Happy January Fellow Netizens!
I hope you all had a wonderful New Year with friends and family! The last few days have certainly been busy with news coverage of multiple global events, from the devastating fires in California to the Supreme Court’s highly anticipated ruling on TikTok’s ban in the United States, which was tied with legislation meant to provide aid to Ukraine and signed into law last April. The field of health policy has also been abuzz with action. One topic in particular caught my attention last year, and I anticipate it will be a focal point in the coming months under the new Republican trifecta: Pharmacy Benefit Manager (PBM) reforms. To start, let me explain what PBMs are and why they matter to you.
PBMs: Background
For those of you who have not heard of PBMs before, you soon will, given that there has been significant appetite on Capitol Hill for reform for some time. In fact, PBM reforms were part of the government funding bills that were rejected by President-elect Donald Trump and were spurred on, in part, by Tesla CEO Elon Musk in December. While an alternative bill was passed which prevented a government shutdown, any mention of PBMs were taken out of the final language.
Simply put, PBMs are “negotiating entities” hired by health insurance companies to manage their overall prescription drug benefits. Their list of clients ranges from public to private groups, including:
- Medicaid
- Medicare Advantage
- Employer-Sponsored Insurance Plans
- Individual Market Plans
PBMs have two main responsibilities for their clients:
- Creating and updating formularies that insurance companies offer as part of their plans. Formularies are lists of prescription drugs covered by a health insurance plan, outlining which drugs are free, require a copay (a portion of the cost you pay out of pocket), or are not covered at all. If you have an insurance plan, you may have seen a section for this at some point.
- Negotiating rebates for insurance plans from drug manufacturers, which partly determines the prices insurance companies pay to pharmacies for the drugs their members buy. Rebates are discounts that drug manufacturers provide PBMs in exchange for adding their drugs to the client’s formularies in favorable categories (“favorable” meaning that they are grouped in tiers that have high utilization mostly based on affordability). Ideally, rebates should be used to reduce costs for clients and ultimately patients—unfortunately, that has not always been the case.
Additionally, PBMs have also taken on administrative roles, such as handling payments between insurance companies and pharmacies. From this brief explanation, I’m sure you can already understand how much influence PBMs have over drug pricing and availability. The chart below summarizes the complex flow of money between entities in the pharmaceutical industry; it emphasizes that PBMs are integral in the control of drug prices in the United States.
So Whats the Big Deal with PBMs?
Healthcare in the United States has become a major topic of discussion, with many Americans expressing frustration, particularly over its high costs. The U.S. Government Accountability Office reports that drug prices have dramatically risen over the last two decades, with Americans paying 2 to 4 times more than people in other countries, such as Canada and France. The Office acknowledges that their estimates are partially clouded by rebates, and as we discussed earlier, PBMs play a significant role in this issue.
So why have PBMs become a target of the federal government? Here are some key reasons:
Transparency
PBMs are not legally obligated to disclose how they operate, including how they develop formularies, the price differences between drugs in a given formulary, and the portion of rebates they retain. Contracts between PBMs and insurance companies often limit access to critical information such as prescription drug claims, drug list prices/rebates, and payment rates to pharmacies. This lack of transparency prevents insurance companies from holding PBMs accountable and tracking spending effectively.
As a result, PBMs can push patients toward more expensive brand-name drugs or even overcharge for generics. This occurs because higher list prices result in higher rebates from drug manufacturers, which PBMs often keep instead of passing savings on to patients.
Consolidation
The PBM industry is highly consolidated, which limits competition and gives the remaining PBMs significant power to set fees and practices with little incentive to reduce costs. As of 2022, the three largest PBMs controlled nearly 80% of the market:
Consolidation within these companies is also prevalent. For example, CVS Health Corporation owns CVS Pharmacy, Caremark (a PBM), and Aetna (an insurance company). This vertical integration allows these companies to control nearly every aspect of drug pricing, leaving patients with few options. For instance, an insurance company that merges with a PBM may have an incentive to increase the costs of drugs they cover, contrary to the usual goal of keeping costs low for coverage, with little oversight or push back from traditional market forces.
In 2022, the FTC ordered the six largest PBMs—Caremark Rx, LLC; Express Scripts, Inc.; OptumRx, Inc.; Humana Pharmacy Solutions, Inc.; Prime Therapeutics LLC; and MedImpact Healthcare Systems, Inc.—to submit documents detailing their business practices for review. Two years later, some PBMs have yet to fully comply with this request, delaying the FTC’s review. The FTC has indicated it is prepared to take legal action if necessary.
Consolidation has allowed PBMs to wield significant influence over drug pricing. The FTC has focused on extreme price discrepancies for two generic cancer drugs (see below) as examples of how PBM-affiliated pharmacies charge significantly higher prices than the national average (otherwise known as NADAC, or the National Average Drug Acquisition Cost) for the same drugs.
The lack of transparency and consolidation within the PBM industry has created an environment where costs are inflated, competition is stifled, and patients ultimately bear the financial burden.
Where Do We Go From Here?
Given that PBMs garnered bipartisan attention last year, it’s not a stretch to assume that PBM reform will carry over into the 2025 legislative cycle. There is speculation that interest in this issue remains strong and that language from the failed bill in December could simply be reintroduced. Even President-elect Trump made statements in favor of PBM reform, causing stock prices for all major PBMs to drop following his comments. It remains to be seen whether this year’s Republican trifecta will succeed in passing PBM reform, but as things stand, unless Congress takes meaningful steps in healthcare reform, Americans will continue to bear the financial burden.
Thanks for reading, and be sure to follow Docnetizen for future articles! If you prefer videos, I recommend watching a summarized explanation of PBMs made by STAT below. Until next time, fellow Netizens!
Featured Image: Photo by Alexandros Chatzidimos: https://www.pexels.com/photo/prescriptions-sign-on-a-drug-store-front-3652750/
Disclaimer: This article reflects the author’s own opinions and statements. They do not reflect the opinions or stances of any organization affiliated with the author
