Mike Burns is a pharmacist and a small-business owner. He also has been a cancer patient.
The last is the role he brought to his testimony before a special Kansas Senate committee investigating drug prices.
“About six years ago, I heard three words,” Burns said during the Sept. 26 hearing. “‘You have cancer.’”
As he began the treatment his doctors prescribed, he quickly got personal experience with something he has often seen happen to patients who come through his AuBurn Pharmacy stores in Kansas and Missouri.
Though his own drugstores were in his network, Burns’ insurance carrier told him his pharmacy couldn’t fill a prescription for capecitabine, an oral chemotherapy medicine. Instead, he was directed to a specialty pharmacy that had a contract with his plan’s pharmacy benefit manager, also known as a PBM.
Burns provided documentation to the Senate committee to show what happened next. His insurance plan, Blue Cross and Blue Shield of Kansas, ended up paying $15,300 to the PBM’s contracted specialty pharmacy, St. Luke’s Advanced Care Pharmacy. But the medicine would have cost just $2,300 had he been able to fill it at his own AuBurn Pharmacy.
“This obviously increases my (insurance) plan expenses, which in turn would trigger an increase in premiums the following plan year,” Burns told the committee. “I don’t have to explain how wrong this is. And this is happening thousands of times daily across our country and right here in Kansas.”
As the cost of health insurance premiums continues to climb, with premiums expected to go up an average of almost 9% on commercial plans next year, calls for state and federal regulators and lawmakers to rein in the complicated drug supply chain continue.
In particular, independent pharmacy owners like Burns want to see more regulation of PBMs, the middlemen who sit at the center of the drug supply chain.
But some health policy experts contend that getting health costs down is hardly that simple in an industry dominated by powerful health care companies. And cutting drug costs, they point out, will barely make a dent in overall health care costs.
Drug spending only accounts for 10 to 20% — depending on the patient population — of the $4.9 trillion in annual U.S. health spending.
“Even if you did lower drug costs,” said Geoffrey Joyce, director of health policy at the Schaeffer Center at the University of Southern California, “its effect on overall premiums would only be that share.”
The complicated drug supply chain
Despite being a relatively narrow slice of the health spending pie, the cost of drugs still amounted to about $650 billion in 2023. And many observers agree that the pharmaceutical industry, dominated by a few large companies, many of which own other players in the supply chain, is ripe for change.
As medicine makes its way from a drugmaker to your medicine cabinet, the parties involved include:
- Drug manufacturers that develop and produce medicine.
- Wholesalers that buy drugs in bulk and sell them to pharmacies.
- Pharmacies that package and distribute drugs to patients.
- Insurance companies and employers that sponsor health plans that cover some of the cost.
- And, at the very center of the web, pharmacy benefit managers.
PBMs have been involved with prescription insurance as claims administrators since the 1960s. But as prescription coverage has grown, so has their role in that market.
Representing insurance companies and self-insured employers, PBMs negotiate drug prices with drugmakers and develop “formularies,” which determine which drugs insurance plans will cover and which drugstores patients will be able to use to fill prescriptions.
At each step in the process, PBMs get paid. They negotiate drug rebates for insurers and employers, sometimes getting a cut, and they get fees from both the manufacturer and the insurers and employers they represent.
“Our job is to be the only member of the supply chain actually putting downward pressure on prices,” Jonathan Buxton, a lobbyist for the Pharmaceutical Care Management Association, the PBM trade group, told Kansas senators during last month’s special committee hearing. “Both from the pharma side … and on the pharmacy side, encouraging competition.”
Buxton did not respond specifically to Burns’ experience with his cancer drug or explain why the medicine cost so much more at the PBM’s pharmacy. But he said specialty pharmacies are generally used to handle complex drugs.
“Each health plan determines which pharmacies are part of its network to achieve the best value for patients and plan sponsors,” he said in a written statement. “In many cases, directing certain specialty prescriptions to in-network pharmacies allows the plan to secure lower prices and ensure proper oversight of high-cost therapies.”
But critics contend that, far from keeping costs down, PBMs rely on tactics that ultimately drive costs up.
“Their fiduciary responsibility is to their shareholders,” not their clients, Joyce said. “They try to make as much money as they can.”
In 2023, about one-third of drug spending, or $215 billion, went to PBMs, wholesalers and pharmacies combined. The division between the three groups is unclear. But in his written testimony to the Kansas Senate, Buxton disclosed that PBMs are paid 6% of drug sales.
Buxton’s organization represents 70 PBMs, but three control the bulk of the business. The vast majority of the 6.6 billion prescriptions dispensed in 2023 were processed by CVS Caremark, owned by CVS Health; Express Scripts Inc., owned by The Cigna Group; and OptumRx, owned by UnitedHealth.
They are among the largest players in the health care industry, and they take up more than one lane in the drug supply chain, sharing ownership with insurance companies, mail-order pharmacies, retail drugstores, health clinics and even private label drug sellers.
The Federal Trade Commission last year called them “powerful middlemen” who “may be profiting by inflating drug costs and squeezing Main Street pharmacies.”
PBMs dispute that characterization. Nonetheless, they remain the focus of pharmacy industry reform efforts.
“PBMs is everyone’s favorite four-letter word,” Buxton told the Kansas Senate committee.
PBM reform efforts
Independent pharmacy owners are leading the charge for PBM reform. They say that PBM tactics are a big reason so many mom-and-pop drugstores have closed their doors.
Independent pharmacists claim they are losing money on many prescriptions they fill because of PBM contracts that set reimbursements rates below actual cost. Often, independent pharmacists argue, the amount they have to pay a wholesaler for a drug exceeds what they get back from insurance.
Burns said pharmacists feel trapped into signing PBM contracts, even if pricing is unfavorable, because some PBMs have such a tight hold on the market. Not being included in a PBM’s network might mean losing a chunk of business.
“While I may not like the reimbursement,” Burns said, “if I don’t sign the contract, I lose 35% of my business overnight. Pharmacies are signing these contracts, trying to figure out, ‘How in the world am I going to make it?’”
Sometimes they can make up the losses on other drug sales, by providing other services or through retail sales, he said. But that’s becoming harder as consumer spending habits shift and more drugs are sold through mail-order pharmacies.
After years of losing money, Burns has finally been forced to turn away customers whose insurance doesn’t cover his cost. That’s something he never thought he would do.
“If I’m losing $80, $90 a month or $1,000 a year on one patient, and I identify 50 of those patients that I have to ask to go somewhere else,” Burns said, “I just put $50,000 to my bottom line. (That) helps keep my doors open. That’s how terrible it is.”
Independent pharmacies want lawmakers in Missouri, Kansas and Washington, D.C., to pass laws they said would help make things better. Among the reforms they would like to see are laws to:
- Require transparency from PBMs about what their rebates with drug manufacturers are and how much they keep for themselves.
- Force PBMs to disclose the difference between what they’re charging health plans for drugs and how much they are reimbursing pharmacies.
- Ban PBMs from “steering” prescriptions to preferred pharmacies that they own or are affiliated with.
- And force PBMs to sign contracts with insurers and employers that pass on all cost savings to their clients rather than pocketing a portion.
Proposed federal legislation includes some of these measures, but many pushing for reform are convinced real change will have to come at the state level. While some states, including Arkansas, have passed significant reforms, bills introduced in Kansas and Missouri in recent years have, for the most part, gone nowhere.
Tim Mitchell, an independent pharmacist in Neosho, Missouri, who directs the Missouri Pharmacy Business Council, said people need to understand that PBMs are making drug costs go up, not down. And that’s pushing up pharmacy bills and insurance premiums.
“I know the PBMs are pointing fingers back at the drug manufacturers … saying, ‘They’re the ones raising prices,” said Mitchell, whose group is lobbying for PBM reform in the state. “And, yeah, they are partly to blame. But at least they’re producing a product. The PBMs aren’t doing anything. They’re just doing a transaction … and making more money than anybody in the whole process.”
What other reforms will help?
Health economists have different theories about what will help reduce drug costs.
Joyce, of USC, recently published an analysis that found simply changing the way PBMs, wholesalers and pharmacists get paid would help cut almost $120 billion — or about 18.5% — from the total cost of drugs. Currently they get paid a percentage of a drug’s list price, which is the price before discounts or rebates are applied.
Instead, Joyce suggests paying a per-claim fee of $4 to PBMs, a percentage based on net price to wholesalers and a $10.50 dispensing fee to pharmacists. That reform, he argued, wouldn’t stifle innovation. But reforms that unilaterally cap prices — something the Trump administration has suggested — would.
“If you told Apple you can’t charge more than $400 or $500 for a phone, we know that would have an effect on the rate of innovation. The same principle applies to pharma. … We will have fewer drugs downstream.”
Dr. Joey Mattingly, a pharmacy professor at the University of Utah who studies drug pricing and PBM practices, said people need to understand that simply pushing PBMs out of the supply chain won’t necessarily lower the wholesale cost or increase the reimbursements pharmacies are getting.
Manufacturers would still want to make the biggest return they can, and the insurance companies and employers paying insurance claims still want to pay as little as possible for drugs.
“Grab your favorite large employer in Kansas City,” said Mattingly, who is also a paid consultant for groups that represent PBMs, pharmacies and manufacturers, “and then ask their HR team, ‘How would you like to pay more for your pharmacy services?’ If you think the answer is yes, they would be happy to pay more, then you’re probably not really following this market closely.”
A better reform, Mattingly said, would be to change the way pharmacists are paid. Instead of treating them like any other retailer, they should be paid as health care providers and reimbursed for consulting with patients.
“The only way the pharmacy gets paid (under the current model) is if they give you something,” Mattingly said. “But what you really need a pharmacy for is not just to get a drug. … Having that individual in the community that has your medication profile, has your background information, gets to know you. That’s where you actually get more value out of that relationship.”
Some experts said the biggest change that might help lower drug costs is for the government to take its thumb off the scale of drug pricing.
They argue that through initiatives like the 340B Drug Pricing program, which forces drug manufacturers to give hospitals and community health centers lower prices, the government inadvertently increases prices in other corners of the marketplace. The same is true for Medicaid drug rebates, said Ge Bai, a professor of accounting and health policy and management at Johns Hopkins University.
“It’s like a waterbed,” she said. “If you push down (one place) it will go up some place else.”
Marketplace changes
The market may change despite what state and federal regulators do, some who study the industry said. In a 2023 paper Mattingly and Bai argued that is already happening.
For example, GoodRx and OptumRX’s Price Edge give customers a way to shop directly for medicine so they can find the pharmacy with the cheapest price. Amazon Pharmacy offers Prime members a subscription program for $5 a month for access to lower-cost drugs.
And cost-plus pharmacies, such as Mark Cuban Cost Plus Drug Co. and local options like Pharmington Drugs in Overland Park, bypass insurance altogether, selling generic drugs for their wholesale price plus a markup, often making them far less expensive.
In other cases, insurance plans and employers are bypassing traditional PBM models, working with smaller PBMs, which provide transparent pricing and simply process claims.
Market changes like these, Mattingly and Bai argue, may be better in the long run than regulatory changes.
As for Burns, he’s turned his business away from traditional prescription insurance coverage for the 180 employees on his plan. Soon after he saw his own cancer drug cost blow up at the PBM-sanctioned pharmacy, he switched to a transparent PBM model.
That means he pays his employees’ medication costs directly, taking insurance out of the equation. Burns is charged a dispensing fee, which goes to the pharmacy, but any drug rebates or discounts go to him, and the PBM simply processes the claims.
The model could come with some risk. If an employee needs an expensive drug that has no discounts or rebates, for example, he would have to cover that cost. But Burns said the model has saved him money overall. His prescription costs have remained flat for several years.
Burns is skeptical the model will be an answer for everyone. Most employers would not feel comfortable leaving a traditional insurance model. Or even understand why they should.
“The transparent pharmacy benefit model has been out there for eight or 10 years,” he said. “I do think we’ll all go there, but it’s just taken too long. By the time that happens, we’re going to have lost 30-40% of our pharmacies across the country.”
This story was originally published by The Beacon, a fellow member of the KC Media Collective.
