22 Feb Pharmacy Benefit Managers: Why Do They Matter?
What is a Pharmacy Benefit Manager?
A Pharmacy Benefit Manager (PBM) is a company that selects, purchases, and distributes drugs for a health insurance company. PBMs have a significant impact on which pharmacy you may go to, what drug you will take, and even how much you will pay for the drug.
Now, you may think: wait a minute. When I need a prescription drug, I head to a pharmacy with a prescription from my doctor. I pay the co-pay, my insurance covers the rest, and go home with my prescription. I’ve never encountered a mysterious guy named the “pharmacy benefit manager.”
PBMs “hide” behind your insurance company and your pharmacy, like an “invisible middleman.” With the increased attention on the high cost of drugs, people have started to pay attention to PBMs.
What Do Pharmacy Benefit Managers Do?
Created in the 1960s, PBMs worked for insurance companies and processed claims to lower the cost of drugs. Today, PBMs have grown much more powerful. For example, CVS, Express Scripts, and Optum are the three largest PBMs in the country, all in the top 25 of Fortune 500 companies.
PBMs do business with virtually all players in the prescription drug supply chain:
- Insurers. PBMs develop formularies for insurance companies and other insurers. Formularies are lists of drugs covered by an insurance plan. PBMs have the power to select what drugs patients will use and how much they pay.
- Drug manufacturers. PBMs negotiate with drug manufacturers to purchase prescription drugs for insurance companies.
- Pharmacies. PBMs contract with pharmacies to distribute drugs. PBMs can decide whether the pharmacy you choose is in the insurance company’s network.
How do PBMs Affect the Price of Cancer Drugs?
Rebates
Pharmacy Benefit Managers can negotiate with drug manufacturers to get lower drug prices. You would think this would cut the price of expensive cancer drugs and benefit patients.
But instead, PBMs typically negotiate for “rebates,” instead of lower drug prices. Rebates are a percentage of drug list prices paid by manufacturers. PBMs can keep the rebates for themselves.
To cover the cost of rebates, manufacturers have to set the list price higher. And, PBMs have a strong incentive to choose expensive drugs over cheaper ones, because they can collect larger rebates.
PBMs claim that they pass a large percentage of rebates to insurers, which should reduce patient premiums. But, they are not required by law to do so. Many small insurers claim they never receive any rebates from PBMs.
Undermining competition
The three largest Pharmacy Benefit Managers (CVS, Express Scripts, and Optum) are in total control approximately 76% of the market. Larger PBMs have more power to control the market, which may lead to higher drug list prices and patient co-payments.
PBMs can also control the supply chain. The three biggest PBMs also own their own pharmacies. So, PBMs can treat their own pharmacy more favorably, which can force smaller local pharmacies out of business.
Can Pharmacy Benefit Managers Be Regulated?
Of course. There are a number of possible actions that could better regulate PBMs and lower the cost of prescription drugs for patients, including:
Increasing Transparency
More transparency of the activities of PBMs would leave less room for secret manipulations. For example, on January 2, 2022, New York passed a new law to improve transparency of drug costs and create rules PBMs must follow.
Restricting Rebates
PBMs should be required by law to pass through the majority of the rebates to insurers or patients. They could be allowed to keep a small percentage of the rebates as an incentive to negotiate prices with drug manufacturers.
Enforcing Antitrust Laws
Antitrust agencies should prevent large PBMs from merging with smaller ones. Agencies should also prevent PBMs from treating their own pharmacies better than competitors.
For more information about managing the cost of prescription drugs, visit our module on CancerFinances.org. And to learn more about engaging in cancer advocacy efforts see our Cancer Advocacy Resources.
About Triage Cancer
Triage Cancer is a national, nonprofit providing free education to people diagnosed with cancer, caregivers, and health care professionals on cancer-related legal and practical issues. Through events, materials, and resources, Triage Cancer is dedicated to helping people move beyond diagnosis.
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