This content originally appeared on Beyond Type 1. Republished with permission.
By Lala Jackson
A major contributor to high insulin list prices that is often misunderstood – because it is designed to be complex and opaque – is the Pharmacy Benefit Manager (PBM) and rebate system. Rebates are a percentage of the list price of a medication, given by a drug manufacturer to a Pharmacy Benefit Manager (PBM), in order to be listed on the health insurance plan formulary or placed in a pharmacy.
Essentially, rebates function a bit like a “broker’s fee” of sorts and can account for 30-70% of the cost a person has to pay at the counter for insulin if they don’t have insurance, or if they are paying the full cost of insulin until they hit their insurance deductible. The PBM takes a portion of the rebate as their own profit, then gives the remainder to their client, which can be the federal government (Medicare), an employer’s health plan, or a standalone health insurer.
Insulin manufacturers choose to participate in this system that drives list prices up because it benefits their business – by giving PBMs a large cut of their profits, their products get placed on insurance formularies more often, leading to more sales. This system creates up to 70% of the current list price of insulin in the US, and it doesn’t have to be this way.
Rebates – They Don’t Mean What They Sound Like
The math is infuriating, but here’s the heavily-simplified basics of how rebates work – if you made a product for $5 and wanted to sell it, you may set the price at $10, to create a $5 profit. With that $5 profit, you can invest back in your company to create better products, pay yourself – whatever you want to do with your $5.
But let’s say you want your product to be in more places and available to more people. You might hire a middle person to place your product in new stores across the country, and they’ll charge a fee, which is reasonable.
When you begin, their fee is $1. So that you can keep your $5 profit, you raise your price to $11. Still reasonable. But over time, your middle person makes themselves indispensable and knows it. You’re making way more money because of how many products you’re able to sell, so you’re not about to drop your middle person.
And oh oops – you also signed a contract with your middle person to ensure you’ll always get your product placed in these nation-wide stores, so you’re locked in. And part of that contract was a promise that you won’t lower your price, since that would impact your middle-person’s profit.
And oh oops – your middle person also has contracts with your competitors, and the contracts signed with those competitors make it so that if your competitor gives the middle person a little bit more of their profits, your middle person won’t sell your product in certain stores for a year. You can fix this by raising your own price to give the middle person more profits, so you can kick your competitor out of a store the next year.
So now, your product costs $50. It’s the same product – you’ve never improved it. Your customers are receiving no more value than when the product costs just $10. Over time, you wanted to make more money from it, so your profit is now $10.
It’s still $5 to make your product.
You get $10 profit, doubled from your original earnings.
And your middle person? They’re making $35, 70% of the list price, off a product they don’t make or even touch.
But you’re definitely not going to get rid of your middle person, because they’re the reason you’re able to sell so many products and make the money that you do.
For a regular product like a water bottle, no worries, your customer will just go somewhere else.
But what if your product was water, and your customer needed it to survive?
The Role of Pharmacy Benefit Managers (PBMS)
PBMs are third-party intermediaries who negotiate prices and drug placements on insurance formularies between pharmaceutical companies and insurance companies. Sometimes they are standalone companies, other times they are attached to national pharmacies or insurance companies.
For their negotiating services, they take a share of the profits from prescriptions. This share is known as ‘rebates.’ They also profit from “administrative fees” for each unit of drug sold, which can be up to 5% of the list price.
Speculated about for some time but difficult to prove because of private contracts (fully legal through the US system, which is notoriously bad at regulating drug pricing) is the sheer amount of cash being collected by PBMs. Originally created to help get needed drugs to patients more efficiently, PBMs have unfortunately become a key agitator to high out-of-pocket drug costs.
From a January 2021 Senate Finance Committee report, we now definitively know that “…drug manufacturers increased insulin WAC [wholesale cost], in part to give them room to offer larger rebates to PBM and health insurers, all in the hopes that their product would receive preferred formulary placement. This pricing strategy translated into higher sales volumes and revenue for manufacturers.”
The big legislative stumbling block we now face is just how reliant on PBMs the US healthcare system has become. In a more simple system, a pharmaceutical manufacturer could provide their medications to a pharmacy for direct disbursement to patients who require them. But in a system with a shaky foundation to start with and many players in the space, across private and public entities, the water gets significantly muddied.
To keep PBMs happy, ensuring they negotiate the placement of each manufacturer’s insulin on insurance formularies, rebates for insulins have increased exponentially, particularly since 2013.
In July 2013, Sanofi offered rebates between 2% and 4% for preferred placement on a formulary. The same product in 2018 provided a 56% rebate. That’s more than half of the out-of-pocket cost of insulin being handed to companies that don’t make the insulin.
This is one example, but every single insulin manufacturer does this. As the report states, “What is clear is that the money that flows through PBMs is nothing short of enormous. As discussed throughout this report, rebates have grown at a rapid pace in the insulin market in recent years, which is not true in all therapeutic markets.”
The Bigger the PBM, the Greater the Power
The three largest PBMs – CVS Caremark, Express Scripts, and Optum Rx – wield significant power in the market commanding large rebates. Lilly documents show that they offered a 22% rebate to a small PBM, but offered Optum Rx a 68% rebate for the same products in order to get placement in Medicare’s Part D prescription plan. As noted in the report, this robust ability to negotiate has led to “…some PBMs securing rebates as high as 70% in recent years.”
Manufacturer contracts with PBMs, previously confidential but exposed by the Senate Finance Committee report, are written in percentages. This means that it is to the PBMs’ benefit to encourage list price increases, making their portion of payout larger.
PBMs actively encourage manufacturers to raise the list price so that they may receive more money, and use threats of removing insulins from insurance formularies as leverage. The bundling of multiple products (increasing one product’s rebate amount to get other products included) is also a tactic used in PBM and manufacturer negotiations, especially in exclusivity contracts.
“As Eli Lilly explained to its investors in 2019, failing to secure formulary placement can “lead to reduced usage of the drug for the relevant patient population due to coverage restrictions such as prior authorization in formulary exclusions, or due to reimbursement limitations which result in higher consumer out-of-pocket cost, such as non-preferred co-pay tiers, increased co-insurance levels, and higher deductibles.”
The Bottom Line
The US healthcare system is deeply broken, and insulin pricing is one of the clearest examples that an unregulated drug pricing system motivated by profit will always put cash flow over patient lives. PBMs and the rebate system exacerbate the problem, but every participant within the system is at blame. Each entity has chosen profit over people.
Significant rebate reform and an overhaul or removal of the PBM system could slash the list price of insulin by up to 70% and would impact not just insulin, but many medications and devices that are subject to the rebate system. Robust federal healthcare reform could create a system where drug prices could be negotiated on a federal level, and current proposals like rolling back prices to more reasonable levels could be a step.
A deeply broken system requires layered solutions. Without a full overhaul, we risk fixing the insulin pricing issue with a bandaid, while driving up prices and limiting access to other life sustaining medications and life changing technology.
Substantial healthcare policy change takes the voice of many, and individual advocates make a resounding and impactful difference. If you are looking to get involved with diabetes access advocacy, start here. Reach out and get to know your state’s congressional representatives in the House and Senate. Make sure they know your personal experience and how issues of healthcare, drug pricing, and access impact you.