Understanding what pharmacy benefit managers are reveals flaws and solutions in U.S. drug pricing and selling system

Not all PBM savings are passed along to members.
(Adobe Stock photo)

Despite a deluge of news information discussing the unfair pricing practices of pharmacy benefit managers, what they are and what they do may still be a mystery. James B. Rebitzer, an economics professor at Boston University, provides some answers in his Q&A for The Conversation.

What are pharmacy benefit managers?
During the 1960s, PBMs "became essential middlemen [companies] between drugmakers and the many insurers, employers and government entities who purchase drugs on behalf of their members. . . . These companies negotiate price, affordability and access to prescription drugs. They do this by operating and designing formularies, which are lists of drugs that insurers cover.

Formularies assign drugs to different tiers that determine what patients must pay out of pocket to access the drug. . . . Tier placement determines how affordable a medication is to consumers and the effective drug price that insurers pay. . . .The price at which the PBM obtains the drug for its clients is the net price – the list price minus the drugmaker’s discount. . . . If a drugmaker increases its rebate, the net price falls, even if the publicly posted list prices remain high. This is why focusing on list prices to determine the cost of a drug can be misleading."

Are PBMs working to decrease their clients' costs or increase their profits?
Both. "If the contest for formulary placement works as it should, competition compels drugmakers to offer substantial discounts off the published list price. As a result, insurers and consumers benefit from a reduced net price for drugs. However, formulary competition can be undermined in various ways. . . . Competition within the formulary can also be distorted when drugmakers post very high list prices. This artificially inflates rebates for PBMs without lowering net prices for insurers and other parties."

How does market competition figure into PBM activity?
"The current regulatory environment in the U.S. tolerates overly large PBMs that engage in anticompetitive practices to accumulate excessive profits. Without strong competitors, dominant PBMs are free to charge their customers high fees and keep a larger portion of drugmaker rebates for themselves. . . . In theory, this problem should be self-correcting. . . . High profits should attract new competitors into the industry." But the chances for scrappy upstarts to survive are also limited by the industry's current PBMs' dominance.

Who are the villians?
The concentration of power is the problem. "If we didn’t have PBMs, we would need to invent them – or something like them – to obtain reasonable prices on patented drugs. But the concentration of market power among a few companies threatens to dissipate the value they create. A more competitive and transparent market for PBM services will help keep that contest fair and transparent – to the benefit of customers and society. . . . In that sense, PBMs aren’t the villain. Too much market power in too few hands is the problem, and that’s something more competition, sensible regulation and vocal consumers might fix."