Are PBMs really needed?

Pharmacy Benefit Managers (PBMs) play a crucial role in the healthcare industry by managing prescription drug benefits for health insurance plans, employers, and other organizations. While PBMs are very profitable. Congress is taking a hard look at PBMs and their role in rising prescription drug costs

The three biggest PBMs — OptumRx, CVS Caremark, and Express Scripts — control about 80% of prescription drug sales in America and are the most profitable parts of the health conglomerates in which they’re nestled. CVS Health, the fourth-largest U.S. corporation by revenue on Fortune’s list, owns CVS Caremark and the insurer Aetna; UnitedHealth Group, a close fifth, owns Optum; and Cigna, ranking 12th, owns Express Scripts. While serving as middlemen among drugmakers, insurers, and pharmacies, the three corporations also own the highest-grossing specialty drug and mail-order pharmacies.

Drug manufacturers claim that exorbitant PBM demands for rebates force them to set high list prices to earn a profit. Independent pharmacists say PBMs are driving them out of business. Physicians blame them for unpredictable, clinically invalid prescribing decisions. And patients complain that PBMs’ choices drain their pocketbooks.

PBMs today mostly make money by owning mail-order and specialty pharmacies and from the government’s 340B program, created to help hospitals that treat a disproportionately elderly and poor population. Medicare requires drugmakers to provide big discounts to participating hospitals and the growing rosters of affiliated physician groups they own, and some of those discounts end up with PBMs.

With PBMs driving prices, competition has had the opposite effect from what economic theory predicted Medicare patients would spend out-of-pocket on drugs, one large study showed. Over a five-year period, patients were paying 50% more for branded drugs that had competitors than for those that didn’t.

PBMs generate revenue through various sources, such as:

Administrative fees: PBMs charge administrative fees to health plans or employers for managing their prescription drug benefits. These fees can be based on a per-member-per-month (PMPM) basis or as a percentage of the drug spend.

Drug rebates and discounts: PBMs negotiate discounts and rebates with pharmaceutical manufacturers, retaining a portion of these savings as revenue. These rebates are typically based on formulary placement, market share, and other factors.

Mail order and specialty pharmacies: PBMs often own or have partnerships with mail order and specialty pharmacies. They generate revenue by dispensing prescription drugs directly to patients through these channels.

Clinical programs and services: PBMs offer various clinical programs, such as medication therapy management and disease management, which can generate revenue through additional fees or improved patient outcomes.

The profitability of PBMs has been a subject of debate in recent years due to concerns about transparency, pricing practices, and the impact on drug costs. Some critics argue that the complex pricing arrangements and lack of transparency in the industry contribute to higher drug prices, limiting cost savings for patients and employers.