Capital Rx exec to senators: Here's how to fix the PBM industry

While calls to “start over again” and “blow up the whole model” seasoned today’s meeting of the Senate Finance Committee investigating the pharmacy benefit management industry, most lawmakers focused on looking at new approaches to fixing a flawed drug pricing system.

Matthew Gibbs, president of the startup PBM CapitalRx, was one of the five experts to testify and the only PBM official present. Gibbs said that the current system of drug pricing based on the average wholesale price needs to be abandoned and replaced with what many state Medicaid plans use: the National Average Drug Acquisition Cost (NADAC) index.

“I don’t know if people understand that in most, if not all, Medicare contracts, you pay the average price of all drugs,” Gibbs said. “That’s your guarantee. You don’t know the price of generic Lipitor. You pay a price based on all generics averaged over a year. We don’t buy any other products like that in our economy.”

Sen. Ron Johnson, R-Wisconsin, said during the hearing that “this whole area is ripe for gamesmanship.” He then asked Gibbs what Capital Rx's model would bring to the table that sets it apart from other players like Amazon or Mark Cuban Cost Plus Drug that are aiming to shake up the traditional PBM space.

Gibbs emphasized Capital Rx's focus on transparency, something that sets it apart in the broader market.

"Using a price index like NADAC, which is published by CMS, they actually do the survey of the pharmacies, and getting it more robust so that it’s not voluntary—today it’s a voluntary survey—and getting responses to that will lead us to the actual drug costs," Gibbs said. "And then you can have your nuances of Costco, Mark Cuban. And the person can actually go in and look and actually be informed about the real prices once and for all. The only way is to level set."

"We have the tools already," he said. "We just need to employ them.”

Lawmakers and experts largely agreed on the dysfunctionality of the drug pricing system and pointed out many of the contributing factors. For example, the market is highly concentrated, and three companies dominate the space.

Karen Van Nuys, Ph.D., of the University of Southern California, said at the hearing that 4 in 5 drug interactions in the U.S. are administered by these three players: CVS Caremark, Express Scripts and OptumRx. These PBMs are also integrated with large health plans—Caremark is a sister to Aetna at CVS Health, Express Scripts is owned by Cigna and Optum Rx is part of UnitedHealth Group.

Jonathan Levitt, an attorney with Frier Levitt Attorneys at Law, testified that not only do the mail-order arms of the large PBMs drive local pharmacies out of business and create “pharmacy deserts,” but the fact that they're all vertically integrated with large health insurance plans begs questions about possible collusion.

“It’s become evident in recent years that the PBM industry is going in the wrong direction," Sen. Ron Wyden, D-Oregon, the committee chair, said in his opening remarks. "What made sense 30 or 40 years ago, doesn’t make sense today.”

Some lawmakers expressed frustration at what they called the “PBM mess.”

“I would blow up the whole drug supply chain model,” said Sen. John Thune, R-South Dakota. “It is an antiquated model that to me makes no sense. I would start over.”

Wyden agreed. “If we were starting over, there’s no way anybody would choose what we have," he said.