For most pharmacy patients, it will come as no surprise that the cost of prescription medications is a huge topic in the media right now. From congressional hearings to Mark Cuban’s drug company, drug pricing is at the forefront of the minds of legislators and patients alike.
In a study published in 2022, three in four adults in the United States said that the costs of prescription drugs are unaffordable, and nearly one in three adults reported that they haven’t taken their medications as prescribed due to costs.¹
What many people may not realize is that pharmacy benefit managers (PBMs) are at the center of the conversation regarding rising drug prices. Because of the complexity and lack of transparency in the process between the patient, pharmacy, insurer, and drug manufacturer, most Americans are unaware of the sizeable role PBMs play in their health care.
What are PBMs?
PBMs are a part of the drug supply chain and act as middlemen between drug companies, insurers, and pharmacies. The Center for American Progress defines PBMs as “negotiating entities” that “contract with health insurance plans to develop and administer pharmacy benefits, including negotiating with drug manufacturers to develop the plan’s formulary and negotiating with pharmacies to develop the plan’s pharmacy network.”²
PBMs are responsible for negotiating the drug manufacturer's cost savings, the insurer's covered medications, and the pharmacy's reimbursements from insurers. They can also be more directly involved by reimbursing the retail pharmacy on the insurer’s behalf.
Both public and private insurers use PBM services, including Medicaid, Medicare Advantage, employer-sponsored, and individual market plans. The PBMs make money by charging these insurers for their services, acquiring rebates from drug manufacturers, and receiving payments from insurers, wholesalers, and retail pharmacies.²
The graphic below, created by the Center for Improving Value in Health Care (CIVHC), illustrates the flow of funds between healthcare entities, including PBMs. CIVHC explains, “Drug manufacturers set prices and sell drugs to wholesalers, which then sell them to retail outlets, like a local pharmacy. Drug rebates refer to compensations provided by manufacturers to PBMs, typically negotiated between the buyer and payer (insurer or PBM). Rebates are typically provided by a manufacturer to a PBM, which in turn shares rebates with health insurance payers to help reduce the cost of specific drugs.”³
How do PBMs affect patients?
When working as intended, PBMs allow smaller healthcare entities more negotiating power with drug manufacturers, wholesalers, and insurers. In actuality, the PBMs are often making significant profits that are not shared within the supply chain—and often at the expense of those entities. There are three main ways that PBMs’ methods affect patients:
1. Spread Pricing
The Center for American Progress defines spread pricing as “a compensation scheme under which a PBM reimburses a network pharmacy less than the insurer pays to the PBM for a drug, and the PBM retains that difference as profit.”² When PBMs engage in spread pricing, it can drive up the cost of drugs and insurance premiums for patients.
Because of the lack of transparency into the prices insurers are contracted to pay pharmacies, PBMs can receive payments from insurers higher than what the PBM pays the retail pharmacy.² In many cases, the insurer is overcharged, and the pharmacy is underpaid.
2. Patient Steering
According to Pharmaceutical Research and Manufacturers of America (PhRMA), spread pricing drives up drug prices because the size of the rebates the PBM receives from the insurer often reflects the price of the medicine. This means that PBMs may favor medicines with high list prices and higher rebates when developing formularies, but no existing legislation requires these middlemen to disclose their negotiated rebates to patients, health insurance companies, state agencies, or employers.⁴
To be included in more favorable formulary positions, drug manufacturers are incentivized to raise their prices so that PBMs select the drugs that make them the most profit. Unfortunately, this cost is passed to the patient, and the patient’s medication options are limited to those higher-cost drugs included in the insurer’s formulary.
3. Limiting Pharmacy Options
Patient steering does not end with the choice of medications; it can also affect where the patient can fill those medications. Put simply, PBMs have connections to some pharmacies and do not negotiate for other pharmacies to be preferred. Some PBMs and pharmacies are owned by the same companies, so the PBMs are inclined to steer patients to use those pharmacies to keep the money within the business. For example, the National Community Pharmacists Association (NCPA) cites that the CEO of CVS Health owns one of the nation’s largest PBMs and pocketed $36.5 million in 2019.⁵
PBMs don’t just own retail pharmacies—they also own mail-order and specialty facilities. NCPA states that in 2017, the top four specialty pharmacies were all owned or co-owned by a PBM.⁵ This is significant because, according to Adam J. Fein, Ph.D., president of Drug Channels Institute (DCI), specialty drugs’ share of the pharmacy industry’s total prescription dispensing revenue was nearly 40% in 2023 and continues to increase.⁶
Without information transparency or negotiating power, independent pharmacies are not only losing money on low reimbursements but also losing patients transferring to in-network pharmacies favored by PBMs. We’re currently seeing the effect of these transfers regularly in the news—as pharmacies lose profits and lose patients, they are forced to close. This can cause “pharmacy deserts” that leave patients with even fewer options and less access to care than before.
What can we do to put an end to unfair PBM practices?
To stop PBMs from manipulating the system, legislation must change how PBMs are paid. PhRMA recommends that state policymakers act to fix this problem by requiring that PBMs pay a fee based on the value of the service they provide, not the price of the medicine. Legislation may include limiting reimbursements from rebates, contracting with state-sponsored health programs to limit rebates, and banning price spreading.⁴
If you are passionate about lowering drug prices, decreasing premiums, and retaining the freedom to choose your pharmacy, contacting your state representatives is a great start! By letting representatives know you care about proposed PBM policies and support reform, you can help enact valuable change in our healthcare system. To learn more about state-by-state regulations, visit ncpa.org/pbm-reform.
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