The Cost of Discount-Focused PBMs: A Case Study of Johnson & Johnson's Prescription Drug Pricing

Earlier this year, Johnson & Johnson (J&J) found itself at the center of a proposed class action lawsuit alleging that its employee health plans were overpaying for prescription drugs. The lawsuit accused J&J of breaching its fiduciary duty under the federal Employee Retirement Income Security Act of 1974 (ERISA) by failing to prudently manage its employee benefit plans.

The Pitfalls of Discount-Driven PBM Strategies

The lawsuit revealed a troubling trend: J&J’s health plans were shelling out inflated prices to pharmacy benefit managers (PBMs) for generic drugs, resulting in steep out-of-pocket costs for employees. 

For example, the plans were reportedly paying $1,629 for a 90-pill prescription of the HIV antiviral drug Abacavir-Lamivudine, which pharmacies typically acquire for only $180. Similarly, prescriptions of Teriflunomide, used to treat multiple sclerosis, were costing the plans $10,200, compared to the usual out-of-pocket cost of $77. 

If you’re asking yourself how this happened, know that J&J isn’t a unique case. In fact, inflated pricing on prescription drugs happens to many companies that contract with PBMs operating under a discount based model like CVS Caremark, Express Scripts, and Optum Rx. 

Understanding PBM Discount Delusions 

The attractiveness of substantial discounts and rebates provided by PBMs often masks a deeper problem within the industry: Manufacturers inflate list prices for brand drugs to accommodate the hefty discounts and rebates demanded by PBMs. Consequently, although the savings offered by PBMs may seem substantial, they are applied to artificially inflated prices. The PBMs then take a significant portion of these savings for themselves (without disclosing exactly how much). This practice ultimately results in higher costs for employers, health plans, and ultimately, patients. 

Sadly, as seen with J&J, this problem also exists for generic drugs only with the incentive to drive spread pricing and increased pharmacy margin in place of rebates.   

If a manufacturer refuses to comply with the PBM's demands, the PBM can exclude the manufacturer's drugs from its formulary. Being excluded from a PBM's formulary can have severe consequences for a drug manufacturer, as it could lead to a significant loss of sales and market share.

Faced with the prospect of losing access to a large portion of the market, many manufacturers feel compelled to agree to the PBM's terms, even if it means accepting lower prices or providing higher rebates than they would prefer. This dynamic essentially allows PBMs to dictate pricing terms to manufacturers, resulting in inflated costs for prescription medications. 

This problem is perpetuated through the discount-based evaluation process given its focus on driving up AWP discounts and increasing rebate guarantees but not on cost. Higher discounts are not a proxy for lower per member per month (PMPM) drug spend. It is important to note that all the drugs cited in the lawsuit had “decent” AWP discounts. Unfortunately, there was greater savings by removing focus on a discount-based evaluation process and leveraging cost-based solutions. 

Embracing Transparency and Cost-Effectiveness

We at SmithRx offer an alternative approach to pharmacy benefits, focusing on lowering overall costs rather than simply chasing discounts and rebates. 

In our cost-centric strategy, the emphasis lies in pinpointing the most economical net cost of a medication, or a clinically appropriate substitute, which encompasses the pharmacy's procurement rate, dispensing charges, and any additional direct expenses. This signifies a shift from solely assessing immediate discounts to encompassing all expenses linked with administering pharmacy benefits. Through prioritizing the comprehensive cost of care, a cost-centric analysis endeavors to uncover approaches that deliver enduring financial efficiencies while upholding or enhancing the caliber of care provided to patients.

For example, under the SmithRx approach, the same 90-day supply of Abacavir-Lamivudine costs only $109.90 (compared to J&J's reported $1,629), and Teriflunomide is priced at $376.30 (compared to J&J's reported $10,200). This stark difference underscores the importance of evaluating PBMs through a cost-based lens and prioritizing strategies that prioritize transparency and lower overall costs, ultimately benefiting both employers and employees alike.

The ultimate objective of our approach is straightforward: to minimize expenses while maximizing clinical results.

The Imperative for Industry-Wide Reform

In the document below, you can view the prices charged by Johnson & Johnson's plan for all the medications cited in the lawsuit, juxtaposed with the prices we at SmithRx would offer through a cost-based approach. 

Our intention isn't to incite controversy against J&J. Instead, we aim to underscore the disparity between conventional pricing methodologies and the innovative approach of cost-based pricing. 

The true accountability lies with J&J's process for electing a PBM and an evaluation methodology that emphasizes so-called “better discounts” over lower costs. This methodology opens the door for traditional PBMs and their vertically integrated entities to gain while employers and employees lose (as illustrated in the table above).   

It’s also worth noting that J&J will not be the only business to find itself in hot water over problematic PBM behaviors. Virtually all companies that have used a discount-based evaluation process that led to contracting with one of the big three PBMs could be vulnerable to similar allegations. This risk highlights the need for greater transparency and accountability in the pharmacy benefits industry across benefit brokers, pharmacy consultants, PBMs and pharmacies.

If you're interested in learning more about how a cost-based approach can benefit your organization or if you have any questions, feel free to reach out to us at sales@smithrx.com. We're here to help you navigate the complexities of pharmacy benefits and find better outcomes for all.