Five things to know about Pharmacy Benefit Managers (PBMs)

November 29, 2017

Five things to know about Pharmacy Benefit Managers (PBMs)

Pharmacy Benefit Managers (PBMs) have a lot of influence in the prescription drug industry—they directly affect the costs of your medications—but many consumers are unfamiliar with these health-industry intermediaries. Here are five things to know about PBMs:

What are PBMs?

Pharmacy benefit management companies (PBMs) administer the prescription drug part of health insurance plans on behalf of plan sponsors such as self-insured employers, insurance companies, and health maintenance organizations (HMOs). They serve as middlemen between consumers and drug companies. PBMs negotiate drug prices and create drug formularies—lists of preferred drugs—that determine how much patients pay. PBMs have the power to drive down costs since drug companies must gain access to the PBM formularies to sell their drugs.

I’m still confused. What does a PBM do again?

You’re not alone. The precursors of PBMs include pharmacy claims processors and mail-order pharmacies. While PBMs continue to provide pharmacy claims processing and mail-order pharmacy services to their customers, many now provide additional services, including formulary management. But, the exact role of PBMs is a mystery to many, even to employers. Fifty-six percent of the U.S. population get their health insurance through their employers. A recent study by Benfield for the National Pharmaceutical Council found that only 30 percent of the 88 employers who responded to its survey understand their PBM's contract details, 63 percent said they don’t know how their PBM makes money, and 50 percent think PBMs lack transparency about the rationale behind formulary and exclusionary list decisions.

What are the largest PBMs?

The three largest PBMs control 80 percent of health plan-related drug purchases. They are CVS Health (aka Caremark), Express Scripts, and OptumRx (a subsidiary of UnitedHealth). According to the Los Angeles Times, Express Scripts reported a profit of $3.4 billion in 2016, up 34 percent from 2015. OptumRx reported an operating profit of $2.7 billion in 2016, up from $1.7 billion the year before.

CVS doesn’t break out its PBM financials, but during the year ended December 31, 2016, CVS’ PBM filled or managed approximately 1.2 billion prescriptions (which equates to 1.6 billion prescriptions when counting 90-day prescriptions as three prescriptions).

How are PBMs contributing to the skyrocketing costs of prescription drugs?

Drug companies buy access to the PBM formularies by paying “rebates” and other “fees” to the PBMs—and the PBMs may choose which drugs to offer among competing products in large part based on who will pay the PBM the biggest “rebate” or other portion of the drug’s cost. This drives up drug prices for consumers because the drug companies keep raising prices to pay larger “rebates” and other fees they pay to the PBMs. Drug manufacturers raise the list price of drugs to pay for these rebates.

What drugs are affected?

Take the cost of diabetes-related drugs such as insulin, for example. Their prices are inflated even though they are not new. Price inflation is a unique problem for the United States. Outside the U.S., you can get insulin—the same drug by the same manufacturer—at one-tenth the cost of U.S. prices.