What Are PBMs & What Do They Do?
Health insurers outsource administration of prescription drug benefits to companies known as Pharmacy Benefit Managers or PBMs. PBMs are third-party corporations that are primarily responsible for contracting with pharmacies, negotiating rates, and processing drug claims. Since 2011, the PBM marketplace has transformed considerably, consolidating into only five national PBMs that control prescription drugs for 266 million Americans, or 80% of the market.
The Changing Role of the PBM
The role of PBMs has expanded from simply handling prescription billing to deciding which drugs insurers cover, what they cost, and how much pharmacies are reimbursed for them. Recognizing the profit that can be made from controlling specialty drugs such as oral oncolytics, all the major PBMs have also acquired or launched their own specialty pharmacies.
How PBMs Affect the Cost of Drugs
PBMs use the purchasing power of multiple health plans to negotiate drug pricing deals with pharmaceutical companies. In theory, PBMs make the health care system more efficient and less expensive by striking cost-effective deals with drug manufacturers. Additionally, PBMs are entitled to a reasonable fee for the services they provide.
However, PBMs often increase the cost of drugs, and therefore their own profits through several methods.
PBMs increase corporate profits through murky “direct and indirect remuneration” fees—commonly known as “DIR Fees”—charged to community oncology practices, as well as retail and specialty pharmacies. DIR Fees, which have no basis in regulation or law, artificially inflate the costs paid by Medicare beneficiaries for prescription drugs, pushing them into the Medicare Part D “donut hole” faster, fueling rising drug prices, and ultimately adding to the burden on taxpayers.
Specialty medications now account for one-third of all spending on drugs in the United States heading towards 50 percent in the next 10 years. Recognizing the profit that can be made from controlling specialty drugs such as oral oncolytics, all the major PBMs have acquired or launched their own specialty pharmacies. As specialty pharmacies proliferate, questions are emerging about their role and business practices. Many patients are limited to one specialty pharmacy — often one owned by their insurer or pharmacy benefit manager and requiring delivery of drugs by mail. This leaves patients without options if they are dissatisfied.
Drug Rebates & Drug Options
PBMs determine which pharmacies will be in the plan’s network, develop the formulary (list of covered medications), and negotiate price rebates with drug manufacturers. Manufacturers provide these rebates in exchange for having specific medications listed on the formulary. The non-transparent nature of these arrangements makes it difficult to know what percentage of these rebates is passed on as savings to plan sponsors and how much is kept by the PBM. Whether drugs are included or excluded from formularies based on profitability to the PBMs is also unknown.
How to Control Drug Costs by Controlling PBMs
The most commonly suggested methods of controlling drug costs by controlling PBMs through transparency are
Unlocking Spread Pricing
Most PBMs do not disclose to employers either the price that they pay to retail pharmacies or drug acquisition costs for their mail operations. The difference between those two is known as the spread price. The spread price is charged in addition to any agreed-upon maintenance fee between the plan sponsor and the PBM. In some cases, spread pricing can double the cost of a drug. By hiding the spread, plan sponsors cannot know the actual cost of the drugs their beneficiaries receive.
Most PBMS do not disclose the rebates received from a drug manufacturer, often as a reward for privileged placement on the PBM formulary. These rebates represent an additional profit center for each drug. To offset the cost of rebates, manufacturers must increase drug prices accordingly.
Facts & Figures
Over 80% of the PBM marketplace (or 80% of the covered lives in the United States) is comprised of only five PBMs.
Since 2000, the number of PBMs has declined significantly and market concentration, particularly among the largest PBMs, has increased as a result of several mergers and acquisitions in the industry. The largest full service PBMs in the country, known as the “Big Three” – Express Scripts, Medco Health Solutions, and CVS Caremark – control 50-60% of the national overall prescription drug volume.
Source: Atlantic Information Services, 2010 data; J.P. Morgan, Healthcare Technology & Distribution, Gill’s Guide to Rx Channel – An Investor Handbook, May 10, 2011. If the Express Scripts-Medco merger is approved, approximately 1/3 of all Americans (roughly 135 million people) would rely on the new “mega PBM” to manage their prescriptions. Bloomberg, Express Scripts-Medco Deal May Spur Purchases by Rivals, July 22, 2011.
Simply stated, spread pricing is the difference between the amount plans/employers pay PBMs and what the PBMs pay pharmacies for a drug. PBMs maximize their profits by reimbursing retail pharmacies for a drug at one price, charging health plans and other payors a steeper price for the same drug and then pocketing the difference, i.e., the spread. For example, a PBM may offer an employer a seemingly competitive overall discount of the equivalent of 55% off the Average Wholesale Price (AWP)1, 2 for generic drug X to gain the employer’s business. On a drug with an AWP of $266, the employer believes it obtained the maximum discount — a savings of about $146. The pharmacies that then dispense drug X to patients are paid around $25, the Maximum Allowable Cost (MAC) price set by PBMs. The PBM then pockets the difference of $95 on each bottle of drug X tablets dispensed to a patient.1, 3
1. National Association of Chain Drug Stores and National Community Pharmacists Association
2. AWP is akin to the sticker price on a new car. It is the published or suggested cost of pharmaceuticals, which forms the basis for most third party prescription reimbursement. It is “fictitious” and rarely, if ever, the price actually paid for the drug(s). For a detailed explanation and history of AWP, see In re: Pharmaceutical Industry Average Wholesale Price Litigation, 491 F. Supp. 2d 20 (D. Mass. 2007).
3. This illustration is explained in detail in the following report: C. Rentmeester & R. Garis, Rebates and Spreads: Pharmacy Benefit Management Practices and Corporate Citizenship, Journal of Health Politics, Policy and Law, Vo. 33, No. 5 (Oct. 2008).