Pharmacy Benefit Managers (PBM) sit in the center of our prescription drug system, coordinating between insurance companies, drug manufacturers, and pharmacies. This gives them a uniquely powerful position in the market. However, a report last year from The House of Representatives and another more recently from the Federal Trade Commission (FTC) argue that PBMs have used this position to drive up drug costs for patients. Without federal action to create transparency in the PBM market consumers will continue to pay higher prices for their medicine.
PBMs act as a middleman between other institutions in the healthcare market. By negotiating discounted prices from manufacturers PBMs are intended to reduce the cost of medicine for patients. This is a lucrative market, with the largest three companies totaling more than $456 billion in 2023, representing 80 percent of the PBM market.
However, as the House report and others note PBMs have numerous sources of revenue that drive up the cost of medicines. These include rebates from manufacturers and charging opaque fees. The FTC reports that from 2017 to 2022 the three largest PBMs took in over $7 billion in drug price mark-ups alone.
PBMs can demand rebates from drug manufacturers by offering better placement on the PBMs formulary tier list. This gives a manufacturer, typically of a brand name drug, an advantage over generic versions or other drug treatments as the preferred prescription. These rebates are supposed to be passed to patients, however, by then providing the drug to patients without the rebate the PBM can pocket the difference through spread pricing.
If a brand name drug is discounted from $100 to $80 the PBM bases its earnings on the $20 saved. But if the PBM chooses the generic which is discounted from $20 to $5 the PBM’s earnings are based on the $15 saved. Even though the generic version is both cheaper and has a greater percent discount, the PBM is incentivized to promote the expensive brand name drug instead. Many name brand drugs cost thousands of dollars each month while their generic competition often cost a fraction of the price, providing a lucrative revenue source at patients expense.
Fees are an added bonus to PBMs’ bottom line and have been growing for more than a decade, with little available information on what they are for. From 2012 to 2023 fees for PBM services increased three-fold, and PBMs have little incentive to stop. By charging fees to other parts of the healthcare system PBMs are further driving up drug prices by driving up the cost of doing business for manufacturers and pharmacies.
PBMs often also limit pharmacies by putting gag clauses in their contracts that prevent pharmacists from informing patients about less expensive options for their medicines. In one 2016 survey the majority of pharmacists responded that they had been restricted from informing patients 10 times or more that it would have been cheaper to just buy the medicine with cash, instead of going through insurance and the PBMs. Nineteen percent of pharmacists that reported the gag clauses prevented them from informing patients more than 50 times.
It is difficult to know the extent of the problems in the PBM market given that there is little in the way of reporting from PBMs and federal agencies like the FTC have only given limited attention to the issue until now. Federal legislation on PBM’s has received more attention in the past few years, but has yet to pass congress, most recently failing to make it into the recent federal funding package. However, this hasn’t stopped states from stepping in. Forty-four states have now passed laws prohibiting gag clauses. States have also passed legislation on patient cost sharing, rebate reporting, and spread pricing.
For the time being though, states are regulating blind to what is going on in the PBM market. What is really needed is transparency in the form of public reporting requirements. This would change PBMs’ incentives. Armed with knowledge hospitals, insurers, and pharmacies can shop between PBMs which would introduce market pressure on them to attract customers through better service. Insurers could choose to engage with PBMs that base their profit model on providing lower prices instead of large nominal savings on high priced name brand drugs.
The current PBM market generates profits through murky and questionable methods instead of market competition. Federal action shedding light on PBM rebates, spread pricing, gag clauses and more would allow for a competitive PBM market to reduce patients’ drug costs instead of inflating them.