Pharmacy benefit managers: a mechanism for containing costs or a contributor to rising drug prices?

While pharmaceutical companies are often the focus of conversations about high drug prices, more recently pharmacy benefit managers (PBMs) have come under increased drug price scrutiny. The American PBM business model, developed in the early 2000s, was designed to identify treatment-eligible patients, reduce health insurer administrative burden, and price negotiate with the pharmaceutical manufacturer. By managing these prescription drug programs on behalf of health plans, PBMs exert wide-reaching influence on drug formularies and rebate negotiations with manufacturers.

A PBM’s revenue comes from upfront and secretly negotiated discounts and rebates following sales for including the pharma company’s medications on their formulary (a powerful leverage for negotiating prices), as well as through charging health plans a higher amount than they reimburse pharmacies. The latter practice is called “pharmacy spread”.

The Pharmaceutical Care Management Association (PCMA), the national trade association representing America’s pharmacy benefit managers, claims that PBMs reduce prescription drug costs for consumers, employers and government programs.¹ However, the National Academy for State Health Policy (an independent academy of state health policymakers)  summarizes concerns around the PBM business model, highlighting anti-consumer practices including²:

• Drug formularies that may benefit PBMs but not patients;
• Gag clauses that restrict pricing information pharmacists can share with consumers;
• Restrictions on drugs purchases to PBM-controlled pharmacies; and,
• Lack of fiduciary transparency in operations.

Are PBMs contributing to high drug prices?

One key question is whether PBMs actually help contain costs for insurers and consumers. Theoretically, their pricing power should benefit insurers, which then pass on savings to their customers through better benefits and lower premiums. In actuality, only a portion of the rebate is passed onto insurers, so the impact at the health plan (and consumer) is diluted.

Moreover, the Medicare Payment Advisory Commission raised concerns that PBMs are not choosing the lowest-cost drugs.³ Since the rebate received by the PBM is based on the drug price, the higher the price of the drug then the higher the rebate. This business model results in conflicts of interest because rebates have the potential to shift incentives towards drugs with the highest rebate rather than the most cost-effective price. DHHS Secretary Alex Azar went further to suggest that PBMs prevent pharmaceutical companies from lowering list prices in order to secure a higher rebate by threatening to remove drugs from their formulary.⁴

PBMs pushed back, with the PCMA releasing a report that lays the blame for high prices on drug makers, asserting that list prices are rising even when there are no rebates to PBMs.⁵

The Ohio Department of Medicaid criticized PBMs after an audit found they used the practice of “pharmacy spread” to collect over $208 million from generic prescriptions during a single year by charging Medicaid more than pharmacies were being reimbursed.⁶ CVS Health and its PBM, CVS Caremark, hit back, claiming that PBMs have saved Ohio taxpayers $145 million annually.⁷

If PBMs do lower costs, are these savings being passed on to patients? Dan Leonard, President & CEO of the National Pharmaceutical Council (a health policy research organization representing American biopharmaceutical companies), pointed out that while PBMs have been able to keep commercial plan drug spending slow, out-of-pocket spending by consumers was at the highest level in a decade in 2016.⁸ This suggests that even if PBMs are saving money for insurers, these savings are not being passed on to patients.

Lack of transparency has also been a key point of contention with PBMs. In a September 14, 2017 Health Affairs brief, Cole Werble of the health care policy firm Prevision Policy, LLC called PBM price negotiations, “…opaque by design,” suggesting that PBM leaders believe that full transparency around rebates could prevent future discounts. ⁹This black box surrounding rebates and net pricing makes it difficult to know what role PBMs have in increasing drug prices and whether they are passing on rebates to consumers and insurers.

The landscape is moving towards increased regulation of PBMs

How is the healthcare ecosystem reacting to criticism of PBMs?

At the federal level, the Senate recently voted to ban ‘gag clauses’, a practice where PBMs prevent pharmacists from telling customers when prescriptions would cost less if purchased outside their plan.¹⁰ State legislatures are also pushing for more transparency and fewer anti-consumer practices, with over 80 PBM bills introduced into state legislatures to address concerns ranging from gag clauses to making rebate amounts publicly available. The National Academy for State Health Policy has drawn together these bills to create a model for PBM legislation.² After its audit controversy, Ohio plans to ban spread pricing, only allowing PBMs to charge small administrative and dispensing fees while requiring rebates to be passed back to the state.¹¹

Some PBMs are responding to criticism with increased cost control measures. CVS Caremark announced in August that it would allow self-funded insurers to exclude any drug launched at a price greater than $100,000 per QALY with the reasoning that this would push pharmaceutical companies to lower launch prices.¹²

How federal and state legislation will evolve remains to be seen. However, mandating increased transparency promises to clarify the role of PBMs in rising drug prices, making it easier to address any anti-consumer practices. With the pressure to contain costs rising, scrutiny towards all players in healthcare will only increase.

Let us know what you think by commenting on the blog. To stay up on news related to pharma pricing and healthcare value around the globe, subscribe to the HealthEconomics.Com weekly newsletters.

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1. PCMA. Our Mission. (2018). Available at: https://www.pcmanet.org/our-industry/.
2. 2.  Horvath, J. Pharmacy Benefit Manager Model Legislation: Questions and Answers. (2018). Available at: https://nashp.org/pharmacy-benefit-manager-model-legislation-questions-and-answers/.
3. MedPAC. Factors increasing Part D spending for catastrophic benefits. MedPAC Blog (2017). Available at: http://www.medpac.gov/-blog-/factors-increasing-part-d-spending-for-catastrophic-benefits/2017/06/08/factors-increasing-part-d-spending-for-catastrophic-benefits.
4. Sweeney, E. Senators press PBMs to clarify Azar’s ‘extremely disturbing’’ drug pricing allegations’. Fierce Healthcare (2018). Available at: https://www.fiercehealthcare.com/payer/elizabeth-warren-tina-smith-pbm-alex-azar-drug-prices-optumrx-express-scripts.
5. PCMA. Reconsidering Drug Prices, Rebates, and PBMs. (2018). Available at: https://www.pcmanet.org/wp-content/uploads/2018/08/Reconsidering-Drug-Prices-Rebates-and-PBMs-08-09-18.pdf.
6. Ohio Auditor of State. Auditor’s Report: Pharmacy Benefit Managers Take Fees of 31% on Generic Drugs Worth $208M in One-Year Period. (2018). Available at: https://ohioauditor.gov/news/pressreleases/Details/5042.
7. CVS Health. CVS Health Statement on Ohio Auditor of the State’s Report on Pharmacy Benefit Managers. (2018). Available at: https://cvshealth.com/newsroom/press-releases/cvs-health-statement-on-ohio-auditor-of-the-states-report.
8. Leonard, D. PBM rebates’ impact at the Rx counter. Chain Drug Review (2018). Available at: https://protectaccessandinnovation.org/pbm-rebates-impact-rx-counter/.
9. Werble, C. Pharmacy Benefit Managers. Health Affairs (2017). Available at: https://www.healthaffairs.org/do/10.1377/hpb20171409.000178/full/.
10. Firozi, P. The Health 202: Senate passage of ‘gag clause’ ban is just a tiny step to lowering drug prices. Washington Post (2018). Available at: https://www.washingtonpost.com/news/powerpost/paloma/the-health-202/2018/09/18/the-health-202-senate-passage-of-gag-clause-ban-is-just-a-tiny-step-to-lowering-drug-prices/5ba012221b326b47ec9596b8/?utm_term=.6da753bc8a40.
11. Inserro, A. Ohio Tells Medicaid PBMs That 2019 Will Be a Time for Transparent Contracts. (2018). Available at: https://www.ajmc.com/newsroom/ohio-tells-medicaid-pbms-that-2019-will-be-a-time-for-transparent-contracts.
12. CVS. Current and New Approaches to Making Drugs More Affordable. (2018). Available at: https://cvshealth.com/sites/default/files/cvs-health-current-and-new-approaches-to-making-drugs-more-affordable.pdf.