Navigating the interactions between stakeholders in the healthcare landscape is crucial for the commercial success of any drug launch. This network of relationships and negotiations significantly impacts treatment outcomes, drug pricing, and market access. At the heart of this ecosystem are Pharmacy Benefit Managers (PBMs) whose role is pivotal yet often misunderstood. As intermediaries between health plans, drug manufacturers, and pharmacies, PBMs are tasked with a crucial balancing act: ensuring that patients have access to necessary medications while managing costs and efficiencies for health plans and employers. Their influence extends beyond drug procurement and distribution, impacting drug pricing and patient access through their business models.
Let’s explore the relationship between PBMs and key stakeholders (1):
Health Plans: Health plans, including insurance companies, employers, and government programs, rely on PBMs to manage prescription drug benefits for their members. PBMs negotiate drug prices, establish formularies, set reimbursement rates for pharmacies, and process prescription claims on behalf of health plans – all factors that ultimately influence the cost and accessibility of medications. Simultaneously, PBMs also provide valuable data analytics and reporting on medication utilization, adherence monitoring, and overall healthcare spending to allow health plans to improve and refine their coverage plans.
Drug Manufacturers: PBMs negotiate with drug manufacturers on behalf of health plans to secure favorable pricing and terms for prescription medications, including discounts, rebates, and other conditions such as formulary positioning, market penetration, and bonus payments. This authority to set coverage formularies gives PBMs significant bargaining power, enabling them to position drugs with higher rebates or more favorable costs in higher tiers.
Pharmacies: Participating pharmacies collaborate with PBMs to provide access to prescription medication for patients and negotiate the reimbursement rates for the medication dispensed to patients. PBMs work closely with pharmacies to obtain reports on key indicators, such as medication utilization and adherence, which help health plans refine their coverage and pricing strategies.
Criticisms and Concerns
Given PBMs’ role as an intermediary to so many critical stakeholders, their decision making has significant ripple effects in the healthcare ecosystem, ultimately affecting the availability and access to prescription medication, as well as the out-of-pocket costs for patients. With rising healthcare costs at the center of national debate, many critics have called out PBMs as a contributor to the rising drug prices. There are four primary concerns surrounding the business model of PBMs:
With rising healthcare costs at the center of national debate, many critics have called out PBMs as a contributor to the rising drug prices
Opaque Drug Pricing: PBMs often negotiate complex contracts with drug manufacturers and pharmacies, leading to opaque pricing structures. Critics argue that this lack of transparency makes it challenging to understand how drug prices are determined and whether PBMs are truly passing on savings to consumers as they had proposed.
Spread Pricing: Spread pricing occurs when PBMs charge health plans more for medications they reimburse pharmacies, pocketing the difference as profit. This practice has drawn criticism for contributing to higher prescription costs for patients and employers.
Rebate Practices: PBMs negotiate rebates and discounts with drug manufacturers, but the extent to which these savings are passed on to health plans and consumers is unclear. Critics argue that the rebate system incentivizes PBMs to favor higher-priced drugs with larger rebates, rather than lower-cost alternatives that may be equally, if not more, effective.
Vertical Integration: There are three PBM companies that control 79% of the market: CVS Caremark, Express Scripts, and Optum Rx (2) These three major PBMs are vertically integrated with health plans and pharmacy chains raising concerns about conflict of interest and anti-competitive behavior. CVS Caremark is a subsidiary of CVS, who also oversee Aetna and CVS Pharmacy; Express Scripts is a subsidiary of Cigna; Optum Rx is a subsidiary of the UnitedHealth Group, the parent company of UnitedHealthcare. Critics have argued that allowing vertical integration of PBMs with other stakeholders in the drug supply chain may influence patients to shop within their affiliated pharmacies, and limit accessibility due to formulary restrictions and prior authorization requirements.
However, in light of the recent criticism they have faced, PBMs remain adamant that they continue to play an essential role in cost reduction and negotiating for lower drug prices. PBMs argue that they are simply working with the prices set by drug manufacturers, and that over the years drug prices have increased due to the monopolistic nature of the drug development industry. PBMs believe they are simply responding and acting accordingly to the mechanisms and dynamics of the market (3). Further, in response to criticism regarding spread pricing, health economists advocate that spread pricing inherently incentivizes lower drug prices as PBMs would negotiate for low prices with pharmacies (2). Removing spread pricing may favor pharmacies but may also come at a cost for payors and patients.
The View from the Crow’s Nest
As we navigate the complexities of the healthcare system, the role of Pharmacy Benefit Managers remains a pivotal yet controversial one. With healthcare costs under continual scrutiny and legislative changes on the horizon, understanding and reforming the practices of PBMs is crucial for ensuring equitable access to medications at reasonable costs. Proposed bills such as the PBM Transparency Act, the Protecting Patients Against PBM Abuses Act, and the Lower Costs, More Transparency Act are all making their way through Congress (4). These bills intend to make drug pricing more transparent by setting the following requirements:
Disclose their drug pricing practices, rebates and out-of-pocket costs to payors, and base their compensation on a flat fee set by their client, not on the cost of the medication (5).
File an annual report with the Federal Trade Commission (6).
Disengage in spread pricing and pass on 100% of any rebates to health plans (7).
Further, with the presidential elections just around the corner, drug prices and access will remain an important point of focus. Both party front-runners have made it evident for the need to lower the cost of healthcare, and we expect legislative changes to continue to address the increasing cost of healthcare (8). However, it remains to be seen how this will impact PBMs and the dynamics of the drug supply chain.
In an industry plagued with bureaucracy where the flow of information is disconnected and siloed within stakeholders and organizations, increasing transparency, and minimizing anti-competitive behavior could help improve the efficiency and affordability of healthcare delivery. There is a delicate relationship among the various stakeholders along the drug supply chain. Thus, as we look towards the future, the role of PBMs will likely continue to be characterized by tension between economic efficiency and ethical responsibility. To navigate this delicate balance, informed policy reforms must strive to simultaneously enhance access to medication and lower healthcare costs.
Author: Shawn Tjahaja
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Sources:
1. Matthews, Jolie. “Pharmacy Benefit Managers.” NAIC, 1 June 2023, content.naic.org/cipr-topics/pharmacy-benefit-managers.
2. Matthew Fiedler, Timothy Layton, et al. “A Brief Look at Current Debates about Pharmacy Benefit Managers.” Brookings, 7 Sept. 2023, www.brookings.edu/articles/a-brief-look-at-current-debates-about-pharmacy-benefit-managers/.
3. Brannon, Ike. “The Misunderstood Role of Pharmacy Benefit Managers.” Forbes, Forbes Magazine, 15 Sept. 2023, www.forbes.com/sites/ikebrannon/2023/09/14/the-misunderstood-role-of-pharmacy-benefit-managers/?sh=b0ad7f44aedc.
4. Amadi, Ayanna. “Congress Hits Pause on Pharmacy Benefit Manager Reform, Awaiting Future Action.” Medriva, 26 Feb. 2024, medriva.com/news/healthcare-policy/congress-hits-pause-on-pharmacy-benefit-manager-reform-awaiting-future-action.
5. “Carter, Blunt Rochester, Malliotakis, Auchincloss Introduce Bill to Protect Patients, Pharmacies from PBM Abuses.” Congressman Buddy Carter, 8 May 2023, buddycarter.house.gov/news/documentsingle.aspx?DocumentID=11175.
6. “Pharmacy Benefit Manager Transparency Act of 2023.” Commerce (Senate), www.commerce.senate.gov/services/files/1EDA8142-DBA4-44E4-B768-7207C2799737. Accessed 9 Apr. 2024.
7. House, caraveo.house.gov/sites/evo-subsites/caraveo.house.gov/files/evo-media-document/fact-sheet-on-h.r.-5378-the-lower-costs-more-transparency-act-updated.pdf. Accessed 9 Apr. 2024.
8. Li, Michael, and Henry He. “2024 Presidential Election Impact on Health Care Stocks.” American Century Investments®, 15 Apr. 2024, www.americancentury.com/institutional-investors/insights/how-will-the-2024-us-presidential-election-affect-health-care-stocks/?nocache=true.