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Pharmacy Benefit Management: How the Middlemen Have Leverage in the U.S. Healthcare System

August 07, 2019
Medication costs have long been a significant component of healthcare bills in the United States. According to the Centers for Disease Control and Prevention, national spending on prescription drugs exceeded $328 billion in 2016, representing nearly 10% of all national health expenditures.[1] However, the unique marketplace for prescription medication in the U.S. has stirred much debate on how to best regulate such a complicated industry.

Beginning in the late 1960s, many insurance companies and plan sponsors outsourced the administration of prescription drug claims to pharmacy benefit managers (PBMs). Since then, the role of PBMs in the U.S. healthcare system has grown significantly, with the firms effectively serving as middlemen between drug manufacturers, insurance providers, and retail pharmacies.[2] They are tasked with a large range of services, such as developing drug formularies, deciding which pharmacies to include in a drug plan’s network, and determining reimbursements.

The PBM revenue stream relies on three key components: fees, rebates, and “spread pricing.”[3] First, PBMs usually charge insurance plan sponsors and manufacturers general administrative fees and payments for their services. PBMs are also directly compensated by rebates, which are discounts on medications that the manufacturer provides in return for including the drugs on the formulary of covered medications. Furthermore, PBMs utilize “spread pricing” to increase their profit margins by charging a plan sponsor more money than the amount that they reimburse the contracted pharmacies.

Image: PBMs in the pharma supply chain. Source: CB Insights.Image: PBMs in the pharma supply chain. Source: CB Insights.

While the larger debate on drug pricing has sparked divergent opinions, many consumers and lawmakers alike have begun to impugn PBMs for potentially exacerbating the rise in prescription medication costs. Yet, PBMs themselves argue that their business model is economically sound and will actually lower costs for approximately 266 million Americans.[4] The firms’ national advocacy group, Pharmaceutical Care Management Association (PCMA), reports that the services of PBMs will result in a $654 billion, or up to 30%, reduction in costs across the board from 2016 to 2025 in comparison to programs that opt not to employ PBM tools.[5] They find that, along with rebates and discounts from manufacturers and pharmacies, PBMs can also produce savings by offering and encouraging access to more affordable pharmacy channels and generic drugs while reducing medicinal waste and managing specialty drugs. In fact, the PBMs argue that they have already been generating substantial savings. A 2018 Oliver Wyman study commissioned by the PCMA shows that rebates in the Medicare Part D plan have saved $34.9 billion in premiums for its beneficiaries from 2014 to 2018.[6] Furthermore, a University of Southern California report in 2017 found that, among 2015 drug sales, PBMs received a net profit margin of 2%, which was lower than that of pharmacies, insurers, and manufacturers.[7] Industry representatives point to this finding to show how PBMs transfer savings to consumers while other participants in the supply chain receive relatively larger financial gains.

However, many individuals take greater issue with the lack of transparency in the PBMs’ pricing models. Currently, PBMs do not disclose many details about how they determine payments, leading some to question whether these companies pocket too much profit for themselves at the expense of their end consumers. Moreover, the PBM industry has become heavily concentrated due to recent mergers, with the top three PBMs accounting for around 78% of the total market share.[8] This means that the industry has strong, and arguably exploitative, negotiating power over providers, pharmacies, and manufacturers. In turn, this business model creates a conflict between the PBMs’ incentive for profit and their “fiduciary duty” toward plan sponsors and consumers. Dr. Robert Goldberg at the Center of Medicine in the Public Interest claims that PBMs, along with government health programs and insurers, keep about $120 billion worth of discounts and rebates for themselves instead of passing on the savings to consumers.[9]

Image: Chart of plan sponsor satisfaction with PBMs by degree of transparency. Source: Drug Chann...Image: Chart of plan sponsor satisfaction with PBMs by degree of transparency. Source: Drug Channels Institute.

Thus, support for governmental action to translate PBM rebates into lower prescription drug prices resounds across the aisle; a recent survey by the American Consumer Institute shows that 79% of Democrats, 86% of Republicans, and 91% of Independents back reforms on this topic.[10][11] However, some believe that these claims “misdiagnose” the issue and that reform would only limit the power of PBMs to effectively negotiate rebates and discounts. This school of thought argues that, if anything, regulation would drive up the revenue of pharmaceutical companies while keeping drug costs high for the average consumer.[12]

Yet, nonetheless, governmental agencies have begun to address the information asymmetry that exists between PBMs and other parties. For instance, the U.S. Department of Health and Human Services (HHS) proposed a rule earlier in the year that would end drug rebates for PBMs in Medicare and Medicaid plans. The HHS Secretary, Alex Azar, stated that the proposal could have “the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever.”[13] Although the Trump administration recently decided to withdraw the proposal amid pushback from insurers and hospitals, many state lawmakers are pressing for stronger regulations on PBMs to increase operational transparency. The state of Ohio took it even further by recently announcing that its Department of Medicaid will only contract a single PBM that would directly report to the state on many financial determinations.[14]

Despite the American healthcare system’s longstanding reliance on the wide-ranging services of PBMs, the traditional way in which the system functions may significantly change in the near future – and the middlemen seem to be on the radar.

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1]https://www.cdc.gov/nchs/data/hus/2017/094.pdf

  [2]https://www.pharmacytimes.com/news/the-role-of-pharmacy-benefit-mangers-in-american-health-care-pharmacy-concerns-and-perspectives-part-1

  [3]http://www.ncpa.co/pdf/PBM-Storybook-6pg.pdf

  [4]https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2019/02/12/drug-price-debate-targets-pharmacy-benefit-managers

  [5]https://www.pcmanet.org/pbms-generating-savings-for-plan-sponsors-and-consumers/

  [6]https://www.pewtrusts.org/-/media/assets/2019/02/ow-part-d-manufacturer-rebate-premium-impact-final.pdf?la=en&hash=CA2058A2D96770C94A9E8054A202343D8B68E4C1

  [7]https://healthpolicy.usc.edu/research/flow-of-money-through-the-pharmaceutical-distribution-system/

  [8]https://www.theamericanconsumer.org/wp-content/uploads/2017/03/ACI-PBM-CG-Final.pdf

  [9]https://www.huffpost.com/entry/pbms-must-put-patients-first_b_58b60bd8e4b02f3f81e44dcc?guccounter=1

  [10]https://www.theamericanconsumer.org/wp-content/uploads/2019/05/PBMs-results.pdf

  [11]https://thehill.com/opinion/healthcare/446456-consumers-agree-greater-transparency-among-pharmacy-benefit-managers-is

  [12]https://www.forbes.com/sites/ikebrannon/2018/06/06/pharmacy-benefit-managers-are-not-the-cause-of-high-prescription-drug-prices/#2d63022e6b9a

  [13]https://khn.org/morning-breakout/pbms-breathe-sigh-of-relief-as-trump-kills-drug-rebate-proposal-and-pharma-companies-become-next-likely-target/

  [14]https://www.benefitspro.com/2019/07/18/pbms-lose-out-to-pharmacists-in-ohio-budget-deal/?slreturn=20190621212209

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  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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