Module 10: Third-Party Insurance and PBMs

Question 1

What is two-way flow of paying for health services?

Answer 1

1. The patient or consumer pays the actual price (Pa) of the product(s) received.
   - Most closely reflects the competitive market.
2. The patient is able to assess the benefits received for the money spent.
   - For example, for over-the-counter medications, you pay the pharmacy directly, use the product, and assess the benefit (Was value obtained?).

Question 2

Most forms of health insurance are not really insurance. What is it best described as?

Answer 2

Best described as a health fund (pre-paid plan) that is drawn upon as needed, or simply if available

Question 3

What’s the deal with pre-paid plans? (2)

Answer 3

1. Some mitigation of risk; but works primarily by spreading costs over a specified time.
   - Expected health care costs plus additional charges for administration of the plan.
2. Insurers mitigate their own risk by pooling the premiums of multiple plans and by adjusting premiums in subsequent years.
   - Also minimize costs by limiting benefits to those meeting plan-specified criteria using lower-cost health care goods and services.

Question 4

What is three-way flow of paying for health services? (2)

Answer 4

1. Individuals pay taxes or premiums to a third-party (insurer) who agrees to pay the provider.
   - Reduced or no direct financial relationship
   between the patient and the provider.
   - e.g. Prescription Drugs (“discounted”) – copays, etc.
   - e.g. Physician Services (“free”)
2. Subsidized prices result in product demand that exceeds the demand that would exist based on the actual price/cost

Question 5

What is four-way flow of paying for health services? (2)

Answer 5

1. Insured services often have detailed criteria and substantial non-monetary transaction costs such as pre-authorization processes to constrain demand.
2. However, managing health benefits is not considered a core business of most insurers.
   - This responsibility is often delegated to other organizations possessing the requisite expertise

Question 6

What are Pharmacy Benefit Managers (PBMs)? (3)

Answer 6

1. Beginning in the late 1950s, PBMs were created to help insurers manage the growing cost and complexity of drug benefit offerings.
2. Initially they focused on creating drug formularies that met the needs of beneficiaries while prioritizing less costly options.
3. Over time, they assumed a larger role and gained greater influence as a critical intermediary within the drug supply chain.

Question 7

What do PBMs actually do? (3)

Answer 7

1. Adjudicate prescription drug claims
   - Ensure prescribed drugs conform with the conditions stipulated in individual plan contracts.
2. Set pharmacy reimbursement contracts.
   - Initially, PBMs reimbursed pharmacies based on the usual and customary rate established by the pharmacy. By the late 1960s they had begun to set reimbursement rates as a condition of pharmacy participation in the PBM’s pharmacy network.
3. Negotiate rebates with drug manufacturers.

Question 8

What do PBMs do in regards to manufacturer rebates? (3)

Answer 8

1. PBMs negotiate with manufacturers for lower prices in the form of confidential rebates in exchange for preferred formulary listings.
2. PBMs also arrange with insurers to either keep a portion of the rebates they negotiate or to collect fees from the insurer based on the negotiated drug price.
3. However, rebates create perverse incentives as PBMs tend to favour higher-priced drugs that offer higher rebates over low-priced options.

Question 9

Over time, the number of PBMs consolidated through mergers into a few large payers. – 3 PBMs accounted for 80% of drug claims by 2021. What does that allow for them? (3)

Answer 9

1. Industry concentration has given the larger PBMs a strong position when negotiating with pharmacies and drug manufacturers.
2. In addition to market concentration, there has been significant vertical integration of PBMs with insurers, as well as with mail-order and community pharmacy networks.
3. Mergers with pharmacy networks has meant some PBMs are negotiating with themselves and steering patients to their pharmacies

Question 10

As the size of the PBMs grow, their ability to extract concessions from pharmacies and manufacturers also increases. Meaning: (2)

Answer 10

1. Ever lower reimbursement rates for pharmacies in exchange for network membership.
2. Ever larger rebates from manufacturers in exchange for favourable formulary listings for expensive drugs.

Question 11

With PBMs growing and consolidating so much, what is the result for patients? (2)

Answer 11

1. A higher portion of the professional fee not covered by insurance, with the difference passed on to patients.
2. Higher co-payments as favourable formulary listings mean expensive options are dispensed more often

Question 12

As discussed previously, PBMs were created to manage the drug portion of health plans. – To provide the expertise many insurers lacked, and ultimately, lower costs for insurers, sponsors and beneficiaries (patients). However, what did market concentration and limited transparency lead to?

Answer 12

Market concentration and limited transparency has meant the concessions gained from manufacturers and pharmacies are more often retained by the PBMs rather than used to secure lower premiums for sponsors, or lower premiums and OOP costs for patients.

Question 13

What stakeholder pushback is being seen in the US with PBMs? (2)

Answer 13

1. In response to PBM practices, US law makers are now attempting to draft legislation to curtail some of the practices of the PBMs through increased regulation.
2. In addition, other players in the supply chain have initiated strategies to disrupt the status quo to reduce the role of PBMs, thus weakening their dominant position.
   - Non-traditional players and smaller PBMs now offering low-cost generics, sometimes directly to patients.
   - Manufacturers are lowering some listed prices (e.g. insulin) and promoting these changes to the public.