Pharmacy Benefit Manager (PBM) Defined
PBMs are third-party administrators contracted by health plans, large employers, unions and government entities to manage prescription drug benefits programs. They were created in the 1960s to process claims for insurance companies. By the 1970s, PBMs were serving as fiscal intermediaries adjudicating prescription drug claims. Today, PBMs not only adjudicate claims but also develop and manage pharmacy networks, determine drug formularies, set co-pays, and set criteria for prior authorizations and the patient’s choice of pharmacy.
Originally intended to process claims on behalf of clients within a set fee structure, they are often called “invisible middleman” because they are hidden between the patient’s insurance company, who the PBM works for, and the pharmacy, who the PBM reimburses for dispensing the prescription. Currently the three largest PBMs - CVS Caremark, Express Scripts and OptumRx (a division of United Healthcare) hold nearly 80% of the prescription benefits market in the U.S.
Why the Negative Attention on PBMs
It starts with the nature of the PBM business model, which masquerades as a “cost saver” but is actually a cost multiplier. PBMs profit at nearly every stage of the supply chain from the drug manufacturer to the patient purchasing the prescription at the pharmacy: PBMs negotiate and keep manufacturer rebates in exchange for adding some drugs to formularies (the lists of medications covered by a given health plan) over others; they determine how much to bill the insurance plan per prescription and what they will reimburse the pharmacy for dispensing that prescription--the difference between the two prices, often referred to as the spread, is kept by the PBM. PBMs manage Medicaid and Medicare prescription plans and bill the government the same way they bill their private insurance clients.
PBMs own their own pharmacies - both retail stores and mail order - and make money when patients are forced to use mail order or only purchase from a PBM-owned pharmacy, such as CVS. PBMs also reimburse their own pharmacies more than they reimburse non PBM-owned pharmacies, especially small community and independent pharmacies. Altogether, PBMs generate more than $315 billion annually in revenue for themselves and their shareholders by adding their cost of doing business to the end cost of the prescription paid by insurance plans, taxpayer dollars and patient copays at the pharmacy counter.
PBMs and Drug Manufacturer Rebates
PBMs work with drug makers to develop the formulary. In the process, PBMs negotiate, and are incentivized by, manufacturer rebates -- which they keep in part or whole. The more expensive the covered drug, the higher the rebate. And while the term “rebate” usually means the buyer receives some money back post-purchase, this is not the case for prescriptions. The patient and the insurer buy the product but the PBM receives the rebate. PBMs will often structure their contracts to allow them to collect and keep rebates as part of an “administrative fee” or “rebate sharing” arrangement with the health plan instead of passing the rebate to its rightful owner - the purchaser of the medication.
The Relationship Between PBMs and Pharmacies
PBMs are responsible for reimbursing the pharmacy for dispensing the patient’s medication. The pharmacy, who has already incurred a cost for stocking and dispensing the medication, has no control over any aspect of the medication’s sale. It is the PBM who determines the patient’s copay and the PBM who determines in advance how much it will reimburse pharmacies for each medication covered under the drug plan. It is the PBMs who pre-determine how much each drug covered under the plan should cost, and this is the amount it reimburses all pharmacies but the ones they own. Often the reimbursement rates are well below the cost of the drug, putting pharmacies in the position of having to fill a prescription at a loss. No one is sure how the cost for each covered drug is determined because PBMs are not regulated and not required to disclose their formulas for determining cost. PBMs consider this information a “trade secret”, leaving pharmacies with no choice but to appeal losses they incur in order to fill the prescription. Often those appeals are denied, or simply ignored by the PBM --despite laws in New York State requiring very specific appeal procedures.
Why Pharmacies Contract with PBMs Despite the Abusive Practices
Because pharmacies are dependent on having patients, and most patients depend on having a prescription drug plan to help offset the cost of expensive medications, pharmacies are left in a “take it or leave it” situation, business-wise. Most pharmacists take it, because they are in the business of providing care and the PBMs have the patients.
PBMs Can Own Pharmacies Even Though Doing So is a Conflict of Interest
Currently there’s no law preventing PBMs from owning retail, mail order, specialty or any other type of pharmacy - a clear conflict of interest since PBMs not only negotiate which drugs will be covered and at what cost, they have direct and proprietary access to their prescription drug benefit plan enrollees and can use their access as a platform to guide, steer, direct or mandate which pharmacies plan enrollees can use. PBMs use their role as drug plan administrator to entice plan enrollees to use PBM pharmacies by offering incentives to patients that they directly disallow other pharmacies to use. For example, a PBM can offer a 90-day medication supply for the price of 60 days at its mail order pharmacy, but prohibits the local community pharmacy in your neighborhood from being able to do the same thing, even though your community pharmacy may be part of the PBM’s pharmacy network. Furthermore, CVS and Express Scripts have been caught in the act - and fined - for engaging in misleading scare tactics that pull patients away from their local pharmacies to a CVS or Express Scripts “preferred status” (large retail) pharmacy, claiming if patients don’t leave their local pharmacy, the price of their medication will greatly increase.
How Taxpayers are Affected by PBMs
Recent investigations in states like Ohio, Kentucky and Arkansas have uncovered serious questions about the level of profit generated by PBMs contracted to manage Medicaid Managed Care prescription benefits. As with private health plans, PBMs provide a third-party prescription drug benefit plan to Medicaid and Medicare enrollees, and bill the government for their services. State government pays for services with money raised by local taxes and receives matching federal funding (also taxes) to cover costs. In Ohio, an independent investigation by the Columbus Dispatch has shown CVS Caremark charging the state as much as 9 times the cost of a prescription drug while reimbursing local pharmacies below cost. As a result, Ohio is overpaying CVS Caremark, CVS Caremark is underpaying the pharmacies and taxpayer dollars are funding historical profits for CVS Caremark through this “spread pricing” model.
How Spread Pricing Affects Patient Access to Medicine
While adding a mark-up to a good or service is standard business practice and not illegal, the alarmingly rampant practice of PBMs marking up their clients’ prescription costs and then under-reimbursing pharmacies for actual cost of those prescriptions leaves pharmacies unable to predict cash flow, stock inventory, or sometimes to even meet payroll. Meanwhile, health plan administrators think they are paying the true cost of the drug while the local pharmacy hasn’t been paid enough to cover the cost of goods sold.
Patients depend on their local pharmacies to fill prescriptions when needed and trust their pharmacists to answer questions or guide them through treatment. Yet the unpredictability of the PBM spread pricing model threatens the viability of most community pharmacies, resulting in the potential for a patient’s loss of access to medicine and/or the risk of nonadherence to their medications.
Spread Pricing is Legal - and Creating a Crisis
The scarcity of regulatory oversight and lack of transparency in the PBM industry have allowed PBMs to overcharge for prescription drugs for decades. PBMs typically don’t provide clients with complete, itemized billing statements so it’s only when informed patients and health plan sponsors “put 2 and 2 together” that they begin to understand how they’re probably greatly overpaying for their prescription medications while the “savings” they thought they would see go directly into the pockets of the PBMs - and their shareholders.
The result is a fomenting crisis among smaller independent and community pharmacies that can no longer afford to keep their doors open or employ staff and are forced to close. The closure of small business pharmacies mostly affects communities and rural areas with populations of less than 50,000 and leaves patients with diminished access to medication while health plan sponsors and taxpayers are left to foot the much-higher bill.
These standard business practices demonstrate the impact PBMs have over pharmacies and healthcare as a whole. In our view, it makes a convincing case for federal and state regulation of pharmacy benefit managers. Currently, NO state or federal law in place is effectively protecting patients, pharmacies or entire health delivery systems from the destabilizing actions of one, two or all three of the large pharmacy benefit managers.
For more information email firstname.lastname@example.org or call PSSNY at 800.632.8822.