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FAQ: Are Pharmacy Benefit Managers a Necessary Part of the Pharmaceutical Market?

September 17, 2019

In this FAQ, Matthew Glans examines several commonly asked questions about what pharmacy benefit managers are, the effect they have on drug prices, and some reforms currently being considered to regulate PBMs.

The cost of pharmaceutical drugs is creating an increasing burden on the cost of health care for millions of Americans. According to the federal Centers for Medicare & Medicaid Services (CMS), that total retail prescription drug spending rose by an estimated 26.8 percent between 2012 and 2016, a growth rate faster than all other categories of personal health care expenditures.

In response to the growing cost of prescription drugs, state and federal policymakers are taking a closer look at why these costs are rising. One actor within the drug manufacturing and sales process that has garnered a great deal of attention are the pharmacy benefit managers (PBMs), who act as a middleman between drug manufacturers and pharmacies. The following are commonly asked questions about what PBMs are, the effect they have on drug prices, and some reforms currently being considered to regulate PBMs.

1.      What are pharmacy benefit managers?

Pharmacy benefit managers, or PBMs, are companies that are hired by health insurers, Medicare Part D drug plans, large employers or other payers to help manage prescription drug benefits. PBMs are designed to act as large buying networks for drugs by pooling demand from multiple employers and insurers and use the aggregate demand of these consumers to negotiate lower costs for drugs. According to the Pew Charitable Trusts, PBMs strike deals that effect the availability and prices of prescription drugs for more than 266 million Americans.

PBMs have proven to be very popular, nearly all major payers have chosen to work with PBMs rather than manage drug procurement internally, this includes government payers like Medicare through Medicare Part D and Medicaid. According to the Pharmaceutical Care Management Association, the national advocacy group for PBMs, the deals made by PBMs and their cost management strategies will save health plans and consumers $654 billion between 2016 and 2025.

One area where PBMs have been especially effective is the growth in the use of generic drugs over costly branded drugs. Writing in Forbes, Avik Roy points out that nearly 90 percent of all prescriptions written today in the United States are for inexpensive generic drugs, Roy attributes much of this success to the sophisticated formulary techniques that PBMs introduced.

2.      How do PBMs effect drug prices?

PBMs effect the cost and availability of drugs in three major ways. First, PBMs build and maintain list of drugs, commonly known as formularies of drugs that are covered under health plans, these formularies determine which drugs consumers are able to use and how much they will pay for the drug. Second, they use their combined purchasing power to negotiate rebates and discounts from drug manufacturers, who seek to add their drugs to the PBMs formulary, Third, PBMs work directly with pharmacies to reimburse for drugs that were sold and dispensed to consumers.

While PBMs can be a very effective mechanism to drive drug prices down, their operations are not very transparent, neither consumers nor regulators are aware of how their negotiations work and if the PBMs are passing the savings from the rebates to consumers. While the United States Government Accountability Office has found that PBMs passed nearly all Medicare Part D rebates on to plan sponsors in 2016, some critics have questioned whether this is occurring across the entire health care market. One recent study by the Pew Charitable Trusts found that “PBMs passed through 78 percent of manufacturer rebates to health plans in 2012 and 91 percent in 2016.”

3.       What role do rebates play in the debate over the need for PBMs?

The rebates received by PBMs from drug manufacturers has grown over the last decade. According to the 2019 Pew study, manufacturer rebates to PBMs increased from $39.7 billion in 2012 to $89.5 billion in 2016. According to the U.S. Department of Health and Human Services, the average difference between the list price of a drug and the net price after a rebate is 26 to 30 percent. Some drug manufacturers have argued the increasing rebates have forced them to raise list prices for their products.

Under the current system, PBMs do have an incentive to favor certain higher priced drugs due to the nature of the rebate process. PBMs generally determine the value of a rebate based on the manufacturer’s list price, PBMs receive a larger rebate for more costly drugs then those that may prove similar value at a lower cost. This would encourage PBMs to favor higher cost drugs and could lead to higher costs for consumers in a connected insurance plan.

4.       What is spread pricing?

Another PBM practice drawing some criticism is spread pricing. As was mentioned earlier, PBMs often work directly with pharmacies to reimburse for drugs that were sold and dispensed to consumers. Under the spread pricing model, the PBM charges a payer, like health plans and employers, more than it reimburses the pharmacy for a certain drug and keeps the difference. Like the rebates, the funds received and the effects on prices are kept confidential from both health plans and regulators.

5.       What reforms are states currently considering to regulate PBMs?

There are three major reform ideas that states are considering to add transparency to PBMs work while ensuring consumers benefit from the deals made by PBMs. The first reform path involves improving transparency, several states, along with federal lawmakers have pushed for new laws and rules that would require PBMs to submit more data on how they negotiate prices and rebates and how these rebates are used. It is important to note that most reform efforts do not attempt to eliminate rebates, only ensure that a large portion of these savings are passed on to consumers.

Second, states are considering legislation that would end the practice of spread pricing in order to ensure payers and employers are not overpaying PBMs for prescription drugs. States could consider moving to a "pass-through model," where PBMs charge payers the same amount that they reimburse pharmacies, along with a set administrative fee.

Third, several policymakers, including HHS have proposed new rules that would require PBMs to pass through rebates to payers or to patients. These proposals would require PBMs to pass through more of the rebate saving to payers. In order to main the incentive to negotiate price reductions with drug makers, PBMs would be allowed to keep part of these rebates.

One approach recommended by the Commonwealth Fund would require PBMs to pass through 90 percent of their rebate savings to payers. These new savings could allow insurers savings to further reduce premiums and cost-sharing payments. The federal government already requires Medicaid fee-for-service programs to use the pass-through model.

Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR