Pharmacy Benefit Managers (PBMs) have been portrayed as a boogeyman for quite some time. PBMs manage drug benefits for health plans, including employee health plans, Obamacare, Medicare Advantage, Medicaid managed care and private insurers. PBMs raised the ire of independent pharmacies years ago because PBMs bargain down the fees pharmacists receive from government programs like Medicaid. For instance, most state fee-for-service (FFS) Medicaid programs pay small pharmacies dispensing fees that exceed $10 for a prescription, while some states pay small dispensing fees of more than $13 a prescription, while others pay more than $15. Dispensing fees are the professional fees (basically for counting pills and placing them in a bottle) in addition to the ingredient costs. Keep in mind that Walmart will dispense a month’s supply of certain generic drugs for a total cost of $4, a fee that includes the dispensing fee and the cost of the drugs themselves. Paying $15 to $20 for a Medicaid FFS prescription that Walmart sells to uninsured consumers for $4 seems excessively generous.
Due to their bargaining power PBMs often negotiate dispensing fees as low as $2 per prescription. Thus small, independent pharmacists descend on state capitols and lobby for much higher fees from Medicaid than the market price. As a bit of background, Medicaid fee-for-service pays the higher dispensing fees, whereas the private insurers who run Medicaid managed care plans tend to pay far less. Pharmacies object but cannot afford to refuse Medicaid managed care business.
In recent years PBMs have been accused of more nefarious behaviors than merely trying to save taxpayers a ton of money. Big Pharma blames PBMs for rising drug costs, claiming “Middlemen are putting profits before patients.” Let me explain. The PBM industry has consolidated to the point that the Big Three PBMs control 75% of the drug market. This gives PBMs the kind of market power where they can begin to extract concessions not only from pharmacies and drugmakers, but also price gouge their clients and consumers. The latter is precisely what PBMs are accused of doing.
Congress is taking notice, and many Members of Congress are clamoring to reign-in what it considers abusive practices. A House panel recently passed a bill to ban several controversial PBM practices, but the measure (if signed into law) only applies to federal employee health plans.
The bill, by Rep. Mariannette Miller-Meeks (R-Iowa), would only allow PBMs to charge a flat service fee, separating those fees from list prices. The bill also would ban the PBM practice, called spread pricing, of charging insurers more than they pay pharmacies. And it would prohibit PBMs from steering patients to pharmacies affiliated with them.
Drugmakers claim PBMs pressure them to provide large rebates, rather than lower prices. This big rebate strategy requires higher prices to accommodate large rebates. Consumer cost-sharing is often based on the higher list prices rather than the (lower) prices net of rebates. Some analysts argue that large rebates make it easier for PBMs to keep a large slice of the rebate as compensation rather than passing it along to their client. Rebates may also result in higher management fees costs to health plans clients.
Large insurance companies own the three biggest PBMs. In years past, drug claims were an expense that insurers had to bear. Increasingly insurers profit when enrollees fill generic prescriptions. This occurs when the copays for cheap generic drugs are higher than the wholesale drug cost. PBMs owned by insurers are also accused of marking up higher-price brand drugs, charging health plan enrollees far more than the drug’s average wholesale cost. PBMs have recently been accused of depriving consumers to lower-cost generic drugs when a competing brand drug provides them with a large rebate.
PBMs are not inherently bad. Drug plan managers have significant bargaining power and save consumers money depending on how and where they buy their drugs. The problems for consumers arose when the federal government allowed the industry to consolidate into a cartel and then be acquired by large insurers who manage many of the nation’s health plans. Also compounding the problem is a health care system that allows large kickbacks (i.e. drug rebates) that create perverse incentives to raise prices for consumers.