Pharmacy as a profession has suffered over the last 10 years. Downward pressure on reimbursement for drug product, combined with a dearth of payment to pharmacies for professional services has led to the closing of hundreds of pharmacies over the past years. The economic pressure being excerpted on pharmacies is leading to the adoption of what we have dubbed “the Stripped Down Model” of pharmacy.
The concept of the PBM originally started as a service to act as an intermediary between pharmacies and the insurance payor, facilitating the processing claims. Today, the PBM industry sells a “network” to insurers, giving their patients access to pharmacies. The PBMs have expanded their services to include formulary management and other services purported to help contain costs for the payor. When the Medicare Part D benefit rolled out, Medicare entrusted this benefit to the PBMs to run, and by and in large, legislators believe that Medicare Part D is a success story.
Pharmacists, however, generally have a different, more negative, view of the PBM. At the same time as pharmacies have struggled, Pharmacy Benefit Managers have regularly reported record profits. Pharmacists, those in the trenches working with patients, are concerned with the amount of money being spent by Medicare on the “middle man” PBM industry. For the most part, the “spread” between what the PBM pays the pharmacy for drug product and what the PBM in turn charges the payor is concealed. There is little transparency in the PBM industry to date. From a pharmacy perspective, pharmacists generally wonder just how much of a success Medicare Part D would be if there were more transparency.
Recently, the Centers for Medicare Services (CMS) released detailed information on prescription drug spending for the 2013. The press release (including some interesting summary data) is available here, and for those with a thirst for raw data, the details are available here. This data is reportedly some of the most comprehensive data released by CMS to date, and it offers significant insights into the Medicare Part D benefit.
As a pharmacist and pharmacy owner, two tables from the press release immediately struck a chord with me. These tables have been copied from the CMS press release and reproduced below:
Given that the tables report Total Drug Cost and Total Claim Count, it is possible to calculate the average cost per prescription to Medicare for any of the drugs in the tables above. This, combined with estimates of pharmacy reimbursement for the same drugs will give insight into the amount being retained (sometimes called the “spread”) by the Pharmacy Benefit Managers (PBMs) charged with administration of Medicare Part D.
Assumptions
Keep in mind that the lack of transparency with the data still limits firm conclusions from being made. For example, the proportion of 30 day to 90 day fills for any given drug is not known. Likewise, the tables above do not differentiate different strengths of a drug, lumping all strengths together. On the pharmacy side, the cost of goods will vary some from pharmacy to pharmacy and region to region. The cost and profit data being presented below is assumed representative, understanding that the while the data was pulled from a specific demographic region and patient population, it is likely in general agreement with national data.
Methods
For each drug in Table 1a and Table 1b, Medicare Cost/Claim was calculated by dividing the Medicare total drug cost by the Medicare total claim count. The result is an aggregate value, representing all possible day-supply and strength combinations.
For the same drugs and time period reported by Medicare, prescription claims for Part D plans for a midsize independent pharmacy were examined, and the Pharmacy Reimbursement (also known as the adjudicated amount) and cost basis of the drug product were extracted. From these values, the following were calculated:
- Cost/Claim minus Pharmacy Reimbursement = PBM Spread
- Pharmacy Reimbursement minus cost basis = Pharmacy profit
Transparency Approximated
Discussion
Generic Drug Profit and Spread
The pharmacy data represented above appears to agree with the CMS data well. While the pharmacy data set size is only a small fraction of the CMS data set size, each drug is represented by more than 500 claims, with most drugs represented by more than 1000 claims. The average pharmacy profit for these 10 drugs during 2013 was just over $6.50, and this appears to be in line with anecdotal reports of prescription profit during 2013. It is interesting to note that if the estimate of pharmacy reimbursement is reasonably close to the average across the United States, the PBM is taking roughly half as much as the pharmacy makes for each prescription. Keep in mind that the PBM does not need to maintain drug inventory, and has almost no patient care expenses to cover. The average estimate of more than $3.50 per generic prescription being paid to the PBM begs the question “what value is being received for the money being paid to the PBM?”
Top 10 (Brand Name) Drug Profit ant the Spread
Unlike the generic data, there are some obvious difficulties with the Brand Name data set. The amount of reimbursement exceeded the total adjudicated amount for one drug. This problem is likely attributed to how certain brand name drugs are priced. Crestor and Junivia, for example, cost pharmacies about the same amount per tablet regardless of the strength being dispensed. Other drugs, like Abilify, increase in cost with an increase in strength. Given the small sample size for many of the brand name drugs represented here, it comes as no surprise that Abilify does not match the CMS data well. This is likely explained by the pharmacy data representing a higher proportion of the higher strengths of Abilify (20 and 30 mg strengths) than the aggregate CMS data. Conversely, despite having only 87 and 80 claims each, Crestor and Januvia do match, likely because the cost per tablet is independent of strength. Because of this discrepancy, Abilify was omitted from average and total calculations in the table. Additionally, the pharmacy data did not include any prescriptions for Revlimid in the data period, so Revlimid was also excluded from average and total calculations.
It is important to note that with the exception of Adair, the small sample size for pharmacy claims could skew results. Based on the dispensing profile of the pharmacy, the most likely skew would be toward the dispensing of a 30 day supply. Such a bias would result in an overestimation of profit for the pharmacy (with 30 day fills generally being accompanied by a higher dispensing fee and lower discount on Average Wholesale Price (AWP). A overestimated pharmacy profit would tend to underestimate the spread (PBM profit) for the drug.
The average pharmacy profit for the 8 brand-name drugs (omitting Abilify and Revlimid) was close to $26 in 2013. By comparison, the PBM profit (spread) was estimated to be $39 per prescription (about $14 MORE than the pharmacy makes).
Being in the Wrong Business
Where this exercise gets interesting is when one extrapolates the profit made by ALL pharmacies for the top 10 generic and Top 10 drugs by cost. Multiplying the profit per prescription for the pharmacy by the total number of claims for each drug, it is estimated that all pharmacies billing Medicare Part D (combined) made a profit of about $3.5 billion. Based on these calculations, all of the Medicare Part D Pharmacy Benefit Managers (a relatively small group of companies) are estimated to profited $3.25 billion (combined) on the spread. A significant amount of this profit would appear to com from brand name medications. The PBM insudstry is making this profit without having employees in the trenches caring for patients, without any investment in brick and mortar stores, and with inventory and equipment needed to actually dispense prescriptions. It also excludes any profit the PBM makes by participating as a provider of Mail Order prescriptions thru its own pharmacies. The lack of transparency into PBM accounting also precludes attribution of any brand-name drug rebates, which may, or may not, be included in the information reported by Medicare.
Conclusions
This exercise is far from a scientific evaluation of the data that CMS has released, though results seem to correspond with the apparent profitability that the financial results for many of the largest pharmacy benefit managers show. It would take a significant effort to determine a more accurate, national, estimate of pharmacy costs for these drugs in order actually quantify the amount Medicare Part D spends on “managing” the benefit. The purpose of this quick exercise, however was to make some general assumptions, and gain an insight into just how much money may being retained by the PBMs. It is no coincidence that the PBM industry and insurance industries have signfificant lobbying efforts in the nation’s capital. The stakes are quite high for these industries. If the quick estimates above are even reasonably close, the public, along with Congress and Medicare should take notice.
Almost $23 billion of an estimated $64 billion spent by Medicare on drugs 2013 was spent on these 20 drugs alone. From this $23 billion, the calculations above estimate that $3.25 billion was paid to administrators of the Part D plans. If accurate, it means that PBMs took more than $8 billion in 2013 for their services. Real savings could be realized by Medicare by increasing transparency of PBMs and limiting the spread allowable for Medicare Part D administrators much in the same way that the PBMs have limited pharmacy reimbursement thru tools like MAC pricing lists. The Congressional Budget Office (CBO) estimates that Part D spending will total $76 billion in 2015. Transparency could easily shave several percentage points from this, and that adds up quickly.