Pharmacy Benefit Managers (PBMs) have had it too good for too long.
If you’ve never heard of PBMs, that’s not an accident—they sit between pharmacies, prescription drug manufacturers, and health plan sponsors (e.g., large employers who offer health insurance to their whole workforce). From this middleman position, PBMs have a lot of power. They:
- Create formularies. Formularies are lists of drugs that health plans cover. As you’ll see, controlling these lists causes huge conflict of interest for PBMs.
- Collect rebates from drug manufacturers. Drug manufacturers offer PBMs rebates for including their drugs on formularies…and excluding their competitors’ drugs. Rebates generally come in the form of a percentage of the manufacturing fee. So, the more expensive the drug, the higher the rebate can be for PBMs.
- Benefit from “spread pricing.” Theoretically, PBMs reflect rebate savings in the prices they charge health plan sponsors. But in practice, they do just the opposite. A Bloomberg investigation showed that one PBM paid less than $6 for a bottle of pills after the rebate, then charged the plan sponsor nearly $200 for it.
- Operate without licenses or disclosures. Until recently, PBMs have had no licensure or disclosure requirements. That means they can manipulate formularies, hide rebates, and drive up prices at will.
If that sounds wrong to you, you’re not alone. 83% of Americans feel the same, including nearly identical portions of Republicans, Democrats, and independents.
Fortunately, pressure on PBMs is (finally) mounting, from several different sources.
Here are the 3 main drivers of new PBM transparency:
- Consumers. Unsurprisingly, regular people disapprove of PBMs’ power and lack of transparency. The ethical reasons alone would be enough, but studies have also found that consumers end up overpaying for prescription drugs due to PBM pricing controls. Nothing is more motivating than finding out you’re wrongly paying more than you should.
With greater transparency, it would theoretically be easier to hold PBMs accountable for their pricing practices, and then pass rebate savings along to consumers. Given that more than 40 million Americans can’t afford basic health services, those savings are more necessary now than ever.
- New competition (startups). New PBMs have sprung up to challenge the near-monopoly that currently exists in the PBM industry (the three largest PBMs own nearly 80% of the market). This includes EmsanaRx, a nonprofit coalition of large employers including Walmart, Microsoft, Disney, and Costco, as well as Mark Cuban’s Cost Plus Drug Company.
Cuban’s initiative has particularly ambitious goals, aiming to control the manufacturing, packaging, and distribution of 100 common generic drugs. He plans to charge a flat 15% markup and $3 dispensing fee for every drug, rather than the sliding pricing scale that makes it possible for PBMs to collect billions in rebates. Cuban’s model would make many drugs more affordable to average consumers.
- Regulation. Finally, stake lawmakers are stepping in to set new transparency and licensing standards for PBMs. Most recently, Governor Gretchen Whitmer of Michigan signed a bill requiring PBMs to get licenses and file transparency reports with state officials. It also bans spread pricing, making it a requirement to pass savings on to consumers.
The Michigan bill also prohibits “gag clauses.” Gag clauses forbid pharmacists from telling consumers that they could purchase drugs more cheaply outside their insurance plan. Unbelievably, PBMs have had the power to force pharmacists to sign gag clauses—a decidedly mafia-like practice.
The more you learn about PBMs, the more their practices seem conflicted at best (at worst, corrupt). Pressure from these three key segments has begun to move the needle. I imagine that, going forward, we’ll start to see much stricter transparency requirements for PBMs—and hopefully, more cost savings for average Americans.