There is a lot of talk about pharmacy benefit manager (PBM) reform. How PBMs aren’t transparent with pricing and can charge patients more at the point of sale than the drug costs the PBM. But I realized today that perhaps some background on PBMs and how we found ourselves here could be helpful for some readers.

Simply put, PBMs are third-party administrators hired by health plans, employers, unions, government entities, etc. to manage prescription drug benefits. PBMs act as intermediaries between pharmacies, insurers, and pharmaceutical companies, streamlining the process of prescription drug distribution and reimbursement. There are three main ones in the United States – CVS Caremark, Express Scripts and OptumRx (a division of United Healthcare) and they manage about 80% of the market.

Key Functions of PBMs:

• Negotiating Drug Prices: PBMs negotiate with pharmaceutical manufacturers to secure favorable pricing for prescription medications. These negotiations usually involve the creation of formularies, which are lists of preferred drugs that are covered by a specific insurance plan.
• Formulary Management: Formulary management is a critical aspect of PBM operations. PBMs work with insurers to develop and maintain formularies that outline which drugs are covered, their tier placement, and any associated cost-sharing requirements.
• Network Management: PBMs maintain networks of pharmacies with which they have contracts.
• Claims Processing: PBMs process prescription drug claims on behalf of insurers and employers. They verify coverage, apply cost-sharing measures, and reimburse pharmacies for dispensing medications.

What Annoys People About PBMs:

Key Reasons for PBM Reform:

• Lack of Transparency:  PBMs negotiate rebates from drug manufacturers as a way to lower the overall cost of prescription drugs. However, the way these rebates are structured and distributed isn’t transparent and may not always result in direct savings for patients, and the actual impact on lowering drug prices can be unclear.
• Spread Pricing Practices: Some PBMs have been accused of engaging in “spread pricing,” where the PBM charges a health plan more for a prescription drug than it reimburses the pharmacy. The difference, or the “spread,” contributes to the PBM’s revenue. This practice has raised concerns about fairness and the potential for overcharging health plans.
• Impact on Independent Pharmacies: Some PBMs are accused of steering patients toward their own mail-order or retail pharmacies, limiting patient choice and potentially harming independent pharmacies. Plus adding in additional fees (direct and indirect renumeration.)
• Patient Out-of-Pocket Costs: The impact of PBMs on patient out-of-pocket costs has a big point of concern. Convoluted pricing structures and rebate systems don’t usually result in direct cost savings for consumers (although it could appear in the form of lower premiums.) Patients do not see the connection between discounts/rebates provided by the manufacturer and the amount they owe at the point of sale.  Regardless, if patients do not take drugs because they can’t afford them, that can add costs to the overall healthcare system.
• More money, more profit. Another issue is that, with many PBM contracts, the more a drug costs, the more money the PBM makes because their administrative fees are based on a percentage and not a flat dollar amount. It is part of the reason that Mark Cuban’s Cost Plus Drugs has made a splash. While not quite a PBM, the company sells generic drugs directly to consumers. Which doesn’t require negotiation as much as sourcing the cheapest generic. Another day, another post.

PBMs aren’t inherently bad but they are the middleman who seem to make a lot of money while not actually taking possession of the drug. Wholesalers are part of the chain and make money based on percentage (for now?) but it’s a relatively low percentage and they distribute drugs and act as a bank in their transactions between manufacturers and pharmacies. The value is more evident.

While PBM reform is not in the current Congressional cards, all hope is not lost. Next week I’ll cover the scope of the different reform efforts out there and what’s in play.