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In the United States, a pharmacy benefit manager (PBM) is a third-party administrator of prescription drug programs for commercial health plans, self-insured employer plans, Medicare Part D plans, the Federal Employees Health Benefits Program, and state government employee plans.[1][2] PBMs operate inside of integrated healthcare systems (e.g., Kaiser Permanente or Veterans Health Administration), as part of retail pharmacies (e.g., CVS Pharmacy), and as part of insurance companies (e.g., UnitedHealth Group).[1]
As of 2016, PBMs managed pharmacy benefits for 266 million Americans. In 2017, the largest PBMs had higher revenue than the largest pharmaceutical manufacturers, indicating their increasingly large role in healthcare in the United States.[3] However, in 2016 there were fewer than 30 major PBM companies in this category in the US,[1] and three major PBMs (Express Scripts, CVS Caremark, and OptumRx of UnitedHealth Group) comprise 78% of the market and cover 180 million enrollees.[1][needs update]
This consolidation and concentration has led to lawsuits and bipartisan criticism for unfair business practices.[4][5] By 2024, The New York Times,[6] Federal Trade Commission,[7][8] and many states Attorneys General[9][10] have accused pharmacy benefit managers of unfairly raising prices on drugs.
In the United States, health insurance providers often hire an outside company to handle price negotiations, insurance claims, and distribution of prescription drugs. Providers which use such pharmacy benefit managers include commercial health plans, self-insured employer plans, Medicare Part D plans, the Federal Employees Health Benefits Program, and state government employee plans.[1] PBMs are designed to aggregate the collective buying power of enrollees through their client health plans, enabling plan sponsors and individuals to obtain lower prices for their prescription drugs. PBMs negotiate price discounts from retail pharmacies, rebates from pharmaceutical manufacturers, and mail-service pharmacies which home-deliver prescriptions without consulting face-to-face with a pharmacist.[11]
Pharmacy benefit management companies can make revenue in several ways. First, they collect administrative and service fees from the original insurance plan. They can also collect rebates from the manufacturer. Traditional PBMs do not disclose the negotiated net price of the prescription drugs, allowing them to resell drugs at a public list price (also known as a sticker price) which is higher than the net price they negotiate with the manufacturer.[12] This practice is known as "spread pricing".[13] The industry argues that savings are trade secrets.[14] Pharmacies and insurance companies are often prohibited by the PBM from discussing costs and reimbursements. This leads to lack of transparency. Therefore, states are often unaware of how much money they lose due to spread pricing, and the extent to which drug rebates are passed on to enrollees of Medicare plans. In response, states like Ohio, West Virginia, and Louisiana have taken action to regulate PBMs within their Medicaid programs. For instance, they have created new contracts that require all discounts and rebates to be reported to the states. In return, Medicaid pays PBMs a flat administrative fee.[15]
Formulary
PBMs advise their clients on ways to "structure drug benefits" and offer complex selections at a variety of price rates from which clients choose. This happens by constructing a "formulary" or list of specific drugs that will be covered by the healthcare plan. The formulary is usually divided into several "tiers" of preference, with low tiers being assigned a higher copay to incentivize consumers to buy drugs on a preferred tier. Drugs which do not appear on the formulary at all mean consumers must pay the full list price. To get drugs listed on the formulary, manufacturers are usually required to pay the PBM a manufacturer's rebate, which lowers the net price of the drug, while keeping the list price the same.[16]
The complex pricing structure of the formulary can have unexpected consequences. When filing an insurance claim, patients usually are charged an insurance copayment which is based on the public list price, and not the confidential net price. Around a quarter of the time, the cost of the insurance copayment on the list price is more than the entire price of the drug bought directly in cash. The PBM can then pocket the difference, in a practice known as a "clawback".[17] Consumers can choose to buy the drug in cash, but in their contracts with pharmacies, PBMs would forbid pharmacists from telling consumers about the possibility of buying their medication for a cheaper price without an insurance claim, unless consumers directly ask about it.[18] Since 2017, six states have passed legislation making such "gag clauses" illegal.[19] This has recently been followed by a federal bans on gag orders[20] for private insurance effective Oct 2018,[21] and for Medicare effective Jan 2020.[22]
Net effect on consumers
The New York Times,[6] Federal Trade Commission,[23][24] and many states Attorneys General[9][10] argue pharmacy benefit managers unfairly raise prices on drugs.
In 1968, the first PBM was founded when Pharmaceutical Card System Inc. (PCS, later AdvancePCS) invented the plastic benefit card.[1] By the "1970s, [they] serve[d] as fiscal intermediaries by adjudicating prescription drug claims by paper and then, in the 1980s, electronically".[25]
By the late 1980s, PBMs had become a major force "as health care and prescription costs were escalating".[26] Diversified Pharmaceutical Services was one of the earliest examples of a PBM which came from within a national health maintenance organization United HealthCare (now United HealthGroup).[27]
In August 2002, the Wall Street Journal wrote that while PBMs had "steered doctors to cheaper drugs, especially low-cost generic copies of branded drugs from big pharmaceutical companies" from 1992 through 2002, they had "quietly moved" into marketing expensive brand name drugs.[28][clarification needed]
In 2007, when CVS acquired Caremark,[1] the function of PBMs changed "from simply processing prescription transactions to managing the pharmacy benefit for health plans",[25] negotiating "drug discounts with pharmaceutical manufacturers",[25] and providing "drug utilization reviews and disease management".[25] PBMs also created a formulary to encourage or even require "health plan participants to use preferred formulary products to treat their conditions".[25] In 2012, Express Scripts and CVS Caremark transitioned from using tiered formularies, to those that excluded drugs from their formulary.[1]
As of 2013, in the United States, a majority of the large managed prescription drug benefit expenditures were conducted by about 60 PBMs.[29] Few PBMs are independently owned and operated. PBMs operate inside of integrated healthcare systems (e.g., Kaiser Permanente or Veterans Health Administration), as part of retail pharmacies, major chain drug stores (e.g., CVS Pharmacy or Rite-Aid), and as subsidiaries of managed care plans or insurance companies (e.g., UnitedHealth Group).[1][30]
As of 2015, the three largest public PBMs were Express Scripts, CVS Health (formerly CVS Caremark) and United Health/OptumRx/Catamaran.[31][32][33]
As of 2022, Caremark Rx, Express Scripts, OptumRx, Humana, Prime Therapeutics, and MedImpact Healthcare Systems were the six largest public PBMs that control 95% of the market, while the top three control 80% of the market.[34]
Express Scripts
In 2012 Express Scripts acquired rival Medco Health Solutions for $29.1 billion and became "a powerhouse in managing prescription drug benefits".[35] As of 2015, Express Scripts Holding Company was the largest pharmacy benefit management organization in the United States.[36]
In October 2015 Express Scripts began reviewing pharmacy programs run by AbbVie Inc and Teva Pharmaceuticals Industries Ltd regarding the potential use of tactics that "can allow drugmakers to work around reimbursement restrictions" from Express Scripts and other insurers. These reviews resulted from investigations into "questionable practices" at Valeant Pharmaceuticals International Inc's partner pharmacy, Philidor Rx Services.[36]
CVS Health
In 2011 Caremark Rx was the nation's second-largest PBM. Caremark Rx was subject to a class action lawsuit in Tennessee, which alleged that Caremark kept discounts from drug manufacturers instead of sharing them with member benefit plans, secretly negotiated rebates for drugs and kept the money, and provided plan members with more expensive drugs when less expensive alternatives were available. CVS Caremark paid $20 million to three states over fraud allegations.[37]
UnitedHealth Group
In March 2015 UnitedHealth Group acquired Catamaran Corporation for about $12.8 billion to extend grow its PBM business.[38]
In 1998, PBMs were under investigation by Assistant U.S. Attorney James Sheehan of the federal Justice Department, and their effectiveness in reducing prescription costs and saving clients money was questioned.[26][non-primary source needed]
In 2004, litigation added to the uncertainty about PBM practices.[37][39] In 2015, there were seven lawsuits against PBMs involving fraud, deception, or antitrust claims.[1][40]
State legislatures have been using "transparency," "fiduciary," and "disclosure" provisions to improve the business practices of PBMs.[39]
A 2013 Centers for Medicare & Medicaid Services study found negotiated prices at mail order pharmacy to be up to 83% higher than the negotiated prices at community pharmacies.[41][non-primary source needed]
A 2014 ERISA (Employee Retirement Income Security Act of 1974) hearing noted that vertically integrated PBMs may pose conflicts of interest, and that PBMs' health plan sponsors "face considerable obstacles in...determin[ing] compliance with PBM contracts including direct and indirect PBM compensation contract terms".[42][non-primary source needed]
In 2017, the Los Angeles Times wrote that PBMs cause an inflation in drug costs, especially within the area of diabetes drugs.[43]
United States Secretary of Health and Human Services Alex Azar stated regarding PBMs, "Everybody wins when list prices rise, except for the patient. It’s rather a startling and perverse system that has evolved over time."[44]
On January 31, 2019, Health and Human Services released a proposed rule to remove Anti-kickback Statute, safe harbor protections for PBMs and other plan sponsors, that previously allowed PBMs to seek rebates from drug manufacturers.[45][needs update][non-primary source needed]
Ron Wyden said in April 2019 that they were as “clear a middleman rip-off as you are going to find”, because they make more money when they pick a higher-priced drug over a lower-priced drug.[46]
In June 2024, the New York Times released its first article in a series critiquing pharmacy benefit managers for artificially raising drug prices.[6]
In July 2024, the Federal Trade Commission released an interim report on its 2-year investigation into pharmacy benefit managers, many of which it accuses of raising drug prices due to conflicts of interest, consolidation and other factors.[23][24] It looks likely to sue as soon as August 2024.[10] As of July 2024, states that have already filed suits against PBMs include Vermont, California, Kentucky, Ohio and Hawaii.[4]
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