Patents and Purchasing Power

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Essays

How many of these have you heard of: Express Scripts (by Medco), CVS Health, Prime Therapeutics (by Blue Shield), United Health, Catamaran Corporation? 

These are the top five pharmacy benefit managers in the United States.

PBM’s are demand aggregators for insurers, creating local monopsonies for drug manufacturers. They do this so that the insurance payers can have uniformity among their patients about which medications they cover, and so that they can negotiate discounts by playing the drug manufacturers against each other.

In a world where there are patents protecting certain pharmaceutical formulas, the PBMs can still list a set of generics for a certain treatment that might not be the same formula, or even the same type of treatment, but still be clinically approved for a given ailment. In that way, PBM’s yield an extraordinary amount of influence. They are like a “group buying” program that most patients don’t even realize they are a part of. What’s more, PBM’s often interact directly with government, as well. Medicare, one of the biggest payers in the healthcare industry, is perfectly fine with working through intermediaries to negotiate discounts on big pharma. And if it means that the pharmaceutical companies have less negotiating power, because they have a more limited set of buyers, then that saves taxpayers money, so from the government’s standpoint, that’s great! And when the patents expire, prices plummet, because the generic drug manufacturers are competing against each other to get listed as one of the PBM’s “covered drugs”. In this circumstance, the PBM’s can wield even greater authority over how drugs get priced, and what revenue flows to the drug manufacturers.

The ‘end users’ in the healthcare system, the care providers and their patients, may not realize that when they are, respectively, “checking whether a drug is covered by my insurance” or “choosing which pharmacy to pick my prescription up from” they are participating in a flow of hundreds of billions of dollars that represents a power struggle between insurers and drug manufacturers. Caremark, the PBM that CVS owns, did over $70B in net revenue in 2013. Yes, you read that right. The other PBMs in the top-five are between $50B and $100B in annual revenue as well. If the power of these PBM’s derives from their ability to aggregate ‘end users’ and create an efficient database and coordination network among them, is it any surprise, then, that CVS is the biggest health company in the country? The consumer brand matters.

(Thank you to Gregory Rockson of mpharma.co for introducing this world to me. So interesting.)

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