Vertical integration and a lack of transparency are at the heart of the problem
I'm drinking coffee and eating cereal when yet another TV ad about pharmacy benefit managers (PBMs) comes on. These commercials are so frequent I'm starting to think election season has come early.
In a way, it has. PBMs play an outsized role in determining prescription drug prices so the companies are spending a lot of money defending themselves from their detractors.
I will admit: even though I'm a seasoned physician, my understanding of PBMs was limited before I began teaching in the University of North Carolina's business school. My clinical expertise lies in patient care, which extends from diagnosis to prescription to hopeful treatment, but once a patient departs the clinical space, I don't have much visibility into what happens. Can they get the medicine prescribed? Can they afford it? Will there be a pre-authorization delaying and complicating care?
The answers to these questions are not always clear, and they have become more opaque because of PBMs and their outsized influence.
What Are Pharmacy Benefit Managers?
PBMs are healthcare middlemen who play a pivotal role in managing prescription drug benefits for health insurance plans, employers, and government programs like Medicare Part D.
These companies negotiate pricing and discounts with drug manufacturers, establish formularies (lists of covered medications), and collaborate with pharmacies to process claims. PBMs also are the companies that determine the drug copay cost for patients. PBMs are meant to leverage their scale to secure favorable pricing for medications, which helps control costs for payers and, theoretically, patients.
In short, PBMs determine what medications patients can take for a specific condition and what they will pay for them.
These companies are rewarded handsomely for this work. In fact, PBMs generally earn more than $315 billion annually.
Who Owns PBMs?
While PBMs claim their mission is to enhance affordability and access for patients, their primary goal is profit. That goal is legitimate, but their practices have faced scrutiny, including regarding transparency.
There also are some conflicts of interest because of who owns most PBMs.
Cigna, one of the largest U.S. health insurers, purchased Express Scripts, a PBM, in 2018. CVS Caremark, another PBM, is owned by CVS, and CVS owns Aetna, a health insurer. Optum Rx, yet another PBM, is owned by UnitedHealth Group, another insurer. These three PBMs, each ultimately owned by health insurers, control more than 79% of the market. The top six PBMs control 96% of the market share. Five of those six are owned by the nation's largest insurance companies and pharmacies.
In other words: Insurers and pharmacies have indirect control over what medications PBMs allow patients. The incentive to choose by price point or profit, as opposed to efficacy or what is right for the patient, is embedded in the system.
How Do PBMs Make Money?
PBMs generate revenue through various mechanisms within the pharmaceutical supply chain. As alluded to, their profit model involves negotiating prices, managing formularies, processing claims, and providing various services to health plans, employers, and government programs.
When a PBM includes a medication on its formulary or list of covered drugs, manufacturers may offer rebates as an incentive for preferred placement. These rebates are typically based on market share, volume, and other contractual arrangements. While rebates and discounts are a critical component of PBMs' profits, consumers and the government have little to no insight into how much profit from rebates is retained.
There's more: the higher the drug price and the higher the rebate, the more PBMs retain a portion of these rebates as revenue. The incentive pushes drug prices higher.
In addition to making money from rebates, PBMs often engage in "spread pricing," a practice by which PBMs charge health plans and employers more for a medication than they reimburse pharmacies for dispensing it. The difference, or "spread," between the two prices contributes to PBMs' revenue.
Again, the higher the price, the bigger the spread and the bigger the profit for a PBM. And from an accounting perspective, a higher "cost" for the health insurer. (More on that in a moment.)
Outraged? I've got even more for you.
Why Insurers and Pharmacy Corporations Love PBMs
The integration of insurer and PBM also distorts the medical loss ratio, which allows for greater profits for the health insurer parent companies and skirts requirements in the Affordable Care Act. Currently, payments made to PBMs are considered an insurance company "cost" even though insurers are just moving profitability to a less regulated entity.
Furthermore, the financial incentives for PBMs and their owners, health insurers and pharmacies, are perverse. Sure, health insurers want lower drug costs for patients since that means they (the insurer) spend less and keep more of the premiums. But they also want a more significant spread price to generate greater profits.
Health insurers also don't necessarily want to pass back those savings and rebates to beneficiaries. In companies where their success is determined by profitability, benevolence generally is not the driver of decision-making.
Consumer advocates and lawmakers have criticized the lack of transparency about how PBM rebates are passed on to health plans, employers, and patients. These criticisms have led to concerns that some rebates may not benefit the people who pay for prescription medications.
On the other hand, some researchers have concluded that without PBMs' ability to negotiate prices on behalf of payers and patients, drug prices could be higher. While that may be true, the system's financial incentives and vertical integration of payers-PBMs-pharmacies and, yes, even providers, create an ever-growing cycle of profitability for health insurer parent companies and result in higher costs and less choice for patients.
Fortunately, Congress may be stepping in.
Congress Must Reform the PBM System
In a surprisingly bipartisan fashion, federal lawmakers have rallied against PBMs. But fixing the problem will not be easy and will require an approach that addresses healthcare industry vertical integration.
My prescription for this broken system is:
Enhance Rebate Transparency: Federal and state policymakers must seek increased rebate transparency from PBMs. More comprehensive rebate data could shed light on pharmaceutical spending trends, guiding potential reforms.
Prohibit Spread Pricing: Policymakers should ban spread pricing, safeguarding patients and employers from potential overpayments for prescription drugs.
Mandate Rebate Pass-Through: To maintain negotiation leverage with drug manufacturers, PBMs should be required to funnel a large percentage of their rebate savings to payers, passing through rebates directly to patients. Implementing this requirement is particularly important for Medicare Part D recipients.
Limit Vertical Integration: The vertical integration of PBMs with national pharmacies, the nation's largest health insurers, and the largest provider groups creates an anti-competitive environment and market distortions. These distortions harm patients, small businesses, and taxpayers.
Enforce the Medical Loss Ratio More Broadly: Health insurer parent companies shouldn't be exempt from adhering to the medical loss ratio and shouldn't be able to utilize inter-company eliminations to hide profits. This can help ensure that patients and enrollees derive the value they deserve from care.
The system that sets drug pricing and availability is complicated and opaque, but it is clear PBMs and their vertically integrated healthcare conglomerates are using this murkiness to their advantage.
It's time for a serious campaign for PBM reform.
About the Author: N. Adam Brown, MD, MBA, is a practicing emergency medicine physician, founder of ABIG Health, and a professor of practice at the University of North Carolina's Kenan-Flagler Business School. Previously he served as president of emergency medicine and chief impact officer for one of the nation's largest national medical groups.