by Marty Makary
“We don’t play the kickback game,” he told me.
Over tandoori chicken and naan, Brandon told me he generally recommends that employers self-fund (self-insure) their benefits. That means the employer is the one who pays the health care bills, not an insurance company. Instead of paying premiums, the employer and employees pay into an escrow account that funds the plan. The employer hires a company called a third party administrator to manage the plans. Many traditional insurance companies offer administrative services. Brandon then makes sure that an employer has catastrophic insurance to cover any massive bills, maybe anything over $80,000 or $100,000. It depends on how much cost risk the employer can afford. Brandon shows the options and prices to the employer and lets them pick. It’s not complicated. Overall, Brandon saves businesses millions of dollars a year just by restructuring the way they pay for health care.
In most cases, bypassing traditional health insurance and self-funding is the best value for employers. It saves so much it’s like giving every employee an instant pay raise. But employers often don’t make the changes, he said. That morning he met with an employer who was hesitant about self-funding, even though it would save a lot of money without reducing benefits.
I asked Brandon if eliminating undisclosed insurance company kickbacks would be a simple reform that would have a big impact. “Bingo,” he said.
Brandon said that a small but growing number of brokers have gone to the flat fee model. I did some research on my own to find other broker firms that use a flat fee commission and found Bernard Health in Nashville, Tennessee. After one trip I had to Nashville, I swung by their offices and met Alex Tolbert and Ryan McCostlin. They affirmed what Contorno and Luckett had both told me: the broken commission-based model was increasing demand for brokers like them, whose payments are aligned with what’s best for employers.
Creating a Brand of Trust—Health Rosetta
American business owners have a tremendous opportunity to lower their health care costs. Dave Chase is trying to arm them with information while establishing standards for the broker industry. Chase created a credentialing process called Health Rosetta. His standards are principles for fair trade for the industry. One of the fundamental commitments of his standards is to complete transparency. Employers should be able to see how brokers, insurance companies, pharmacy benefit managers, and providers are being paid.
When I met Chase at a restaurant in Washington, D.C., a few blocks from the White House, he struck me as a man of deep passion and moral conviction. He had made a fortune as a successful technology executive, leading the health care business for Microsoft for a dozen years. Chase also worked at the firm now called Accenture, consulting for hospitals. From his broad business experience in health care, he quickly learned about the business of buying health insurance through brokers and benefits consultants. In due time, Chase became an expert on the administrative waste in health care. He knew the money games and the middlemen as well as anyone.
Chase founded Health Rosetta to disrupt this business of employer-sponsored benefits. His mission is to educate employers on how to buy health insurance products based on value rather than broker kickbacks. Health Rosetta is a certification process for health insurance brokers and benefits consultants that uses principles of full transparency. Chase has brokers sign a code of conduct and agree to use a standard disclosure form that shows all the different ways they are being paid. Contorno was one of those brokers attracted to Chase’s effort early on, and Contorno’s firm, EPowered Benefits, became one of the first Health Rosetta–certified brokerage firms out of the hundreds certified today.
Using the “open source” concept he had espoused in his past technology work, Chase decided to make everything freely accessible, including the code of conduct and disclosure forms. You can find it all at HealthRosetta.org.
The Big Picture
Some have called for legislation to shine light on the health insurance broker industry. Consumer protections are one approach. After all, after the crash of 2008, the mortgage industry benefited from tighter legislation. But market forces can also be a powerful change agent. Next time your business buys health insurance, ask if the broker is “Health Rosetta–certified” or if it follows the principles of full disclosure and fair trade that Health Rosetta outlines on their website. At a minimum, download the Health Rosetta disclosure form and ask your broker or health benefits consultant to fill it out. And consider giving your business to brokers that charge a flat fee, or make their commission based on how much is saved instead of how much is spent.
Some individuals and employers are leaving the insurance industry behind altogether. In recent years, faith-based sharing ministries have become more popular. Samaritan Ministries in Illinois and others are taking the Christian concept of sharing one another’s burdens quite literally. They pool the resources of their members to pay one another’s bills. Samaritan says its 250,000 members share more than $27 million per month in medical costs. Their growth shows they’re meeting a need, and also that the same old way of doing health insurance is not working. The plans are typically less expensive than insurance. But don’t rely on your health insurance broker to tell you about this low-cost option. Samaritan Ministries and other health insurance co-ops don’t pay kickbacks to brokers.
American employers spent an estimated $738 billion on health benefits in 2018, a figure that has been rising about 5% annually in recent years.3 The average premiums for a family reached almost $20,000, according to the Kaiser Family Foundation.4 If employers could provide their excellent benefits for less, it would save billions.
One myth of employer-based health care is that the employers are paying for it. Company owners, executives, and HR people love to say the organization pays for the health benefits—or for most of them. That’s not the most accurate way to describe what’s happening. The employers pay for health benefits out of the pool of money they use for worker compensation. Therefore, that compensation allocated to rising health care costs is not going toward increasing an employee’s wages. In other words, it’s coming right out of the employee’s pocket. It’s one of the main reasons wages have been stagnant in recent years.
It’s time to clean up the business of buying health insurance, with transparency and competition. It’s time we gave American workers a raise.
CHAPTER 14
Pharmacy Hieroglyphics
After finishing my speech at an employee benefits conference for Michigan business leaders, I handed the microphone to Danny Toth, the next speaker. Toth is a gracious, somewhat frail man from LaGrange, Georgia. I hadn’t met him before, but his cowboy boots, modest appearance, and matter-of-fact manner sent a strong message: I don’t care what you think, I’m going to do some straight talk.
And that’s exactly what he did. When Toth stood before the audience, he described what sounded like a cartel. Most people are familiar with a few bad actors in the pharmaceutical industry. The media had a field day when the infamous “pharma bro” Martin Shkreli jacked up the price of his company’s drugs—and then smirked his way through subsequent court proceedings. But the underworld described by Toth was much larger than a few high-profile cases of executives inflating prices. What Toth revealed was the inner workings of a drug pricing game that’s a million times bigger—and more expensive—than the games of the pharma bad actors.
Toth detailed how a giant industry of middlemen called pharmacy benefit managers—PBMs for short—are systematically gouging American businesses. Employers, directly or through their health insurance company, hire a PBM to manage the pharmacy benefits for their employees. But Toth explained how PBMs, who collectively manage pharmacy benefits for 266 million Americans, routinely fleece American businesses using clever shell games.
As I learned more about PBMs, I recalled the research advice many pharmacists have whispered to me over the years: “You should take a look at PBMs. Their margins are sick.”
“The Spread”
One
of the most important terms to understand the PBM world is “the spread.” “The spread” is the difference between what the PBM pays a pharmacy for a medication and what they invoice an employer or health plan for that same medication. You would think it’s a simple transaction: the pharmacy charges $10 for a medication, so the employer pays $10. But it’s not so simple. The PBM is the middleman, so if the pharmacy charges $10 for the medication, the PBM might bill the employer $50 and pocket the extra $40—that’s “the spread.”
Wanting to get into the weeds, I asked Toth if we could meet. There in Grand Rapids, we found a time that worked and met in the café, where we pulled two chairs up to a small table. He had a thick briefcase and I had a notepad and pen. I started by asking him if it was common for PBMs to have giant spreads. He grabbed a stash of documents out of his briefcase and showed me jaw-dropping numbers. He had data examples in which employers were paying their PBM 5 to 20 times more than what the PBM was paying a pharmacy for the medication. That’s the spread, and it’s where PBMs cash in.
In the weeks that followed, I talked to industry insiders and obtained a confidential document that showed the “spreads” between what one PBM paid a pharmacy for a drug and what it charged one employer for the same drug. I’ve withheld the names of the employer and PBM, but I assure you, this is a real-life example.
I couldn’t believe this breakdown when I saw it. I have personally prescribed some of these medications for my patients. I had no idea what happened behind the scenes. I had even taken a heartburn medication like the first one listed. Seeing these spreads almost reactivated my heartburn.
A PBM can charge an employer almost any price for a drug, and it gets paid. In the above table, a PBM billed an employer $188 for bupropion but paid the pharmacy nothing. In that case, the employee copay covered the entire cost of the medication, but the employer got charged an arm and a leg anyway.
Similarly, a PBM can set any copay for patients regardless of the medication or the true cost. One patient paid a $285 copay for a $40 medication.1 This is not an extreme case of criminal fraud, it’s perfectly legal. It’s the business model of most of today’s PBMs.
But why would any business or government health plan paying for these meds tolerate this? Well, imagine that you are an employer reading this list, and it’s thousands of lines long and does not have the “Amount Paid to Pharmacy” column. You would not see the spread. That’s what businesses see in the real world.
The above list—minus the spread—is typical of what’s sent to most businesses and health plans by their PBMs when itemizing medications used by their employees. For a typical midsized company, this list is thousands of medications long. For a human resources (HR) person handling health care benefits at a company receiving this list, it might as well be written in ancient Egyptian hieroglyphics.
At the bottom of a typical report is some big sum of money the employer owes the PBM. It has the appearance of transparency because each pill is itemized in detail with a price. But “the spread is nowhere to be seen.” The PBMs have gone to great lengths to keep the real prices secret, using a fog of fees, rebates, and discounts that make a true value too complicated for anyone to determine. Even if an employer figured out the spread on a few medications, there are thousands of these meds and they go by different names, have different comparables, different generics, different schedules and different dosages—and each combination of these variables is priced differently.
As one employer said, “I got a 100-page printout of all the medications my employees take and the price of each. I wouldn’t know where to start.” He’s right. It’s daunting. Health care is typically the second largest expenditure for most businesses after wages. I began to realize why so many of them were getting taken for a ride when I started asking CEOs how they picked the PBM to manage their employees’ pharmacy benefits. They often responded saying that it just came with their health insurance plan, or that their broker recommended it, or that the PBM they chose was one of the big three so they went with them. CEOs would sometimes boast that their PBM gives them a 10 or 20% discount on the meds. But most CEOs were simply fed up with the high cost of it all and the fact that it goes up year after year.
Getting Information
Unfortunately, even going directly to the pharmacy and comparing what their business’s PBM was paying for a certain medication probably wouldn’t accomplish anything. A curious CEO would likely hit a wall because pharmacists are gagged under their PBM contract to not disclose what they are paid by the PBM.
When I learned that many pharmacists were contractually gagged, I couldn’t believe it. I had heard of hospitals encouraging doctors to use their own MRI machines but never contractual gagging—restricting what a clinician can tell a patient. Gagging a health professional violates everything that sets medicine apart as a noble profession. It compromises our heritage of trust, a craft rooted in compassion, and undermines our commitment to do what’s best for the patient.
My grandfather was a pharmacist. In his day, pharmacists dispensed medications without a prescription, as a physician would. Grandpa would be sad to see how corporate medicine has gagged today’s pharmacists. As I talked to other pharmacists, I saw the scope of the problem—and became convinced something needs to be done. We need to stand against gagging of all health professionals everywhere. Their conversations with patients must never be restricted by outside forces. It’s just wrong.
Some pharmacists told me they put patients over corporate interests and break the rules by telling patients what’s best for them. These honorable pharmacists risk getting fired from their pharmacy. At independent pharmacies, they risk losing their large PBM contracts altogether, which could put them out of business. In my opinion, they are heroes. Thankfully, a new federal law passed in 2018 ended the common practice of prohibiting pharmacists from helping patients find less expensive options.
Cookie Benefit Manager
Think about how this PBM game might look if it happened with another important commodity: Girl Scout cookies. Let’s say a dad approaches the CEO of a small company and offers to provide discounted Girl Scout cookies services to the company’s 100 employees. The busy CEO has no idea how much the different boxes of Girl Scout cookies normally cost (who does?), but he likes the simplicity of getting all his cookies from one guy. And he’s intrigued by the promise of a bulk discount the dad claims he can pass along to the company. The CEO agrees to make the dad the exclusive Girl Scout cookie manager for his employees.
A week later, the dad arranges for a few young Girl Scouts to set up a stand at the company office. One employee walks up and asks for a box of Thin Mints—everybody’s favorite. The girl asks if he’s an employee of the company, and he says “yes.” She says it will cost him only $2. He pays the $2 “copay” for his box and gobbles them up. The girls go on to sell a hundred boxes. The CEO is glad to see his employees enjoying the cookies.
A month later, the dad bills the company’s CEO a whopping $50 per box and subtracts a “20% discount,” bringing the bill to roughly $40 per box. The busy CEO can’t decipher the bill but pays it anyway, comforted by the 20% discount reflected on the bill.
The dad then gives the Girl Scouts $1 for each box that they sold, so the girls collect a total of $3 per box ($2 copay from the employee + $1 from the cookie manager). Their wholesale cost is $2.50, so the girls make 50 cents per box. The dad makes $39 per box, or $3,900 for the day, for “managing the employee cookie benefit.”
Eventually, someone tells the CEO that a box of Girl Scout cookies normally sells for $5. When he finds out the real price, his smile disappears. He’s been played.
Crazy, right? No one would put up with the scheme of that profiteering dad. But that’s how it works in health care. The dad is the PBM and the Girl Scouts are the pharmacies.
Of course, this is where the analogy breaks down, because in the PBM world, finding out the street price for thousands of medications is very difficult for a CEO. For one t
hing, the prices vary by substitute drug name, dose, capsules versus tablets, etc.
Today, approximately 80% of Americans get their medications through a PBM.2 American businesses financing the coverage and the employees paying for their medications are usually oblivious to the price gouging. When people get frustrated that drug prices keep going up, they often point the finger at pharma bad boys like Martin Shkreli. More often, though, the price spikes are taking place right under their noses.
Very disturbed by what I was learning, I decided to walk over to the office of Dr. Gerard Anderson, a colleague of mine at the Johns Hopkins School of Public Health and one of the nation’s leading authorities on drug pricing. Jerry is a terrific colleague who has mentored thousands of students, and some faculty like me, and he is always happy to talk. He greeted me with his characteristic big smile. I told him what I was learning and how bothered I was by it. I asked him were people—the public, business owners, policy makers—aware of the secretive practices of PBMs jacking up the price of health care?
“Marty, of course not. Secrecy is how everyone in the drug supply chain makes so much money. The sad part is that patients are being asked to pay more and more of the higher and higher prices,” Jerry explained.
Rebates and Mail Order Meds
If “the spread” is the leading shenanigan of PBMs, rebates are a close second. Rebates are the smoke bomb of the PBM world. Pharmaceutical companies offer rebates for medications, but the employer paying for medication doesn’t know the amount of the rebate, or that it even exists. The PBM keeps all or part of the pharma rebate for itself, for “administrative work.” This could also be called a “kickback.”
In his presentation, Danny Toth enumerated so many schemes that I couldn’t keep up. There are so many that they add up to a lot of money. A 2018 study in the Journal of the American Medical Association showed that customers overpaid for one quarter of their prescriptions, with an average overpayment of $7.69 per prescription. Overpayments totaled $135 million during a six-month period.3