Robert J. Feeney, Jr. , Founder and CEO

Formulary exclusion lists have become the blacklists of the pharmaceutical industry. Direct-to-patient channels offer manufacturers an alternative.

With the advent of managed care in the 1980s came prescription formularies—lists of medications that were approved for prescription to patients in various care settings. Originally, formulary inclusion was based on third-party assessment and clinical evaluation of the efficacy, safety, and cost-effectiveness of a given medication. These lists represented a sensible way for payors, providers and patients to determine which drugs qualified for coverage and optimized the cost vs. clinical effectiveness equation.

Over the past thirty years, however, formularies have evolved from straightforward, single-tier lists of brand and generic medications to become exceedingly complex matrices of as many as ten separate tiers with selection criteria than can be described as opaque at best. What was once defined by objective clinical standards is now dictated by for-profit middlemen in the form of pharmacy benefit managers (PBMs). The growth of tier-based differential rebates—created by PBMs as a means for pharmaceutical manufacturers to secure access to formularies—fundamentally altered the role of formularies and become the driving force of formulary inclusion. As the prevalence and size of these rebates has grown, formularies have become increasingly narrow, evolving from inclusion lists to the exclusion lists we know today. The result is that patients now pay larger and larger percentages of the cost of certain necessary medications, sometimes as much as 100 percent.

The Blacklists of the Pharmaceutical Industry

Formulary exclusion lists have become the blacklists of the pharmaceutical industry, created by PBMs to block consumers from gaining access to medications, not because of efficacy or safety concerns, but solely as leverage points for PBMs in their rebate negotiations with manufacturers. And the exclusivity of these lists only continues to grow. The size of formulary exclusion lists has increased by nearly 160 percent since 2014, during which time the combined number of treatments on CVS Pharmacy’s and Express Scripts’ drug formulary exclusion lists grew from 132 to 344. Over this same period, the prevalence of consumer-driven health insurance models also grew substantially; approximately 40 percent of consumers are now enrolled in some form of high-deductible health plan.

How did we get to a point where one healthcare company can pay another to block patient access to a competing product in the marketplace?

With patients taking on more and more responsibility for the management of their own healthcare and experiencing first-dollar exposure for the actual costs of prescription medications, should a PBM continue to decide which medications prescribers and their patients select as optimal for their care? When PBMs make these decisions based in large part on the scope and depth of the rebates that manufacturers are willing to pay, the resultant limitations on patient choice seem especially cynical. How did we get to a point where one healthcare company can pay another to block patient access to a competing product in the marketplace?

An Existential Threat to Manufacturers

Given the recent vertical integration trifecta of Aetna/CVS (a payor/retailer combination), Cigna/ESI (a payor/PBM combination) and Walgreens/AmeriSource Bergen (a retail/wholesale combination), now is a good time to think about the next logical step in the evolution of increasingly narrow formularies. If the PBM and the retailer are the same company, what motivation would they have to even stock non-formulary drugs in their stores? If wholesalers can’t get them into stores, why should they even include such medications in their supply chain or distribution networks? CVS and Walgreens comprise no less than a 40-percent share of the US retail pharmacy marketplace. The manufacturers of products excluded from these companies’ formularies face an existential threat when it comes to medications in which they’ve invested billions of dollars to research, develop and commercialize. Overnight, that investment could be all but wiped out by a large PBM/retailer partnership that decides not to stock their product.

The upward trend of mergers and acquisitions throughout the healthcare industry means that the scenario described above isn’t just pessimistic speculation. It’s only a matter of time before patient access to medication via traditional retail channels is defined by singular corporate entities who control both the playing field and the rules of the game. And that’s just brick-and-mortar retail. With its acquisition of mail-order pharmacy PillPack, Amazon’s entry into the space represents a consolidated corporate force majeure on the online flank of the competitive landscape as well.

Leveraging Brand Loyalty with Direct-to-Patient

To survive in this new industry paradigm, pharmaceutical manufacturers are going to have to take their fate into their own hands. Only by establishing independent, direct-to-patient channels can manufacturers ensure that the massive investments they’ve made and continue to make into innovation and development won’t be subject to the whims of PBMs and retailers who deem their products cost prohibitive. By utilizing direct-to-patient platforms driven by e-commerce and anticipatory logistics, manufacturers will always have an ace up their sleeve when it comes to patient access, engagement and retention. Brand loyalty, after all, is a powerful thing. Manufacturers can leverage that loyalty by engaging patients on the clinical value of their brand and offering a more consumer-friendly alternative to the fragmented and overly complex traditional pharmacy process—an alternative that is fully automated and streamlined by e-commerce technology designed with the patient in mind.

The reality is that today’s formulary lists are pay to play, and rebates are the cost of admission. But increasingly narrow formularies are just the tip of the iceberg when it comes to the challenges that pharmaceutical manufacturers will face in the years ahead. Brands that approach these challenges with passive strategies dependent on traditional channels risk facing existential threats to core products. Manufacturers that tackle these challenges head on, with independent, direct-to-patient platforms at the ready, will be poised to define the future of the industry themselves, rather than letting it define them.