Pharmacy Benefit Managers

Health care is a large and complex sector of the United States’ economy.  Many companies have sprung up to deliver and manage the delivery of various types of health services.  Prescription drugs used to be a relatively small portion of overall health spending.  But a wave of discovery of new drugs for common conditions, and decisions by drug companies to push price as high as they could, led to that category becoming the fastest growing for a long period now.  As medication spending rose, health plans and the government sought assistance in better managing the cost.  That gave rise to pharmacy benefit managers, who as the name suggests, handle the prescription drug benefit for self-funded employers, private health plans and some government programs.

Managing the prescription drug benefit typically involves contracting with retail and mail pharmacies to provide the drugs to patients, processing and paying the claims for the drug costs, deciding what the “formulary” looks like,  contracting with manufacturers regarding price, consulting with patients and physicians on the best drug for a particular patient and disease and other matters.  A formulary lists what drugs will be covered by the health benefit plan.  Manufacturers will often pay bigger rebates or discounts in order to get on the formulary at all, or to get a preferred position in a category of drugs.  For these services, the pharmacy benefit managers get paid in a variety of ways, which has led to much controversy.

A PBM could just charge a flat fee for its services, of a fee for each drug claim processed or a set amount for each covered person during a set period of time, or some other method that would be relatively unobjectionable.  Instead, they chose to generally make money by keeping part of the discounts and rebates manufacturers paid in regard to formulary position.  The total amount was often hidden from the health plan customer.  This method also led to warped incentives–if you are keeping part of the rebate or discount, you aren’t interested in getting the lowest price, but this highest rebate or discount.  So if a manufacturer charges more, but has a high discount, fine with the PBM.

As these practices became common knowledge, customers were outraged, and regulators began investigating.  PBMs attempted to be more “transparent” about how they made money, but they really just shifted to new methods of obfuscation–collecting “administrative” fees from drug manufacturers, instead of rebates or discounts.  Sounds better but has the same impact on costs.  And the discontent was magnified because at the same time, retail pharmacies were complaining that the PBMs were inadequately compensating them.

The pharmacy benefit manager industry consolidated rapidly.  Today there are basically three large ones–OptumRx, owned by UnitedHealth Group; Express Scripts, owned by Cigna and Caremark, owned by Aetna/CVS.  Note that Aetna/CVS also owns a very large chain of drug stores.  All of these large PBMs also own mail pharmacy facilities.  Several other large health plan companies also own a pharmacy benefit manager.  As is usually the case in health care these days, a few large entities control much of what happens.  And now they are all in the sights of regulators.  The Federal Trade Commission recently released a report, the title of which tells you exactly how the agency feels about PBMs:  Pharmacy Benefit Managers:  the Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies.  (FTC Report)

Among other issues, the report notes that PBMs which own retail and mail pharmacies tend to pay those owned pharmacies substantially more than unaffiliated ones. While PBMs have earned their reputation, the report may be a little too dramatic in ascribing problems to them.  But unless the large health care companies’ lobbying and campaign contributions overcome the public, legislative and regulatory outrage, they appear headed for further limitations on their activities, particularly in regard to compensation.  And meanwhile, employers and health plans have begun looking for alternative managers, breaking up the package of services or finding smaller PBMs willing to be paid via a truly more transparent method.