Pharmacy benefit managers

What Is Pharmacy Benefit Managers?

Pharmacy benefit managers (PBMs) are third-party administrators that act as intermediaries in the complex healthcare system, primarily managing prescription drug benefits for health insurance plans, employers, and government programs. As key financial intermediaries, PBMs negotiate with drug manufacturers to secure discounts and rebates, establish drug formularies, and process prescription claims. Their overarching goal is to control drug spending for their clients and facilitate access to prescription drugs for patients through networks of retail pharmacies and mail-order services. Pharmacy benefit managers influence which medications are covered under a patient's health insurance plan and how much patients ultimately pay at the pharmacy counter.

History and Origin

The concept of pharmacy benefit managers emerged in the late 1960s, a period when health insurance plans began to expand their coverage to include prescription drugs. Early PBMs were initially tasked with simplifying the administrative burden of processing the growing volume of paper claims for these new benefits⁸. This early function addressed a significant need, transforming a manual, fragmented system into a more streamlined process.

As drug spending escalated for employers and health plans in the 1980s, the role of PBMs evolved. They began leveraging their aggregated buying power to negotiate better prices and secure bulk discounts from pharmaceutical manufacturers, a practice that became central to their value proposition. The industry's evolution has since been characterized by significant vertical integration and increasing market concentration, with a few large PBMs now dominating the market⁷,⁶. This historical development underscores their critical position in the pharmaceutical supply chain. The Federal Trade Commission (FTC) launched an inquiry into the practices of the largest pharmacy benefit managers in 2022 to examine their impact on the accessibility and affordability of prescription drugs, citing the industry's significant influence over the U.S. prescription drug system.⁵

Key Takeaways

• Pharmacy benefit managers (PBMs) are middlemen in the U.S. healthcare system that manage prescription drug benefits.
• PBMs negotiate drug prices and rebates with manufacturers, create drug formularies, and process claims for health plans.
• Their services aim to control prescription drug costs for clients, though their practices have drawn considerable scrutiny regarding transparency and pricing.
• PBMs also establish pharmacy networks and often operate their own mail-order and specialty pharmacies.
• The industry has undergone significant consolidation and vertical integration over time.

Interpreting the Pharmacy Benefit Managers

Understanding the role of pharmacy benefit managers involves recognizing their multifaceted impact on drug pricing and patient access. PBMs manage a formulary, which is a list of prescription drugs covered by an insurance plan. This list is often structured in tiers, influencing patient cost-sharing amounts. Drugs on preferred tiers typically have lower out-of-pocket costs for patients, while non-preferred drugs may require higher copayments or coinsurance.

PBMs influence drug prices through negotiations with manufacturers, aiming for discounts and rebates in exchange for favorable placement on formularies. However, the exact nature of these negotiations and the flow of funds can be opaque. Patients typically interact with their PBM through their insurance plan's drug coverage, but the direct financial impact of PBM activities, such as how much of the negotiated savings is passed on to consumers versus retained by the PBM, is often not transparent. This opacity has led to increased public and regulatory scrutiny.

Hypothetical Example

Consider a hypothetical employer, "Tech Solutions Inc.," offering health insurance to its employees. To manage its prescription drug benefits, Tech Solutions Inc. contracts with a pharmacy benefit manager, "MediRx PBM."

When an employee, Sarah, needs a prescription for a common condition, MediRx PBM's services come into play. Sarah's doctor prescribes a medication. MediRx PBM has negotiated with various drug manufacturers to secure lower prices for both generic drugs and brand-name drugs. Because the generic version of Sarah's medication is on MediRx PBM's preferred formulary tier, Sarah's copay is significantly lower than if she chose a brand-name alternative.

MediRx PBM processes Sarah's prescription claim in real time at the pharmacy. It verifies her eligibility and applies the appropriate copayment based on her plan's benefit design and the drug's formulary status. In the background, MediRx PBM continuously negotiates with pharmaceutical companies for rebates and with pharmacies for dispensing fees, aiming to reduce the overall drug spending for Tech Solutions Inc. while ensuring Sarah can access her medication at a predictable cost.

Practical Applications

Pharmacy benefit managers are integral to the U.S. pharmaceutical supply chain and have practical applications across several areas:

• Benefit Management for Insurers and Employers: PBMs provide services to health plans, self-insured employers, and government programs like Medicare Part D and Medicaid. They manage formularies, process claims, and administer patient cost-sharing, helping these entities control their prescription drug expenditures. This is a core function of managed care organizations.
• Price Negotiation and Cost Containment: PBMs aggregate demand from millions of patients, giving them significant leverage to negotiate prices and rebates with pharmaceutical manufacturers. This negotiation is intended to lower the acquisition costs of drugs for health plans and, in theory, for patients.
• Pharmacy Network Administration: PBMs build and maintain networks of retail pharmacies, ensuring broad access for patients to fill their prescriptions. They also establish mail-order pharmacies and specialty pharmacies, which are often owned by the PBMs themselves due to vertical integration.
• Utilization Management: PBMs implement tools such as prior authorization, step therapy, and quantity limits to ensure appropriate and cost-effective use of medications.
• Data Analytics and Reporting: They collect vast amounts of data on prescription drug utilization and spending, providing clients with insights to optimize their benefit designs.

The Federal Trade Commission's launch of an inquiry into the six largest pharmacy benefit managers underscores the significant impact PBMs have on the pharmaceutical market and the affordability of drugs.⁴

Limitations and Criticisms

Despite their stated goal of reducing prescription drug costs, pharmacy benefit managers face substantial criticism regarding their business practices, transparency, and impact on the broader healthcare ecosystem. A primary concern is the lack of transparency in their pricing models, particularly the practice of "spread pricing," where PBMs charge health plans more for a drug than they reimburse the pharmacy, keeping the difference as profit³. This practice, alongside the complex system of rebates negotiated with manufacturers, can obscure the true cost of medications.

Critics also highlight issues related to market concentration within the PBM industry, with a few dominant players controlling a significant portion of the market. This limited competition may reduce the incentive for PBMs to pass on maximum savings to clients and patients. Furthermore, the vertical integration of major PBMs with large health insurance companies and their own mail-order or specialty pharmacies raises concerns about potential conflicts of interest and practices that may steer patients toward PBM-owned entities, potentially at the expense of independent pharmacies². Independent pharmacies often report receiving lower reimbursement rates from PBMs compared to chain pharmacies, impacting their viability.

An investigation by The New York Times found that pharmacy benefit managers often act in their own financial interest, potentially overcharging employers and government programs, underpaying pharmacies, and delaying access to medications by not disclosing all fees and rebates.¹ These criticisms suggest that while PBMs began as a solution to manage drug costs, their current structure and practices contribute to the escalating prices consumers face. The focus on profits through opaque mechanisms and the control of various parts of the pharmaceutical supply chain also raise questions about whether the reduction in transaction costs they initially offered is fully realized by the end consumer.

Pharmacy Benefit Managers vs. Health Insurance Provider

While pharmacy benefit managers and a health insurance provider are both crucial components of the healthcare system, they serve distinct, though interconnected, roles. A health insurance provider offers comprehensive health plans, covering a wide range of medical services, including hospital stays, doctor visits, and often prescription drugs. Their primary function is to pool risk and pay for healthcare services on behalf of their members in exchange for premiums.

In contrast, a pharmacy benefit manager specializes specifically in managing the prescription drug portion of these benefits. While a health insurance provider may decide to offer a prescription drug benefit, they often contract with a PBM to administer that benefit. This includes negotiating drug prices with manufacturers, developing and managing the drug formulary, processing prescription claims processing, and managing the network of pharmacies. Essentially, the health insurance provider sets the overall framework for benefits, while the PBM acts as a specialized administrator for the drug component, working behind the scenes to manage the pharmaceutical supply chain and associated costs.

FAQs

What is the main purpose of a pharmacy benefit manager?

The main purpose of a pharmacy benefit manager is to manage prescription drug benefits for health plans, employers, and government entities. They aim to reduce drug costs through negotiations with drug manufacturers and pharmacies, ultimately influencing the price patients pay for their medications.

How do pharmacy benefit managers make money?

Pharmacy benefit managers primarily generate revenue through fees charged to their clients (health plans), and by retaining a portion of the rebates negotiated with drug manufacturers. They may also profit from "spread pricing," which is the difference between what they charge a health plan for a drug and what they pay the dispensing pharmacy.

Are pharmacy benefit managers regulated?

Yes, pharmacy benefit managers are subject to some federal and state regulations. Regulatory scrutiny has increased in recent years, with government bodies like the Federal Trade Commission (FTC) launching inquiries into their business practices due to concerns about their impact on drug pricing and competition. Many states have also enacted legislation aimed at increasing transparency and regulating PBM conduct.

Do pharmacy benefit managers save patients money?

Pharmacy benefit managers assert that they save patients and health plans money by negotiating lower drug prices and securing rebates. However, critics argue that the lack of transparency in their operations, coupled with certain business practices, may limit the direct savings passed on to consumers. The actual impact on patient out-of-pocket costs can vary significantly based on the specific health plan and the individual's prescription drug needs.

What is a drug formulary?

A drug formulary is a list of prescription medications covered by a health insurance plan, often managed by a pharmacy benefit manager. Drugs on the formulary are typically categorized into tiers, with different levels of cost-sharing for patients depending on the tier (e.g., generic, preferred brand, non-preferred brand).