The Role of Pharmacy Benefit Managers and Skyrocketing Cost of Medications

Abstract

This article reviews how pharmacy benefit managers (PBMs) play a role in the delivery of modern healthcare services. A discussion regarding the lack of transparency regarding PBM services, consolidation of the market and vertical integration, as well as a typical flow of payments related to medications is provided. Authors review what higher drug costs are doing to patients, and provide an overview of what is happening to fight these trends.

Introduction

Pharmacy benefit managers (PBMs) like Express Scripts®, CVS Caremark®, and OptumRx® claim to lower drug prices for patients. Perversely, PBMs are driving up the costs of healthcare and prescriptions. This manuscript will take an in depth look at PBMs including their functions in the healthcare system and their roles in determining the cost of medications.

What is a Pharmacy Benefit Manager?

Pharmacy benefit managers (PBM) play a significant role in the delivery of pharmacy services. PBMs (Table 1) act as an intermediary (or middle-man) between pharmacies, insurance companies or employers, and drug manufacturers.¹ (Figure 1). In 2023, the three largest PBMs combined to account for approximately 80% of the equivalent prescription drug claims (PBM market share) in the US.^2,3

Table 1.

Three Largest PBMs in the United State²,³

CVS Caremark® (part of CVS Health)

Express Scripts® (part of Cigna)

OptumRx® (part of United Health Group)

Figure 1.

PBMs Act as an Intermediary⁴

Abbreviations: PBM: Pharmacy Benefit Manager

How Did PBMs Start?

Pharmacy benefit managers got their start in the US in the 1960s when large insurance companies started offering a drug benefit.^1,5 As early as 1966, a democratic Senator from Illinois, Paul Douglas, wanted to add a prescription drug benefit to Medicare and introduced an amendment to a Social Security bill.⁶ While the Douglas amendment was later deleted from the bill, it soon became the norm that third-party payers (private companies, nonprofit firms, and government programs) would cover prescriptions on behalf of employees and retirees.⁷ These plan sponsors subsequently hired an outside company, a prescription benefit manager (what would later become PBMs), to help manage the overall costs of the program and help organize a network that would accept their enrollees prescription coverage benefits.⁷ The original intent in hiring these PBMs was to help insurance companies keep the cost of prescription drugs contained.

PBMs Role in Delivering Pharmacy Services Has Expanded

In the 1970s, PBMs began to take on other roles in the management and dispensing of medications. They started to adjudicate (i.e., electronically process) drug claims. To adjudicate a drug claim in a pharmacy today means that pharmacies determine patient eligibility for the medication in real-time. The pharmacy submits patient, medication, and insurance information to the PBM online; the pharmacies are then notified of the formulary status of that claim (i.e., a prescription drug), whether accepted or rejected, by the PBM. If accepted, pharmacies can then be assured they will be reimbursed for the medication prior to it being dispensed to the patient. Claims may also be denied or declined in real-time. If denied, the drug is not covered, and the PBM will not be reimbursing the dispensing pharmacy for this medication. Prescription claims may also be reversed by the pharmacy. This is typically carried out if the prescription item is not picked up by the patient and returned to the pharmacy’s inventory.⁸

In addition to adjudicating prescription claims, PBMs have other roles in the delivery of pharmacy services as well. The PBM will establish the plan’s formulary, negotiate pricing and rebates with drug manufacturers, and set up the network of pharmacies that policy holders can use.⁹ (Figure 2). For example, members of the plan may only be able to utilize one large pharmacy chain, such as Walgreens, for their pharmacy needs and/or a mail order pharmacy. This means that if the patient were to try to get a medication filled at a Medicine Shoppe, the drug would not be covered or the patient would pay a higher copay, simply because this pharmacy is out-of-network.

Figure 2.

Functions of a PBM⁹,¹⁰

Typical Flow of Payments in the Prescription Drug Market

The supply chain for prescription medications in the US is complex and involves payment flowing between multiple parties. In simple terms, drug manufacturers sell the drugs they have developed to wholesalers (distributors). Distributors store these drugs, that are then sold to pharmacies. The pharmacy may be a member of a group-purchasing organization (GPO) which helps negotiate drug prices on behalf of its pharmacies (this is often the case with independent pharmacies). Pharmacies then process the prescriptions and dispense them to patients.¹¹ (Figure 3)

Figure 3.

Flow of Payments⁹,¹¹,¹²

Where Did Things Start to Go Downhill with PBMs?

As previously stated, PBMs act as a “middle-man” or intermediary between drug manufacturers and insurance companies. There are a number of ways that PBMs make money,¹³ including spread pricing, manufacturer rebates, administrative fees, and requiring patients to fill medications at the PBM-owned mail order pharmacy. With spread pricing, the PBM reimburses the pharmacy a certain amount for a prescription drug (e.g., $30) while charging the plan sponsor a higher amount (e.g., $45); the difference (i.e., $15) the PBM keeps.¹⁴ The lack of transparency, through proprietary contracting, enables the PBMs to perpetuate this practice.

Another means by which PBMs make money is via manufacturer rebates. Third-party payers (i.e., the health plans) hire PBMs to negotiate drug prices for their members. These negotiated prices often include a rebate from the manufacturer. The manufacturer is incentivized to negotiate because the PBM’s leverage formulary placement of medications. The placement of a drug on a plan’s “preferred” formulary is financially beneficial, especially if there are multiple competitors (drugs in the same class) vying for market share. For example, when there were two branded COX-2 inhibitors on the market in the early 2000s, (Pfizer’s Celebrex and Merck’s Vioxx), both wanted preferred formulary status on as many insurance platforms as possible. If their COX-2 inhibitor obtained preferred status on a PBM plan’s formulary, this would mean that those insured members (i.e., patients) would pay a lower co-pay (Tier 1) and have no insurance issues getting this prescription filled. Conversely, if a manufacturer has a “non-preferred” drug on a PBM formulary, this results in higher costs for the patients and fewer prescriptions sold.

The consolidation of the PBM market has enabled a rapid expansion of manufacturer rebates paid in exchange for preferred formulary status.¹⁵ Estimates from 2022 indicate that rebates, as well as discounts and price concessions, accounted for $223 billion for brand-name medications—with rebates factoring as the largest and most significant portion.³ PBMs are not forced to publicly disclose how much of the manufacturer rebate they retain. Likewise, the percent of the manufacturer rebate that is passed through to the insurer is not disclosed. The insurers can use these pass-through rebates to reduce the premiums for all plan participants.. While the lack of rebate transparency obfuscates this situation, it is believed that a significant percent of these drug rebates are kept by the PBMs.¹⁶ The same is true for 340B rebates as well.

PBMs also benefit financially through 340B contracting and rebates.¹⁷ The federal 340B Drug Discount Program enables qualifying healthcare organizations (e.g., hospitals and clinics), or “covered entities,” to receive discounted prices on qualifying outpatient medications.¹⁸ The intent is that these savings would be used to provide services to uninsured and low-income patients per the Public Health Service Act.¹⁹ According to the Health Resources and Services Administration (HRSA), enrolled covered entities can see savings of up to 50% in their drug spend.¹⁸ Pharmacy benefit managers have penetrated the 340B program by increasing contract pharmacy agreements with covered entities as well as gaining 340B market share.¹⁷ As PBMs own a vast number of these contracted 340B pharmacies throughout the country, a large percentage of these prescription profits are also going to PBMs.²⁰

PBM reimbursements are significantly harming dispensing pharmacies.^21,22 PBMs pay pharmacies through a complex reimbursement model. What is being paid by the PBM (to the pharmacy) is often less than what the pharmacy paid the wholesaler for the drug. There is also a lack of transparency in these pricing structures which leads to financial challenges and payments to pharmacies being delayed. This practice is unique to pharmacy. For example, this would NOT be the case in fast food. Think of going to McDonalds and ordering a double cheeseburger. The owner of the local McDonald’s pays its distributor for the components of the double cheeseburger (bun, cheese, burger, pickle, onion, ketchup, mustard); however, the owner is forced to sell the cheeseburger to the consumer for a price lower than what the restaurant paid the distributor. In this example, McDonalds makes zero profit; it actually loses money. This is essentially what PBMs are doing to independent pharmacies. Not only are these drugs being sold below the acquisition cost to the pharmacy, but many business expenses—including staff salaries, utilities, and property taxes—are not being reimbursed when prescriptions are filled. This is not sustainable and has led to many independent pharmacy closures.^{21, 22} In some areas of the country, this has led to pharmacy deserts.

A pharmacy desert is a neighborhood with an average distance to the closest pharmacy of 10 or more miles.²³ A rural pharmacy desert is a community with lower density of both chain and independent pharmacies, fewer 24-hour pharmacies, and fewer pharmacies offering delivery service.²⁴

What is Meant by Vertical Integration?

The term “vertical integration” reflects the business relationships among the largest US healthcare companies: insurers, PBMs, specialty pharmacies, and even provider services. The aim of these vertically integrated companies is to keep patient’s healthcare needs “in house” or to themselves. For example, the umbrella company financially incentivizes the patient to stay within the closed network (of vertically integrated companies) to obtain medical care and medications (Table 2).

Table 2.

Examples of Vertical Integration.²⁵,²⁶,²⁷,²⁸

Umbrella Company	CVS Health ®	The Cigna Group©	Unitedhealth Group©
Insurance company	Aetna®	Cigna©	United Healthcare®
PBM	CVS/Caremark®	Express Scripts©	Optum Rx®
Specialty pharmacy	CVS Specialty®	Accredo©	Optum Specialty Pharmacy©
Provider Service Examples	CVS minute clinic® Oak St Health (CVS Healthspire) ™	Evernorth Health Services(SM) MD Live®	Optum Care©

Vertical integration has come to be the norm over the past decade as multiple parties involved in the drug distribution and reimbursement arena have merged or been acquired.²⁸ There have also been the creation of GPOs or group purchasing organizations; some of which are also owned by PBMs. GPOs serve the healthcare system by working to collectively purchase for its members things like medical and surgical supplies, pharmaceuticals, equipment, IT supplies, and even food. Hospitals, nursing homes, long-term care pharmacies, assisted living centers, infusion pharmacies, and home healthcare providers are examples of GPO clients. By using a GPO, the cost of supplies should go down.

How Do PBMs Affect Providers in the State of Missouri?

Pharmacy benefit managers have inserted themselves between providers, patients, pharmacists, and even their health insurer. They create and control drug formularies for insurance companies while patients (and employers) continue to pay high premiums, deductibles, copays, and coinsurance. PBMs ultimately determine which drugs patients are able to acquire and afford by setting the prices via the tiered co-payment structure. PBMs likewise determine which medications are non-formulary and which drugs require prior authorization. By preferentially selecting higher cost medications and keeping a portion of the discounts (e.g., manufacturer rebates)²⁹ for themselves, PBMs increase their profits.

Pharmacy benefit managers own or contract with PBM-affiliated pharmacies (Table 2). They direct as much business to their pharmacies as possible to increase market share and profits. This is accomplished by requiring patients to use these PBM-owned or affiliated pharmacies. Some patients feel “forced” into using these pharmacies, as they are charged more (i.e., a higher co-pay) or given a reduced day supply at a non-affiliated pharmacy. This practice not only disadvantages many independent pharmacies, but also leaves patients feeling like they have limited choices. For example, a patient may wish to have a prescription for insulin filled at the local Medicine Shoppe that is not affiliated with a PBM (affiliated pharmacies are designated “in-network”). This patient prefers a 90-day supply for convenience. The PBM may force this patient to use a mail order pharmacy, as the Medicine Shoppe is out-of-network. The PBM may charge a higher co-pay to have it filled at the Medicine Shoppe. Additionally, the PBM may not allow more than a 30-day supply unless the prescription is filled through a PBM-affiliated mail order pharmacy. The patient, by no longer visiting their local pharmacy (where they have a relationship with their established and trusted pharmacist), may be deprived of the level of personalized service and attention that is required.³⁰ Patients are often confused by these in-network and out-of-network pharmacy requirements which may impact adherence, affordability, as well as patient outcomes.

How Is the Price of Medications Affecting Your Patients?

Measuring drug spending is a challenge due to limited public data on how much the various third-party payers and supply chain intermediators pay for prescription drugs.³¹ Only 4% of prescription drugs were covered by third-party sponsors in the 1960s, but this increased to 32% by 1980.³² Private health insurance, Medicare, and Medicaid accounted for approximately 90% of prescriptions covered in 2022.^33,34 The Centers for Medicare and Medicaid Services (CMS) estimates that the US experienced a 26.8% rise in total retail prescription drug spending between 2012–2016. The annual spending in today’s America vastly exceeds that of even a decade ago. The US medication market grew by 5% in 2022 and was valued at approximately $430 billion.³⁵ The growth of new and expensive specialty drugs, such as those used to treat Hepatitis C and various cancers, has significantly impacted the overall cost of medications in the US³¹

Interestingly, many patients that have prescription drug coverage are electing to simply not use it. Patients elect to pay cash (or out-of-pocket) for medications instead of having them run through their prescription insurance plan.³⁶ In one survey, respondents listed the following reasons for paying cash for medications: using discount cards is less expensive, the preferred pharmacy is out-of-network, the medication is not covered, or the deductible has not yet been met.³⁶

What Can Be Done?

Lawmakers have taken notice and drug prices are in the political spotlight. Several modifications were made to the drug reimbursement system through the 2022 Inflation Reduction Act.⁹ In an effort to shed light on these confidential discounts, legislators want to increase transparency surrounding these transactions. The state of Ohio is leading the charge in stopping PBM abuse. Their attorney general (AG) is waging war on the PBMs; he has filed four different lawsuits against the PBMs related to the cost of prescription drugs and violations of antitrust laws.³⁷ In one case, the Ohio AG is suing Express Scripts claiming that the company overcharged the state’s Highway Patrol Retirement System, a public pension fund. In another, he is suing Optum for drug overcharges.³⁸

In 2015, Arkansas passed a law making it illegal for PBMs to reimburse pharmacies at a lower rate than what it cost to dispense the medication.³⁹ This same law allows pharmacies to refuse to sell a medication if the reimbursement is too low.³⁹ This case made it all the way to the Supreme Court, which sided with the Arkansas lawmakers, paving the way for other states to follow suit.

The Department of Justice has formed a Task Force on Health Care Monopolies and Collusion. As part of their Antitrust Division, this task force is considering competition concerns brought forth by the public and providers. The task force will also be reviewing issues with payer-provider consolidation and is empowered to investigate and enforce both strategy and policy in this area. ⁴⁰

On a local level, in the state of Missouri, several bills have been proposed for both the House and Senate in the past couple of years. These reform bills center around increasing PBM transparency with regard to rebates, incentives, pricing, and oversight.⁴¹

Pharmacies that serve vulnerable patient populations should be protected by maintaining in-network status with insurance plans. Pharmacies must also be reimbursed adequately for offering pharmacy services to this patient population. Accordingly, these patients will continue to have a steady, reliable, and trustworthy pharmacy to fill their prescriptions.⁴²

Conclusion

Pharmacy Benefit Managers do hold a valuable place in the delivery of healthcare to patients. However, without reform, their practices are harming the healthcare arena and the patients they serve. Future regulation of PBMs is needed. Changes in unreasonable drug pricing and improved transparency will benefit everyone. Health plans, drug manufacturers, and pharmacies will be better informed to negotiate contracts and regulators will be able to hold PBMs accountable to fair business practices.⁴³

Addendum

The Federal Trade Commission recently brought administrative action against the top PBMs — CVS Health’s Caremark Rx, Cigna’s Express Scripts, and United Health Group’s OptumRx — saying the companies created a “perverse drug rebate system” that artificially inflates the cost of insulin. This action demonstrates the government also feels that PBMs raise the cost of drugs as explained in this manuscript.