The J&J lawsuit should be a wakeup call to the PBM industry — and to companies everywhere

The ongoing legal dispute involving Johnson & Johnson has again thrust the topic of pharmacy benefit managers (PBMs) into the spotlight. Ann Lewandowski, a J&J employee, sued the company for overpaying for its employees’ prescription drugs through its PBM, Express Scripts, claiming that these overpayments resulted in higher health insurance premiums and out-of-pocket drug costs for employees.

This lawsuit is a significant entrant in the recent groundswell of efforts to shine light on the traditional PBM industry and its opaque pricing structures and outdated evaluation models. It follows on the heels of probes by government regulators and attention from Congress into PBMs’ business practices. In late May, executives from three major PBMs were asked to testify before the House Committee on Oversight and Accountability.

While this attention from regulators and lawmakers is welcome, the J&J lawsuit is significant because it has brought the conversation about the problem with PBMs into the mainstream, including to employers that sponsor health benefit plans and their employee beneficiaries.

People like Lewandowski know they can go to pharmacies like Cost Plus Drugs and maybe get their prescriptions for less. More and more people are catching onto the fact that the wool is being pulled over their eyes when it comes to the true cost of medications — and PBM markups on drugs.

This moment is an inflection point for how pharmacy benefits are managed in the U.S. For policymakers, business leaders, and the wider health care industry, the J&J lawsuit is helping reveal deep flaws in the country’s pharmacy benefits market and the monopolistic control the Big 3 PBMs— CVS Caremark, Express Scripts, and OptumRx, which control nearly 80% of the market — have over drug benefits. This moment’s spotlight serves as an opportunity to depart from the status quo of traditional PBMs and push for fresh thinking, in both the private and public sectors, that results in affordable medications for all employees.

That’s why I built my company, SmithRx. I wanted to create a new kind of PBM that puts patients and their employers first by optimizing for the lowest-cost drugs and passing through 100% of cost savings.

The lack of price transparency in the Big 3

The dominance of the Big 3 PBMs, which are owned by three of the largest health care conglomerates in the country — CVS Health owns Caremark, UnitedHealth Group owns OptumRx, and Cigna owns Express Scripts — leaves little room for competition. They strongly influence which drugs are offered on formularies and how much consumers and their employer-sponsored health plans pay for drugs.

One problem with the Big 3 is that they typically operate with opaque pricing structures, making it difficult, if not impossible, for businesses to fully understand the true costs associated with their pharmacy benefits. Additional fees and hidden charges are often buried within contracts. When a PBM is part of a large health care conglomerate, financial transparency gets blurred, and business practices designed to increase margins, like spread pricing and rebate retention, are hidden behind the organizational curtain. All of this can (and usually does) result in higher prices for the people who need medications. It’s clear the lack of competition in the PBM market and increased drug costs harm consumers.

The pitfalls of traditional PBM evaluation

When an employer selects a PBM to manage its pharmacy benefits, it typically works with benefits consultants or brokers and employs one of two approaches: a discount-based evaluation or a cost-based evaluation.

A discount-based evaluation compares PBMs based on the discounts and rebate guarantees they negotiate on drugs on behalf of the plan. A cost-based evaluation, by contrast, focuses on the total net cost of pharmacy benefits, including the PBM’s services and the cost of drugs.

While discounts are valuable, focusing solely on them has several limitations. A key one is that a discount is off a drug’s list price, and if that list price is high, then even a discount that sounds large can fail to produce a net price that is the cheapest option available in the marketplace. A narrow focus on discounts and rebates can also cause (and even incentivize) a PBM to overlook broader cost-saving opportunities, like swapping a higher-priced brand drug with a generic or biosimilar.

Imagine you’re at the grocery store to pick up a gallon of milk. Assuming all the milk is of the same quality, would you make your decision based on which brand has the largest percent off its sticker price (a discount-based approach), or would you look at the final cost of all available choices and select the least expensive one (a cost-based approach)? Though the decision seems obvious, the PBM evaluation process has traditionally favored discount-based evaluations, even though cost-based evaluation results in choosing the lowest-priced drugs for the business and its employees.

This brings me back to the J&J lawsuit. Lewandowski alleges that the company — and Aon, its benefits consultant — favored enticing discounts and rebates rather than analyzing the actual costs the company and its employees would be responsible for. J&J is accused of prioritizing the discounts and rebates offered by Express Scripts over the critical goal of minimizing overall plan costs, which exposed the company to allegations of breaching its fiduciary duties and has underscored broader concerns regarding the transparency and effectiveness of its PBM strategy overall.

Lessons to be learned from the lawsuit against J&J

This lawsuit brings to light the hazards of traditional PBMs. By using discount-based pricing structures that appeal to budget-conscious employers, traditional PBMs create business models that sound great in theory but don’t actually control costs for the employer and its employees.

The unfortunate reality is that, according to the lawsuit documents, J&J completed what is considered a “typical” PBM evaluation process — the company leveraged a benefits consultant to recommend a PBM partner, and they listened, as most companies do. Given the market dominance of the Big 3, it’s no surprise that J&J’s consultant recommended Express Scripts. But following the traditional path of PBM evaluation is alleged to have led to higher drug costs and insurance premiums that ultimately trickled down to J&J’s employees.

The U.S. pharmacy benefits market has been built to obfuscate price information and blind decision-makers to how drug costs are set, calculated, and passed down to health plans and employees. And the Big 3 have helped shape the status quo pharmacy benefits evaluation methodology to tip the scales in their favor.

The J&J lawsuit should serve as a wake-up call, especially for employers who have to make decisions about who manages their health benefits: There is an urgent need for a shift toward a more transparent, comprehensive approach in PBM evaluation and selection. Bringing this issue to the mainstream is the first step. The general public must understand that the current system has been set up to extract extra money from them, money that could be used for other things.

Creating a viable alternative path and pushing for reforms that safeguard against the pitfalls of superficial financial incentives can ensure access to high-quality and affordable pharmacy benefits for all employees who need them. A shift in thinking — to an approach that focuses on achieving the lowest net drug spend for employers and employees — would be a welcome first step.

Jake Frenz is the CEO and founder of SmithRx, a pharmacy benefits manager.