Insurance ‘middlemen’ are driving up drug costs, local pharmacists say. A federal agency is looking into the companies’ practices.

When Scott Newman opened Newman Family Pharmacy in Chesapeake in 2013, it was a new chapter in his career as a pharmacist as he stepped away from Rite Aid.

But over the years, he said, changes in the industry started to squeeze his business until he knew he’d reached the end of the road.

“There was nowhere to go but down,” Newman said.

The driving force that put him out of business was what he called “take it or leave it” contracts with entities called Pharmacy Benefit Managers, according to Newman, president of Pharmacists United for Truth and Transparency.

“They slashed my reimbursements again every year — going down and down and down,” he said.

The entities are “middlemen” between drug manufacturers and pharmacies that were created by the pharmaceutical companies to help with billing, Newman said.

“Traditionally, the idea of a PBM is a good idea,” he said.

But they are driving up costs for pharmacies and patients by reducing competition as they push business towards pharmacies in their own corporate umbrella in addition to increasing fees for rebates to drug manufacturers, according to Newman.

The Federal Trade Commission announced an investigation into PBMs and how they are affecting pharmaceutical prices on June 7 after years of outcry by independent pharmacists and customers.

“Although many people have never heard of pharmacy benefit managers, these powerful middlemen have enormous influence over the U.S. prescription drug system,” said FTC Chairwoman Lina Khan in the announcement. “This study will shine a light on these companies’ practices and their impact on pharmacies, payers, doctors and patients.”

The commission will request information and records from the six largest pharmacy benefit managers and will evaluate how their relationship with insurance companies, such as Caremark and Aetna, which are both owned by CVS Health, which also owns CVS Pharmacy.

The three largest benefit managers — Caremark, Express Scripts and Ascent Health Services, which are owned by Cigna; and OptumRx, which is owned by UnitedHealth — held over 75% of the market share in 2020, according to data released in April 2021 by the Drug Channels Institute, a pharmacy and distribution industry group.

PBM representatives said they will comply with the inquiry and referred requests for more information to the Pharmaceutical Care Management Association, a PBM industry and lobby group.

JC Scott, president and CEO of the association, said in an emailed statement he is “confident” the inquiry will show benefit managers are a force that reduces prescription drug costs as they are the “only member of the prescription drug supply” that is trying to lower costs for patients.

“Drug manufacturer price setting is the root cause of high drug costs,” Scott said. “The most effective study of issues around drug costs for consumers would examine the entire supply chain. PBMs are holding drug companies accountable by negotiating the lowest possible cost on behalf of consumers, and by driving and delivering local competition that consumers are demanding.”

PBMs have been found to not be the cause of price increases for insulin, but rather the increased cost from the manufacturers of the drug, according to a 2021 drug pricing report by the U.S. House of Representatives Committee on Oversight and Reform.

Del. Keith Hodges, R-Urbanna, gave up his last independent pharmacy last year in Gloucester. He said he sees pharmacy benefit managers as part of the problem of rising prices.

Hodges bought his first pharmacy in West Point in 1991 at the age of 25. He was a pharmacist for over 30 years.

“When you try to talk to legislators about it, they glaze over and they oftentimes say ‘Let the free market take care of it’” he said. “Well, it’s not a free market because the patients have no control. It’s a free market when the patients have control over their premiums, co-payments and so forth and there’s no negotiating power on their end and no negotiating power with the pharmacies because they’re blind contracts.”

One complication on addressing PBMs in Virginia is the federal Employee Retirement Income Security Act, according to Hodges. However, a Supreme Court ruling from Dec. 2020, Rutledge v. Pharmaceutical Care Management Assn., allowed an Arkansas law to regulate PBMs reimbursements to pharmacies and that it was not in conflict with ERISA.

Hodges said he is convening a work group to see how that decision could open the door to Virginia regulation on PBMs and other third-party administrators in health care.

“The problem is the states are limited in what they can do until we can really try to find a way to address that under ERISA law,” Hodges said.

Another issue with PBMs is spread pricing, which he discovered while reviewing one of his Gloucester pharmacy’s patients explanation of benefits.

“It showed me the plan was billing the plan sponsors $30, so the patient is paying the $10, but the plan is billing the plan sponsor $30 but they’re only paying me $10 so there was a $20 spread on that prescription,” Hodges said.

And when he ran the numbers for that kind of spread at his pharmacy, it was $38,000 a year from his Gloucester pharmacy alone.

A Virginia Department of Medical Assistance Services report presented to the General Assembly in 2019 found that the spread pricing for 18 months ending June 30, 2018, totaled $29 million. In Ohio, the spread yielded $223.7 million for PBMs, according to a 2018 report by the Ohio Department of Medicaid.

“The FTC really needs to look into this and peel back the layers to see what’s going on,” Hodges said.

Newman said the FTC inquiry has been “a long time coming.”

“Most of us are getting screwed by the person that doesn’t produce anything, doesn’t really have any legal oversight or regulation and doesn’t distribute anything and doesn’t house anything except their own competing pharmacies, so you just have an entity that works both sides of the supply chain to their betterment,” he said.

Ian Munro, ian.munro@virginiamedia.com, 757-861-3369, @iamIanMunro