to move away from the “big three” PBMs to “transparent PBMs” that do not obscure their pricing and drug selection decisions.

“We hired nine Fortune 500 companies and 1.2 million patients this year,” said AJ Loiacono, CEO of New York City-based Capital Rx, a PBM founded in 2017. According to a recent survey, up to half of U.S. employers are considering this switch.

Cuban said in an interview with KFF Health News that he has told hundreds of Fortune 500 executives in one-on-one meetings and in groups that they are overpaying for drug benefit plans to line the coffers of large PBMs.

“You’re being cheated,” Cuban tells them. "You don't really understand the elements, and it's costing you money and your well-being. And now you're being sued. It's not a question of if, but when."

Putting pressure on a purchasing cartel

The billionaire who launched Mark Cuban Cost Plus Drugs in 2022 to upend the byzantine $500 billion U.S. drug market is convinced the Lewandowski lawsuit and others will end the dominance of the big PBMs, which control 80% of the business.

Cost Plus Drugs charges a direct markup of 15% with small processing fees for the 2,500 drugs it sells, most of them generics, said co-founder Alex Oshmyansky. Its nearly 3 million customers – individuals, health plans and transparent PBMs – appear to be saving money in many cases.

The big PBMs say their purchasing power and exclusive access to information allow them to save money for insurers, employers and patients. Critics say they siphon up to 25% of the drug market, perhaps $100 billion a year, according to Oshmyansky. Critics say the opaque policies and conflicts of interest often result in the poorest and sickest patients paying the most for medicines.

The three PBMs amount to a "purchasing cartel," Oshmyansky said in an interview at the Dallas headquarters of Cost Plus, once home to Broadcast.com, the Internet radio company that earned Cuban his first billion dollars when he sold it to Yahoo in 1999. "They buy all the drugs, raise the prices and then resell them."

Richman and Amy Monahan of the University of Minnesota argued in a journal article this year that the Labor Department, which has previously focused its ERISA oversight on retirement benefits, should set legal standards for the use of health care funds.

If companies “sign stupid contracts with insurers or PBMs, they may be violating ERISA,” Richman said. “If you take the law seriously, the employers who spend half of the country’s health care dollars would have to spend that money in very different ways.”

But some drug market experts doubt the ERISA lawsuits will succeed. Complex PBM money channels “complicate the argument,” said Stacie Dusetzina, a professor of health policy at Vanderbilt University School of Medicine. “You may think your company is paying too much, but relative to what?”

The ERISA Industry Committee, which lobbies Congress on behalf of some of the largest U.S. companies, is asking Congress to give PBMs a special duty to represent their customers' financial interests, said Melissa Bartlett, the group's senior vice president for health policy. That could lead to patients suing the PBMs rather than their employers.

Some large employers are already changing their drug plans.

In 2019, Connecticut became CVS's first PBM customer to negotiate a transparent fee structure. The contract called for 100% of drug discounts to be passed on to the state and the price band was eliminated.

The state decided to go a step further when it sought a new contract for its 214,000 employees this year, said Joshua Wojcik, director of health policy and human services in the state auditor's office. Instead of rebates and rebates, the lowest net cost per employee was required.

Of the three major PBMs, only CVS bid on the contract. It has pushed out some "transparent PBMs" - a sign, in Wojcik's view, that CVS at least doesn't want to be left out as more customers abandon the current PBM business model.

Wojcik estimates the change will save the state up to $70 million per year.

$13.40 versus $2,500

It takes time to change drug subsidy policies at large companies, Cost Plus's Oshmyansky said. Their PBM contracts last three to five years, so "you have to win them in the one year they're looking at other options," he said. PBMs pay benefit plan consultants and brokers who hire large companies to run the business their way.

“We have this weird structure where multiple sclerosis and cancer patients subsidize everyone else’s drugs,” Oshmyansky said. Instead of creating a pool that distributes the costs among all insured people, there is a “disproportionate burden on the sickest members”.

Cost Plus generates the greatest savings for its customers on around 50 extremely high-priced generics. The flagship product is imatinib, a generic cancer pill that Cost Plus sells for $13.40 for a 30-day supply, compared with the $2,500 it costs at pharmacies. A study conducted by Dusetzina and colleagues found that Medicare could save $662 million per year just by purchasing imatinib and six other generic cancer drugs from Cost Plus, rather than through a large PBM.

Ironically, however, most generic drugs are cheaper in the United States than in Europe or Canada - so cheap, in fact, that they cause shortages when companies go out of business or stop making necessary improvements to their production lines.

In response, Cost Plus has opened a compounding pharmacy to produce common generic drugs and hopes to soon have a sort of "private reserve" of 70 to 80 products that can be manufactured at short notice if shortages arise, Oshmyansky said.

While the company has not yet finalized purchase agreements for most of the branded drugs, Oshmyansky and Cuban are confident. Drugmakers have lobbied hard over the past two years to rein in PBMs through their trade group Pharmaceutical Research and Manufacturers of America.

At a Sept. 24 hearing where Sen. Bernie Sanders (I-Vt.) criticized Novo Nordisk CEO Lars Fruergaard Jørgensen over the high prices of diabetes and weight loss drugs Ozempic and Wegovy, the board expressed support for a more transparent pricing model.

“On average, we give PBMs a 74% discount on our products” for every $1 the company charges, he said. If instead “we simply paid PBMs a small fee for the limited risk and contribution they make, I think patients would be significantly better off.”

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