Pharmacy benefit managers could be in legislative crosshairs

By   /   January 3, 2017  /   News  /   No Comments

While Congress has taken drug executives to task with high-profile committee investigations of price increases on everything from HIV medication to EpiPens, a crucial link in the drug-price chain has gone largely unscathed: pharmacy benefit managers, who play an obscure by significant role in determining the cost paid for prescription drugs by tens of millions of Americans.

But as the new Republican Congress once again takes on the task of overhauling the U.S. health care system, the relative anonymity of PBMs might be about to come to an end.

As PBMs have grown in size, they have begun attracting an increasing amount of controversy over their how much savings they actually produce, which could make them a target for state legislatures and as part of any repeal of the 2010 health care law.

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Criticism has mounted from pharmacists, consumer advocates and large employers, who claim that PBMs are abusing their position as middlemen in a complex industry to reap huge profits, while providing little in return to clients and consumers.

PBMs, though hardly a household name, are nothing new in American health care.

The first ones were formed in the 1970s to serve as intermediaries between the health plans that covered pharmaceutical prescriptions and the pharmacies that filled them.  Initially this role was administrative, with PBMs merely shuffling paper between the two groups.

As drug costs continued to rise however, PBMs were able to sell themselves not just as administrative functionaries, but as managerial experts who could use their knowledge of the pharmaceutical industry to deliver more effective, less expensive prescription benefit programs.

This reinvention of PBMs has led to an explosion in their size and scope.

Today, PBM companies like Express Scripts and CVS Caremark handle everything from negotiating prices with drug manufacturers and setting co-pays, to creating pharmacy networks and determining which drugs your health plan will cover.

The added responsibilities PBMs have taken on has proven very lucrative for the industry, which pulls in roughly $423 billion in annual revenue.

Express Scripts alone — the largest PBM — earned $101 billion in revenue 2015, and is responsible for the drug coverage of more than 100 million people.

Beating the spread

The problem, says Susan Pilch, of the National Community Pharmacy Association, is the PBM industry’s lack of transparency.

Everything from negotiating with drug manufacturers, to reimbursing pharmacists is done in secret, says Pilch, which enables PBMs to charge outrageous prices to their clients, which more than make up for any discounts they might extract from drug manufacturers.

To illustrate this point, she provides the example of spread pricing, where a PBM will reimburse pharmacies for the cost of filling a prescription at one price, and then turn around and charge a higher price to their client for the same drug.

“They basically make a spread for themselves,” Pilch says.  “And the plan is not necessarily privy to all of these behind the scenes things.  If you ask the plan, they would probably assume what the PBM is charging them is what they are paying the pharmacy.”

An example of this can be seen in the experience of Meridian Health Systems, a non-profit hospital system in New Jersey, which contracted with Express Scripts in 2008 to manage its employee prescription drug benefit program.  As reported by Fortune Magazine, Meridian saw the cost of its drug benefit program increase by more than $1 million after contracting with Express, despite the company’s promise to save it money.

Unlike most companies however, who are aware only of what their PBM is charging them, Meridian was able to cross-reference what Express Scripts was billing them for filling prescriptions against what they were reimbursing Meridian’s own pharmacies for those same drugs.  What Meridian found was that Express Scripts was collecting a spread on almost all the prescriptions, in some cases in excess of $60 per prescription.

And the Meridian case is hardly unique.

In March 2016, Anthem — of the nation’s largest insurers — brought a $15 billion lawsuit against Express Scripts for a similar pattern of alleged overcharging, which they claim has led to “massive damages to Anthem and an obscene profit windfall to ESI.” This charge is based on a third-party audit, which found Express Scripts was billing Anthem above competitive benchmark rates for drugs, to the tune of $3 billion per year.

Two further class action lawsuits have since been filed against both Express Scripts by members of Anthem health plans who claims these excessive prices have led to them paying far more in pharmaceutical co-pays and other expenses.

Express Scripts denied any wrongdoing and filed a countersuit against Anthem, saying it has adhered to the contractual obligations it has made to the health insurance company.

‘Sophisticated health purchasers’

PBMs claim that their growing stature and importance is a product of their proven ability to drive down the cost of pharmaceuticals for their clients, which they purport to do in three ways.

— The first is through pooling of their clients’ buying power to extract large upfront discounts off the list price of a drug from the manufacturers, usually running between 15 to 21 percent for brand name drugs, which are then passed on to the client.

— The second is through the designing of drug plans to make greater use of cheaper generic medications, and more efficient mail-order pharmacies.

— The third is the ability of PBMs to obtain huge rebates from drug manufacturers in exchange for agreeing to cover particular drugs, and attach to them lower priced co-pays.

But the opaqueness with which PBMs operate has raised concerns not just about the prices they charge, but also what proportion of manufacturer rebates they pass on to their clients.

The ability of PBMs to obtain rebates is one of the primary ways the industry says it is lowering drug costs.

But says Linda Cahn, president of Pharmacy Benefit Consultants, PBMs have proven quite adept at exploiting convoluted contracts and a general lack of transparency to retain many of the rebates they receive.  PBMs can do this, says Cahn, by reclassifying rebates as fees or other types of financial transactions, or by including provisions that allow them to hold onto 100 percent of rebates on hazily defined “specialty drugs.”

Evaluating how much of these rebates are actually passed on is difficult because much of the data on the inner workings of PBMs is proprietary.

But a recent survey conducted by the Pharmacy Benefit Management Institute of some 302 employers and clients of PBMs — collectively covering 16 million people — sheds some light on the topic.

That survey found that about a quarter of employers receive no direct share of the rebates procured from drug makers. Of the 75 percent that do receive rebates, a plurality (39 percent) reported that 100 percent of rebates were passed on to them. A further 30 percent received a fixed rebate per prescription, while the rest relied on a fixed percentage of whatever rebates the PBMs received.

Operating of a separate set of data, Adam Fein of the Drug Channels Institute, estimated that on average 90 percent of rebates received by PBMs are passed onto their clients.

The Pharmacy Care Management Association — a trade group that represents the industry — insists that PBMs are an essential tool in keeping drug prices down. To support these claims, the PCMA released a study in November 2016 that found PBMs save clients and consumers an estimated $941 per person per year.

Mark Merritt, president and CEO of PCMA, told Watchdog in an email that concerns over transparency are also largely misplaced. The clients of PBMs he says “are the largest, most sophisticated health purchasers in the U.S. These are tough, experienced negotiators who choose exactly the type of contracts, formularies, and transparency levels they want. If one PBM doesn’t give them what they want, a competing PBM surely will.”

Indeed, there does exist a wide range of PBMs, including smaller, new “transparent PBMs” that forgo spread pricing and rebate retention, instead charging a flat administrative fee for their services.  So too is there a large PBM contract consulting business that advises employers on how to sign the best possible contract with their PBM.

While critics applaud the rise of competition, Pilch says that transparent PBMs — whatever their merits — are too small to fundamentally change industry-wide practices.

She instead favors greater legislatively mandated transparency that would force PBMs to reveal any spread they collect, and what proportion of rebates they retain.

A number of bills that do just that have already been passed at the state level in places like Ohio and Oregon, and others are currently under consideration by state legislatures around the country.

And when the Obamacare repeal train rolls out of the station early in the 115th Congress, that will likely be high on the list for industry lobbyists.


Christian Britschgi is the Arizona Reporter for He began his reporting career in college, writing stories for The College Fix and The Lens. After graduating from Portland State University, he interned at Reason Magazine's D.C. Office, where he wrote extensively on everything from public transit to pop culture. He also is a member of Investigative Reporters and Editors.