I wrote about pharmacy benefit managers (PBMs) extensively in the past. PBMs are the middlemen who manage pharmacy benefits for employee health plans, Medicare, Medicaid and insurance companies. The concept is simple: PBMs leverage buying power to extract discounts from drug makers. These discounts are (in theory) passed on to consumers and health plan clients. PBMs also create drug formularies and adjudicate drug claims. Drug plan managers are paid a management fee by the client (i.e. a health plan) or they retain drug maker rebates, or a combination of the two. My public policy research on PBMs centered around state Medicaid programs. Most state Medicaid programs pay far too much for drugs. For instance, states agree to pay pharmacies for the cost of the ingredients (i.e. the pills) and an extra dispensing fee for counting the pills, bottling them and handing them to the Medicaid enrollee. Whereas Walmart will sell a month’s supply of selected generic drugs for $4 in cash, many states pay dispensing fees of $10 or more plus additional amounts for the drugs themselves. Much of my prior work on PBMs was to advise state legislatures to let PBMs negotiate dispensing fees with pharmacies rather than fees set by the legislature. It makes little sense for that $4 Walmart prescription to cost state Medicaid programs three to four times what Walmart charges. It’s PBMs’ job to bring those costs down.
Just over a decade ago something began to change. Drug makers themselves began to raise the alarm that PBMs were driving up drug costs (not lowering them). The PBM industry has consolidated to the point that the three biggest PBMs now control 79% of the drug market. Two of the largest PBMs are controlled by health insurance companies, accounting for nearly half (46%) of drugs sold. After industry consolidation PBMs became less competitive, which is often the goal consolidation. Critics claim PBMs are no longer as concerned about providing their client companies with the lowest costs and instead began using their market power to enrich themselves.
PBMs have been in the hot seat lately. The U.S. House Oversight Committee began investigating PBMs several years ago. The Wall Street Journal reports:
The drug middlemen that promise to control costs have instead steered patients toward higher-priced medicines and affiliated pharmacies—steps that increase spending and reduce patient choice, a House investigation found.Among the evidence cited by the committee were emails from staff at Cigna Group’s Express Scripts discouraging discussion of using lower-priced alternatives to the arthritis drug Humira. At the time, Humira listed for around $90,000 a year, while at least one alternative drug was about half that price.
I’ve written about the way drug makers conspired with PBMs and threatened to withhold rebates if PBMs steered patients away from Humira to the new, lower-cost biosimilar generic versions.
Ahead of a hearing on PBMs on Capitol Hill, the PBM trade association released their own analysis claiming they greatly reduce the price patients pay for drugs. That is often true, but sizable drug maker rebates can bias PBMs to favor expensive drugs rather than cheaper generics.
Both Republicans and Democrats pressed the executives for answers about their business model. Rep. Jamie Raskin (D., Md.), the committee’s ranking member, asked why some patients find it cheaper to pay out-of-pocket for drugs than to use their insurance benefit managed by the PBMs.“Even if this system works for some patients, it’s clear that many served by your companies are falling through the cracks,” Raskin said.
In years past the drugs used by health plan enrollees was an expense to health insurers. Nowadays generic drugs are often sold to health plan enrollees at a profit. PBMs are also accused of steering patients to more expensive name brand drugs with higher rebates and higher cost sharing. The older generic drugs PBMs used to steer patients toward do not pay rebates.
Pharmacy benefit managers purchasing drugs and managing drug benefits is beneficial when done in a competitive market. However, the industry has been allowed to consolidate to the point that PBMs can now structure some business practices for their own benefit rather than for the benefit for clients. Furthermore, health insurers buying PBMs became a conflict of interest, where health plans began to profit off selling drugs to enrollees at inflated prices. One problem that industry experts have identified is consolidation. Another is the excessive drug maker rebates paid on the purchase of expensive, name brand drugs.