A Conversation with Alan Lotvin, M.D. on the PBM Industry’s Reputation | Part 1

The president of CVS Caremark discusses the PBM industry’s reputation, list prices and rebates.

First of three parts

Editor’s note: We interviewed Lotvin several weeks ago, before the Federal Trade Commission announced its study of the PBM industry and before a whistleblower lawsuit was filed against the company An excerpt of the transcript of that interview ran in our June 2022 print issue. Here is first segment of the full transcript, which has been edited for clarity.

The premise of my first question is that PBMs have a really bad reputation as middlemen. So I'm curious whether you accept that premise. And if not, why not? Because it would seem to go against a lot of what I've read. And if you do accept the premise, are you concerned about it? And what should CVS Caremark and the industry do about it?

Those are all good questions. I would first of say that everyone loves to characterize middlemen, in general — no matter what the industry is — as awful. But are we all going to really get in our car and drive out to the farm and buy food directly from the producer? The barter economy tends not to work. So, yes, we are middlemen.

What I would say is, from a reputation perspective, I do think that the industry has a challenged reputation. I think part of it is that we have very well funded — we'll just call them rivals — who are trying to distract from the core issue.

(The way I would) characterize it is drug prices are high. Drug spending, which is the total amount of drugs spend, actually isn't that high. And if you look back over the last several years, drug spend, year over year, has gone up less than inflation.

That's largely for a couple of reasons. One, it's been the influence of generics and, two, is the influence of discounts driven by the PBMs

Drug pricing — drug pricing — is set by the manufacturers. I have nothing to do with it. If they want to give that to me to set, hey, I'm more than happy to take that.

But when they were asked if they would lower prices if rebates went away — Congress asked them this question in 2019. None of them raised their hand under oath and said, “Sure.”

So you think about the dynamics of the industry, right? One is you have the pharmaceutical industry, which sits with intellectual property-granted, monopoly pricing power. I believe in intellectual property. It is a big driver of innovation.

But, like any tool, it can be misused.

On the other side, to combat the monopoly pricing, what we and our competitors in the PBM industry do is we aggregate lives, we aggregate people's purchasing power, so that we can say to a manufacturer, look, we like your drug, but we like drug A and like drug B, they're kind of the same. And, you know, we need a better price. Or if it's generic, we're going to use the generic.

I think it creates this natural tension that upsets the manufacturers a lot. They spend a lot of money.

Objectively, if I had to point at something, the GAO (General Accounting Office) in the early part of the 2000s did an assessment of the PBM Industry (as to whether) it creates value. They were pretty unequivocal about it. That there is no question that PBMs lowered prices. That's one unequivocal piece.

The second unequivocal piece is that these are very sophisticated buyers. I mean when you look at buyers like Anthem and Centene, these are people who are super sophisticated about healthcare, to say nothing of really smart employers — Microsoft, Google. They are buying a service because they understand that combining this purchasing power, driving generics, simplifying the processing of prescriptions, creates value.

It would be disingenuous of me to disagree with you and say that the industry doesn't have a poor reputation. I do, completely, think it is undeserved.

Now, is the industry perfect? Absolutely not. Are there things that have happened over the years and like every industry, there's good players and bad players.

But on balance, I think we can look back and say we've done a pretty good job of reducing the expense of drug spending in the United States.

What you're addressing is the difference between list price, and net price and net spend. Got it. But as you know, the beneficiary doesn't benefit from that difference between the list price and the net price, directly. Their coinsurance is based on the list price. You guys get the rebates, but as Joe citizen, I don't experience that net price. I know what you're going to say, that I do, in lower premiums, but that's rather indirect.

That's fair. So I would say a couple of things. Ninety-eight percent of the rebates that we generate go back to our clients. Sometimes those go back to members at the point of sale. That’s a decision that the ERISA (Employee Retirement Income Security Act) client make.

Sometimes it goes, to your point, into reducing premiums. That's absolutely true.

The rebates that we collect — collect on behalf of our customers — lower the overall cost of drugs, lower the net price of drugs.

The other place, though, where you do benefit directly as the individual is the ability to drive greater use of generics. Generics are just much, much less expensive than brands.

So your point is how do we take this rebate, the gross-to-net (difference) and make it more applicable to the individual?

Let me play you a flip of that, though. The whole principle of insurance is we take all of the costs and we distribute them across a lot of people.

Let's take two people, person A, who is on an expensive medication that has a copay card from the manufacturer. Person B, who needs to have their hip replaced. Persons A and B, they work for the same employer, they have the same benefit plan.

When Person A goes and has a $1,000 deductible, because of their Humira, or whatever drug they're taking, if they then get the $1,000 back from the manufacturer or if they got the rebate applied to them, they have lowered their out of pocket costs.

The person who has their hip replaced — no one is helping them take care of their deductible, there's no rebate coming back to them.

Look, it's bad luck to get sick. I just dealt with this with my wife. She needed a pretty big operation.

So how do you balance this? I think what we have started to think about is how do we think about deductibles. What's the advice we would give people around high-deductible plans and how to think about minimizing the impact of that drug spending has (when someone has) a high deductible plan?

Your response should be, “Yeah I hear you. But the plan is getting back the money. So they should figure out how to make it better.”

I can tell you what we do at CVS with our own benefit plans. We try to smooth out — especially for lower-income employees — that out-of-pocket cash flow problem. We cap the total out of pocket.

Every employer is different, right?

If you're an employer that has a really stable workforce, and you're really in a competitive place, you're probably going to have lower deductibles. If you're an employer that has tons of turnover or, depending on your population, tons of expenses, you're going to think about it differently.

But all of the things that we do, ultimately, are helping to keep the benefit affordable. Because we do have plenty of plans, who come to us and say, “Hey, I'm an ERISA plan. I don't want to cover this category.” And we're, like, you can't do that. We don't want people to do that. We try to help them come up with approaches to keep their overall benefit affordable within their cost structure.

But as to your point, it stinks to get sick. You're losing the lottery and, depending on what you get, it's going to it's going to change your experience.

Why not make the rebates point of sale? It would seem then that the individual would experience directly.

We do. We're happy to make rebates to the point of sale. That's fine with us. We do it for a lot of our clients. Some of our clients take that approach. Like I said earlier, that means the person who is (taking) Humira gets a better benefit package than the person needs a hip replacement.

Or they say, “Look, if we're going to, if I'm going to pay for all of this other expense, I want to use all of this rebate dollar to buy down everybody's premium.”

So I think what the plans that choose not to pass (rebates) through at the point of sale are essentially saying is that they are trying create a more even, level, equitable benefit.

Part of the point you're making here is that this is really up to the plans to decide.

I always think it's a bad idea when you get asked a hard question to blame your customers. I'm not blaming them. What I'm saying is, there are some things that become philosophical.

If I want everyone to get exactly the same benefit, everyone can get a $50 a month reduction in their premium versus one person getting a $4,000 rebate.

We do have conversations with people and we say, “Well, then maybe you should bring your overall deductible down.” So it's a consultative discussion around plan design.

But, ultimately, yes, the plan does decide what they want to do. If someone said to me, “Hey, I want 100% of rebates to go through the point of sale,” 100% of rebates go to the point of sale.