by Matt Gibbs, PharmD, chief pharmacy officer at Blue Shield of California
When you pick up a prescription at your pharmacy, you might assume what you pay is determined by a joint decision made by the manufacturer and your health plan. Unfortunately, reality is much more complicated. The prices you pay for your medications are shaped by a complex web of negotiations that often drive up costs at every juncture along the drug supply chain.
Think of it like buying fresh produce from your local farmers market. The supply chain in this instance is fairly simple: a farmer grows fruits and vegetables and sells them directly to you at a stand that they pay for. There are no intermediaries, so the price you pay reflects the cost of growing and harvesting that produce — with an appropriate markup to pay for the stand and net some profit for the farm.
Now imagine if purchasing produce at the farmers market were anything like the world of pharmacy care. Instead of a direct exchange, there would be anywhere between eight to 12 intermediaries negotiating behind the scenes. These intermediaries would influence which farms could sell at the market, which fruits and vegetables were available, how much they cost, and even when you’re actually able to buy them. This tangled system is what the pharmacy supply chain looks like today: layers and layers of complexity that more often than not inflate costs for consumers.
The pharmacy care journey
The pharmacy journey begins with pharmaceutical manufacturers determining a starting price, or “list price,” for their prescription drugs. Then, pharmacy benefit managers (PBMs) often negotiate and strike deals with these manufacturers, securing rebates for institutional customers, such as health plans and employers, in exchange for including certain medications on their list of covered drugs.
These rebates — discounts originally designed as a way to lower overall drug costs for consumers — are increasingly created only for expensive, brand-name drugs that are prescribed at high volumes. In most cases, the higher the list price, the bigger the rebate. This is where things go awry.
Within this system, manufacturers are incentivized to raise list prices to offer higher rebates, which PBMs negotiate in exchange for placing drugs on preferred formularies. But PBMs aren’t the only ones benefitting financially from inflated prices. Other intermediaries, like wholesalers, distributors and group purchasing organizations, all take a cut as drugs move through the supply chain. It’s as if the farmers at the produce stand were forced to inflate their costs — not because it costs more to grow lettuce, but because intermediaries along the way each take a share. Each entity in the drug supply chain adds complexity and cost, making it difficult for health plans and employers to know if they’re paying a fair price or getting the best value for their members.
What we do know is that the rebates PBMs negotiate don’t directly lower costs for patients. More often, they actually do the opposite. According to the Leonard D. Schaeffer Institute for Public Policy and Government Service, for every $1 increase in rebates, the list price of a drug rises by an average of $1.17. In other words, intermediaries are profiting from higher rebates.
This arrangement increases the total cost of care for everyone.
A pharmacy model that works better for everyone
At Blue Shield of California, we believe that access to affordable, life-saving medications shouldn’t be complicated by hidden fees and backroom deals. Rather than participating in this complex, rebate-driven model that increases drug costs, we are reimagining pharmacy care and challenging others to demand a model that moves away from rebates and instead is focused on transparency, fairness and an understanding of the true cost of prescription drugs.
Here’s how we’re doing it.
●Removing the PBM as an intermediary: Instead of relying on traditional PBMs that profit from opaque fees and distorted rebates, we are working with collaborators committed to straight-forward pricing and affordability.
●Paying for actual value: We’re moving toward a “net pricing” model in which we negotiate directly with manufacturers. Net pricing generates savings for us and you by lowering the list price and removing intermediaries' fees. (Read more about how Blue Shield is implementing this here).
●Passing savings on to members: In our model, rebates can be used to achieve their original purpose. Instead of benefiting third parties, the rebates we negotiate help mitigate the increasing cost of care for our members and ensure fair and transparent pricing.
●Policy advocacy: We continue to advocate for drug pricing and PBM reform with policymakers at the state and federal level to ensure our members have access to affordable, life-saving medications.
This is just one piece of our larger Pharmacy Care Reimagined initiative. We’re working hard at Blue Shield of California to build a model of pharmacy care that serves you, not intermediaries. That requires removing unnecessary costs and ensuring our members get the medications they need at prices that make sense.
Matthew Gibbs, PharmD, is the senior vice president and chief pharmacy officer at Blue Shield of California, leading the company’s Pharmacy Care Reimagined strategic efforts and commercialization. With experience as the president of Capital Rx and EnvisionRx, he works on dismantling the vertically integrated pharmacy benefit manager (PBM) model. He has also provided expert testimony for the U.S. Senate Committee on Finance regarding PBM transparency, and served as a leader at Anthem (now Elevance Health), Medco (now Express Scripts) and Walgreens. Follow Gibbs’ insights on LinkedIn here.