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Don't Like Big Pharma? Meet the PBMs...

by Steven Moore, published

Just when you thought that the health care system in America can't get any more convoluted or maddening, a new wrinkle emerges.

Seventy-seven percent of Americans think that the price of prescription drugs is unreasonable, according to the Kaiser Family Foundation, and that same percentage of Americans think that pharmaceutical profits are a major factor contributing to drug prices.

Certainly drug companies make a lot of money. Johnson & Johnson, at #35 on the Fortune 500 list is the largest drug manufacturer in America. It is also the eighth most profitable company in America, behind Apple, Alphabet, Microsoft, and several financial institutions.

However, pharmacy benefits managers (PBMs) make extraordinary amounts of money as well. Just three PBMs control eighty percent of the prescription market, driving enough revenue to put them way ahead of all drug manufacturers on the Fortune 500.

And it really isn't clear what they do.

Express Scripts is the only standalone PBM. By some estimates, the company's profit per prescription has increased an average of 38% every year between 2003 and 2016.  That kind of growth has landed Express Scripts at number 22 on the Fortune 500 list in 2017.

Pharmacy retailer CVS Health, with nearly 9,700 retail locations, really isn't a retailer. It makes two-thirds of its revenue off its PBM services, putting it at number 7 on the Fortune 500. United Healthcare, America's largest health insurance carrier and number 6 on the Fortune 500, makes nearly half its revenues from its PBM subsidiary Optum RX.

While there is nothing wrong with a company generating revenue, the question becomes what do they do to make it? What does a PBM do?

And that is a good question. PBMs don't make drugs, they don't purchase drugs, nor are they at risk in the transactions they manage. PBMs are arguably the most opaque link in the health care chain. And that is really saying something.

PBMs have been around for decades - Express Scripts was founded in 1986 - but really began to pick up steam after the passage of Medicare Part D in 2003. PBMs were seen as an independent, private sector solution to control the price of prescription drugs, which they may have been until PBMs became an oligopoly.

A PBM makes its money from both sides of the transaction.

Let's say that Tall Glass Building (TGB) insurance company hires MiddleMan PBM to negotiate its prescription drug prices for a million TGB clients. MiddleMan then goes to Childproof Cap (CC) drug manufacturer and says that it will include CC's drug on Tall Glass Building's formulary if it gets a 10% discount on the price of the drug.

CC wants access to TGB's million customers, and has no way to get to them except for through MiddleMan. Likely the company gives the discount. Maybe Middleman PBM asks for rebates as well.

If Childproof Cap drug manufacturer gets hit with this too many times - and they will since virtually all prescriptions are controlled by PBMs - they are going to start raising the prices of the drugs they manufacture.

MiddleMan then goes to Used to Serve Ice Cream (USIC) pharmacy, an independent pharmacy in Main Street America, and charges USIC pharmacy fees to sell the drugs on their formulary. USIC pharmacy wants to be able to serve TGB insurance company's customers in their area, and the only way they can do that is through MiddleMan PBM. So they pay the fees.

The fees can be retroactive as well. USIC pharmacy can sell a prescription to a customer and make a $10 profit on a $150 transaction. Weeks later, if MiddleMan decides it is not making enough money, the pharmacy might receive an additional charge (called a "claw back") of $8, limiting the pharmacy's profit to $2.

Clearly, it is good to be a PBM.

While pharmacy benefit managers may have once played a role in controlling the cost of prescription drugs, they are doing a poor job of that now. Between 2013 and 2016, prescription drug prices have averaged a ten percent increase, correlating with the consolidation in the PBM industry.

Perhaps some of the same scrutiny applied to drug manufacturers should be applied to pharmacy benefit managers.

Photo Credit: funnyangel /

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