Pharmacy Benefit Managers (PBMs) play a central role in today’s healthcare system, overseeing how prescription drug benefits are delivered and paid for.
In this article, we’ll take a closer look at how PBMs have evolved from their original role in reducing drug costs to becoming powerful, often opaque, intermediaries.
The Emergence of PBMs: A Cost-Saving Solution
PBMs emerged in the 1960s as insurers started incorporating prescription drugs into health insurance coverage. This shift introduced a range of new challenges that PBMs stepped in to help manage and solve, including:
- Rising Prescription Drug Costs: As medications became a standard part of health coverage, insurers faced escalating drug prices and needed mechanisms to control spending.
- Complex Claims Processing: Managing prescription drug claims required specialized systems and expertise that many insurers lacked, leading to inefficiencies.
- Formulary Management: Determining which drugs to cover and at what reimbursement levels added complexity to benefit design, necessitating dedicated oversight.
The Evolution of PBMs: From Cost-Saving Administrators to Profit-Driven Entities
Over the years, PBMs quietly evolved from basic claims processors into powerful intermediaries in the prescription drug pipeline. Through mergers and vertical integration – where they became part of larger corporations that also own insurance companies, pharmacies, and even healthcare providers – PBMs gained significant control over drug pricing and access, ultimately positioning themselves as gatekeepers between manufacturers, pharmacies, and patients.
Today, just a few major PBMs control most of the market – giving them overt influence over which drugs are covered, how much is reimbursed, and who gets access.
“Today, the PBM market is dominated by three PBMs, who accounted for 79% of prescriptions in the US in 2023.”
This market domination has created a system where transparency can be limited, and the interests of patients and payers are often overshadowed by profit-driven incentives such as rebates and spread pricing.
Rebates refer to the post-sale discounts that drug manufacturers provide to PBMs in exchange for placing their medications on preferred formularies. While these rebates are intended to reduce drug costs, PBMs often retain a portion of the rebate, leading to concerns that they prioritize higher-cost medications with larger rebates rather than more affordable options. This practice can drive up drug prices for consumers and health plans.
Spread pricing occurs when PBMs charge health plans or employers more for a drug than they reimburse pharmacies, pocketing the difference as profit. This practice has been criticized for creating hidden costs and reducing transparency in the pricing system, leaving employers and patients unaware of the true cost of medications.
The Call for PBM Reform: A Focus on Transparency and Net Cost Savings
Lawmakers and federal agencies are pushing for more regulation and transparency, aiming to hold PBMs accountable for these practices and ensure that savings are passed along to health plans rather than being absorbed by PBMs.
While widespread reform may still be a long way off, employers and their benefits consultants don’t have to wait for legislation to make a positive change. There are PBMs already operating with full transparency, passing through all savings, and putting clients’ interests first. The key is knowing what to look for:
- Demand Full Transparency in PBM Contracts: Ensure that PBM contracts are clear, with no hidden fees or complicated rebate structures that obscure true savings.
- Evaluate PBM Models that Focus on Net Cost Savings Over Rebates: Employers should look for PBMs that prioritize the organization’s net savings rather than relying on opaque rebate structures that may not deliver tangible cost reductions.
- Work with Fully Transparent PBMs: Some PBMs operate with full transparency, allowing employers to easily see how much they are saving and where those savings are coming from. Working with these PBMs can help employers avoid the complexities of spread pricing and ensure that they’re getting the best deal.
Making the Right PBM Choices for Employers and Employees
When selecting health insurance and pharmacy benefit solutions, benefits consultants and employers should look for plans that prioritize transparency and net cost savings.
By asking the right questions and partnering with a PBM that’s already doing the right thing, employers can take control of their pharmacy benefits today and deliver real savings for their organization.