The Driver Dictating Prescription Drug Benefits: PBMs Explained

Pharmacy benefit managers, liaisons between drug companies and health insurers who administer patients' prescription benefits, are at the center of the debate about why drug prices are so high in the United States.

PBMs were originally formed in 1968 to handle complaints and negotiate lower prices with drug manufacturers. PBMs now administer drug plans for more than 266 million Americans who have health insurance.

The Federal Trade Commission is expected to investigate the PBM industry this year over the fairness of its refund policies.

1. What do PBMs do?

PBMs administer patient drug benefits for health insurers, large employers, Medicare drug plans, and other entities that provide health benefits.

They negotiate price discounts with drug manufacturers and determine how pharmacies are reimbursed for filling prescriptions. They design formularies, lists of preferred medications in a health plan. They also determine how much patients pay through copays.

The Association for Pharmaceutical Care Management, which represents PBMs, says they save 40% to 50% on prescription drugs, an average of $962 per person per year.

Wherever possible, PBMs replace cheaper generic drugs that are equivalent to brand name drugs,

Three PBMs control up to 85% of the market. These are OptumRx from UnitedHealth Group Inc., CVS Caremark from CVS Health Corp., and Express Scripts from Cigna Corp.

2. Which of your practices have drawn criticism?

There are questions about how much PBMs keep from discounts they negotiate with drugmakers and how much is passed on to consumers or health insurers and employer plans.

Critics say PBMs can also have misaligned incentives. Since they get discounts and rebates, this might lead them to prefer more expensive drugs on the formularies.

Drugmakers argue that having to pay rebates and rebates to PBMs leads to higher initial list prices. Health insurers, meanwhile, argue that high drug prices are set by manufacturers, not intermediaries like PBMs.

Independent pharmacies claim that the structure of the supply chain puts them at a disadvantage because PBMs direct patients to pharmacies or mail-order services owned by insurers that own PBMs.

Another tactic called "differential pricing," in which PBMs charge an insurer or employer more for a drug than they reimburse the pharmacy and keep the difference has caught the attention of lawmakers. The Congressional Budget Office estimated that eliminating price differentials in the low-income Medicaid health care program alone would generate about $900 million in federal savings over 10 years.

Another tactic that some observers believe improves PBM's bottom line is the use of "direct and indirect compensation rates" or DIRs. These are after-sales costs billed by PBMs to network healthcare providers (oncology practices claim to be particularly affected here) or to pharmacies, sometimes months after the medicine has been distributed to the patient.

The PBM industry counters that it lowers drug costs by negotiating directly with drug manufacturers for discounts at high list prices. The PCMA says the pharmaceutical industry is to blame for keeping drug prices high through "coupons, co-pay cards, direct-to-consumer advertising and payments to doctors".

3. What do the courts say about PBMs?

The PBM industry has long argued that any attempt by the state to regulate it is eclipsed by the Employees Retirement Income Security Act. Over the past two years, the courts have undermined this argument.

In 2020, the Supreme Court ruled in favor of an Arkansas law that requires PBMs to reimburse state pharmacies at or above the wholesale cost of the pharmacy. The judges said the state law is a basic form of cost regulation and does not violate plans covered by ERISA.

There are similar laws in at least 36 states, and the courts are still weighing them. In November, the United States Court of Appeals for the Eighth Circuit partially upheld a North Dakota law. The decision allowed the state to require PBMs to disclose certain information to pharmacies upon request and to limit the conditions they can impose on network pharmacies.

PBMs have also faced legal challenges for “recoveries” of consumer co-payments that exceed the cost of the drug to the pharmacy, fraud, misrepresentation, kickbacks, and non-compliance. safety and ethical standards.

4. What can the government do?

So far, government actions around PBMs have focused on transparency. In November, the Biden administration released an interim final rule that requires health plans to report health care spending information to the government, including prescription drug reimbursements, fees, and other compensation paid by drug manufacturers. medications.

There are also legislative proposals aimed at obtaining information. The Democrats' Build Back Better Act (H.R. 5376) would require PBMs to provide detailed information about reimbursements, fees, and other compensation to employers and insurers. A Republican-sponsored bill (H.R. 19) requires disclosure of generic dispensing prices, discounts and reimbursements for PBM drugs, and their payments between health plans and pharmacies.

Proponents want the government to go further by banning price sharing or requiring PBMs to pass on all reimbursements to patients or health plans, for example.