Jeffrey Wade
Pharmacy benefit managers (PBMs) are companies that work with health insurers, large employers, and other payers to manage their prescription drug benefits. They are the middlemen between patients and their doctors, negotiating prices with drug manufacturers and pharmacies, establishing drug formularies and pharmacy networks, and processing drug claims. PBMs are currently attracting considerable critical attention from policymakers due to their lack of transparency and their role in high drug costs. While PBMs are commonly used for commercial insurance, they are also used by self-insured employers and Medicare Part D plans.
| Characteristics | Values |
|---|---|
| Definition | Pharmacy benefit managers (PBMs) are entities that administer prescription drug insurance benefits. |
| Functions | Negotiating prices with drug manufacturers and pharmacies, establishing drug formularies and pharmacy networks, and processing drug claims. |
| Role in drug pricing | PBMs play a major role in influencing what insurers pay, how pharmacies are reimbursed, and which medications people can access. |
| Criticism | Lack of transparency in their business models, harmful tactics such as accumulator and maximizer programs, denying patients the benefit of patient assistance programs, and restricting access to medicines. |
| Market concentration | The market for PBM services is highly concentrated, with a few major players controlling a large market share. For example, CVS Health, Cigna, UnitedHealth Group's OptumRx, and Humana Pharmacy Solutions. |
| Impact on drug costs | PBMs argue that they help control and reduce drug costs for insurance companies, but critics argue that their practices drive up drug costs for patients. |
| Regulation | State legislatures have been pushing for greater transparency and disclosure provisions to better regulate PBMs. The Pharmacy Benefit Manager Transparency Act of 2023 prohibits PBMs from unfairly lowering rebate payments to pharmacies. |
| Rebates | PBMs collect rebates from drug manufacturers, which can constitute a significant portion of their revenue. There is debate over whether PBMs should retain these rebates or pass them on to payers or insurers. |
| Cost-sharing | PBMs engage in cost-sharing practices, such as high deductibles and coinsurance, which can cause patients to forgo necessary drugs and increase out-of-pocket costs. |
| Competition | Increased competition among PBMs and market changes could help reduce drug costs and spending. |
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What You'll Learn
PBMs' role in rising prescription drug costs
Pharmacy benefit managers (PBMs) are companies that work with health insurers, large employers, and other payers to manage their prescription drug benefits. They have been the subject of scrutiny in recent years due to their lack of transparency and their role in rising prescription drug costs.
PBMs have a significant impact on the total amount insurers pay, how much pharmacies are paid, and which drugs are available to patients. They negotiate drug prices with manufacturers, establish formularies or lists of covered drugs, and process drug claims. PBMs can collect revenue through administrative and service fees from insurance plans and rebates from manufacturers.
One of the main criticisms of PBMs is their lack of transparency. Traditional PBMs do not disclose the negotiated net price of prescription drugs, allowing them to resell drugs at a higher public list price through a practice known as "spread pricing." This lack of transparency makes it difficult to determine how much money is lost due to spread pricing and whether drug rebates are passed on to patients.
PBMs have also been accused of inflating prescription drug costs. They may charge insurers a higher amount for a drug than they reimburse the pharmacy, and they often place higher-cost medications in more preferable positions on their formularies, even when lower-cost options are available. This can result in higher out-of-pocket costs for patients, especially those needing expensive medications for conditions such as cancer.
Additionally, PBMs have been criticized for their anticompetitive practices. Their consolidation and vertical integration have reduced competition and made it difficult for independent pharmacies to compete. The largest PBMs have also been accused of creating foreign entities and moving operations abroad to avoid transparency and proposed reforms.
While PBMs argue that they help control drug costs by negotiating rebates and managing formularies, their financial incentives and market power may contribute to rising drug prices and higher patient out-of-pocket costs. Federal and state policymakers are exploring reforms to increase transparency and regulate PBM practices, with some proposals aiming to require PBMs to pass all rebates along to payers.
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PBMs' impact on patient access to medicines
Pharmacy benefit managers (PBMs) are entities that act as intermediaries between pharmacies, health plan sponsors, pharmaceutical manufacturers, and wholesalers. They negotiate with drug manufacturers and pharmacies to set prices, determine patients' access to different medications, and contract with pharmacies to participate in networks. PBMs also collect administrative and service fees from the original insurance plan and rebates from manufacturers.
PBMs have been criticised for their lack of transparency and their impact on drug pricing and access. They have been accused of unfairly raising prices on drugs, inflating drug costs, and contributing to high out-of-pocket costs for patients. In 2022, the three largest PBMs excluded more than 1,150 medicines from their standard commercial insurance formularies, representing a nearly 1,000% increase since 2014. This has restricted patients' access to medicines and limited their treatment choices.
PBMs negotiate rebates with manufacturers, which should generate savings that are passed on to patients. However, PBMs often retain a portion of these rebates, recouping profits while patients struggle with the high cost of medications. Additionally, PBMs' contractual terms can be arbitrary and confusing, impacting local pharmacies' businesses and creating "pharmacy deserts".
PBMs also have the power to control drug formularies, determining which drugs are included and instituting practices such as prior authorization and adverse tiering. These practices can limit patient access to treatments recommended by their physicians and disproportionately impact communities with existing access barriers, such as people of colour and lower-income individuals.
The market for PBM services is highly concentrated, with a few firms controlling a significant market share. This market power can be used to earn excessive profits and reduce competition. While PBMs argue that they promote cost-effectiveness and savings, their practices often result in higher costs and restricted access for patients, particularly those with chronic and complex conditions.
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PBMs' rebate retention
Pharmacy benefit managers (PBMs) are entities that administer prescription drug insurance benefits. Their key functions include negotiating prices with drug manufacturers and pharmacies, establishing drug formularies and pharmacy networks, and processing drug claims. As of 2023, PBMs managed pharmacy benefits for 275 million Americans, with the three largest PBMs in the US making up about 80% of the market share.
PBMs have been criticised for their lack of transparency in pricing, rebate retention, and spread pricing. PBMs collect rebates from drug manufacturers, which are after-the-fact payments that occur when a discount is negotiated off the list price of a drug. PBMs' contracts with payers sometimes allow them to retain a portion of these rebates rather than passing them all through to the payer. This has led to proposals to require PBMs to pass all rebates along to the payer, including a proposal from the Senate Committee on Health, Education, Labor, and Pensions.
The rebate retention and spread pricing practices of PBMs have been the subject of recent debates and congressional proposals. Critics argue that PBMs should be compelled to pass through all or a larger portion of the rebates they negotiate to insurers and other payers, which could then be used to reduce premiums and cost-sharing payments. However, some argue that restricting these practices may not save much money for payers, as PBMs could extract revenue from payers in other ways.
PBMs argue that they help make prescription drugs more accessible and affordable and that their ability to negotiate manufacturer rebates and manage formularies can promote cost-effectiveness over time. While there are concerns about the market power and profitability of PBMs, it is important to recognise that they provide a range of services and that some other entity would need to perform these services if PBMs were eliminated.
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PBMs' market power
Pharmacy benefit managers (PBMs) are entities that administer prescription drug insurance benefits. Their key functions include negotiating prices with drug manufacturers and pharmacies, establishing drug formularies and pharmacy networks, and processing drug claims.
The market for PBM services is highly concentrated, with three firms controlling 79% to 80% of the market, which gives PBMs immense market power. This concentration has led to concerns about the role of the highly concentrated PBM market in rising out-of-pocket costs and pharmacy closures. Federal reform is seen as one of the few options for regulating the market power of PBMs.
PBMs can make a profit in several ways. They collect administrative and service fees from the original insurance plan and rebates from manufacturers. Traditional PBMs do not disclose the negotiated net price of prescription drugs, allowing them to resell drugs at a public list price, or "sticker price", which is higher than the net price they negotiated with the manufacturer. This practice is known as "spread pricing".
PBMs advise their clients on how to "structure drug benefits" and offer complex selections at various price rates. They do this by constructing a "formulary" or list of specific drugs that will be covered by the healthcare plan. The formulary is usually divided into several "tiers" of preference, with low tiers assigned a higher copay to encourage consumers to buy drugs on a preferred tier. Drugs that do not appear on the formulary mean consumers must pay the full list price.
Greater competition could reduce the profits of PBMs, and recent PBM transparency proposals may help, albeit modestly. However, even eliminating all PBM profits would only reduce total drug-related spending by several percentage points.
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PBMs' lack of transparency
Pharmacy benefit managers (PBMs) are entities that administer prescription drug insurance benefits. Their key functions include negotiating prices with drug manufacturers and pharmacies, establishing drug formularies and pharmacy networks, and processing drug claims. PBMs advise their clients on ways to structure drug benefits and offer complex selections at a variety of price rates from which clients can choose.
The market for PBM services is highly concentrated, with three firms controlling 79% to 80% of the market, which almost certainly gives PBMs market power they can use to earn excessive profits. This consolidation and concentration have led to lawsuits and bipartisan criticism for unfair business practices. In 2024, The New York Times, Federal Trade Commission, and many states' attorneys general accused pharmacy benefit managers of unfairly raising prices on drugs.
Traditional PBMs do not disclose the negotiated net price of prescription drugs, allowing them to resell drugs at a public list price (also known as a sticker price), which is higher than the net price they negotiate with the manufacturer. This practice is known as "spread pricing". The industry argues that savings are trade secrets. Pharmacies and insurance companies are often prohibited by PBMs from discussing costs and reimbursements. This leads to a lack of transparency. Therefore, states are often unaware of how much money they lose due to spread pricing, and the extent to which drug rebates are passed on to enrollees of Medicare plans.
PBMs have increasingly integrated with health insurers, forming a vertically integrated ecosystem. This integration raises critical questions about reduced competition, increased market power for industry giants, and a lack of transparency in cost control and profit distribution. Ethical concerns regarding potential conflicts of interest are also prevalent, as PBM-insurer relationships could potentially allow insurers to circumvent Medical Loss Ratio (MLR) requirements.
In response to mounting calls for enhanced transparency and increased competition, some major PBMs have started to provide real-time visibility for medication costs and available lower-cost therapeutic options. For instance, CVS Health recently announced that its PBM, CVS Caremark, would begin providing real-time visibility for member-specific medication costs. However, because the top-tier PBMs control the majority of the marketplace, it is challenging for smaller companies that emphasize transparency to gain a larger foothold.
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Frequently asked questions
Pharmacy Benefit Managers (PBMs) are companies that work with health insurers, large employers, and other payers to manage their prescription drug benefits. They negotiate prices with drug manufacturers and pharmacies, establish drug formularies and pharmacy networks, and process drug claims.
No, PBMs work with a variety of entities, including commercial health plans, self-insured employer plans, Medicare Part D plans, and Federal Employees Health plans. They are also involved in managing prescription drug benefits for a large number of Americans, which includes commercially insured and non-commercially insured individuals.
PBMs make a profit in several ways, including collecting administrative and service fees from the original insurance plan and receiving rebates from drug manufacturers. They also benefit from "spread pricing," where they resell drugs at a public list price higher than the net price they negotiated with the manufacturer.
There are several concerns regarding PBMs, including a lack of transparency in their business practices, the impact on drug pricing and patient costs, and their role in the closing of independent pharmacies. PBMs have also been accused of unfairly raising prices on drugs and restricting access to medications.
