Benefits

Unraveling PBMs and Their Role in the Marketplace

June 14, 2018

Unraveling PBMs and Their Role in the Marketplace

Once upon a time, buying a new car meant purchasing it directly from the automaker. Then dealerships emerged to function as intermediaries between manufacturers and consumers. As a result, we’re all accustomed to buying new cars from dealers representing one or more brands exclusively.

But imagine if, rather than being brand-specific, dealerships sold any and all brands, and you shopped from one dealer to the other to find the best deal on whatever car you were looking for.

Then imagine a few “middlemen” got into the game with the aim of serving everyone involved. They would make purchasing agreements with lots of consumers and then negotiate with manufacturers to get the best prices. The more consumers the middlemen have under contract, the more leverage they have for getting lower prices and rebates. They then pass along their savings (after taking a profit) to dealerships, who then sell cars to consumers according to the negotiated prices.

Everybody would benefit, right? The manufacturers sell more cars, dealerships make sales, consumers get better prices, and the middlemen make a profit.

That, in a slightly fractured and oversimplified nutshell, is how PBMs, or Prescription Benefit Managers work. They are the “middlemen” that negotiate prices with drug manufacturers, allowing pharmacies—the counterpart to the dealerships in our car scenario—to sell drugs at lower prices.

More technically, PBMs function as Third Party Payers representing major insurers, government health plans, union plans, and self-insured corporations in price negotiations with drug companies. In that role, PBMs manage pharmacy benefits for nearly 270 million Americans. This means when you go to a pharmacy to have a prescription filled, you pay the price the PBM representing you has negotiated—even though you might have no idea what PBM represents you.

PBMs have been around for decades, but they’ve only recently emerged from the shadows as consumers and employers have sought greater drug-pricing transparency. And while PBMs generally have been viewed as just another link in the prescription-benefits chain, they are receiving increased scrutiny for their practices, prompting many to ask if they’ve gained too much power and profit from their position. Today, three PBMs—UnitedHealth/OptumRx, CVS Health, and Express Scripts, recently purchased by CVS—control almost 80% of the marketplace.

Prescription Benefit Managers make the case that their power helps keep drug prices down. In fact, CVS Caremark recently told Health Payer Intelligence it actually reduced pharmacy costs for 42% of its clients from 2016 to 2017, and that it kept overall price increases to their lowest levels in five years. Of course, you might wonder, if PBMs are so effective, why do costs continue to rise? Drug companies will tell you it’s because of factors such as the ongoing cost of developing new drugs, growing demand for specialty drugs, and the increase in expensive conditions, such as diabetes. Others, however, point to profit-taking, acquisitions of drugs for the express purpose of raising prices, and the more than $5 billion that drug companies spend on advertising each year. 

Regardless of why prices go up, consumers need some kind of leverage on their side: It’s estimated that nearly 50% of all Americans take at least one prescription drug, and one in four Americans reportedly have trouble affording their medications.

That is part of why PBMs—along with the entire drug-pricing infrastructure—have come under increased review in the last few years. In response, some PBMs are investigating new models that make greater use of technology and marketplace data to monitor and control costs, and that focus on specific challenges, such as high-priced specialty drugs and opioid drug abuse.

Where will all of this lead? Initially, it might simply add to the changes we all have to contend with in the prescription drug marketplace, but eventually—we hope—it will lead to lower prices and greater access to healing medications. 

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