The U.S. Congress left pharmacy benefit manager (PMB) reform out of its latest funding package. Despite that, states are taking on the intermediaries who decide how pharmacies are paid for the medications they dispense.
This is part two of a three-part series on struggles within American pharmacies and the impact it has on access to health care. In part one, we covered how consolidation ‘bloated’ pharmacies.
In April, Arkansas Gov. Sarah Huckabee Sanders, R, signed legislation banning PBMs from owning pharmacies in the state, claiming that the companies engage in anticompetitive practices. Meanwhile, a handful of other states have laws in the works to address the payment processors. On top of potential legislation, 39 state attorneys general called on Congress to pass legislation similar to Arkansas’ on the federal level.
Health care
The top three pharmacy benefit managers processed nearly 80% of the roughly 6.6 billion prescriptions filled by pharmacies in 2023, according to the FTC.
As of March, 326 pharmacies closed their doors after PBM reform was dropped from the funding bill according to the American Economic Liberties Project.
What is a pharmacy benefit manager?
Pharmacy benefit managers have been a part of payment processing within the pharmacy ecosystem for decades.
“A pharmacy benefit manager is a middleman between a drug manufacturer and the pharmacy and ultimately to the patient who needs the medication,” former health insurance executive Wendell Potter told Straight Arrow News.
PBMs negotiate prices between manufacturers and pharmacies while also managing prescription drug benefits.
“I started practicing pharmacy way back in 1980 and, you know, PBMs really started out as being nothing but processing,” Rep. Buddy Carter, R-Ga., who previously owned retail pharmacy locations told Straight Arrow News. “They just process claims.”
“And, all of a sudden, formularies became very prevalent, and insurance companies began to understand that they could influence the price of a medication by including them on their primary, on their formulary,” Carter added.
PBMs are also responsible for formularies, which are a list of prescription drugs covered by an insurance plan.
Growth of PBMs
“Just a few companies decide what happens with prescription drugs for almost the entire country,” Douglas Hoey, CEO of the National Community Pharmacists Association told Straight Arrow News.
The three largest PBMs handled processing for 80% of all prescriptions filled in 2023 according to a Federal Trade Commission report from July 2024.
CVS owns roughly 10,000 stores, as well as owning health insurer Aetna. The combined company also owns a PBM, Caremark. Meanwhile, insurance provider Cigna bought PBM Express Scripts in 2018. And UnitedHealth Group has OptumRX, a PBM, under its umbrella.
“The vertical integration has just really put kerosene on the fire,” Hoey said. “So the vertical integration was when the health insurance companies and the PBMs used to be separate, but then they merged.”
Each of these PBM/insurance company combinations owns a brick-and-mortar or online pharmacy.
The FTC study found that “pharmacies affiliated with the three largest PBMs now account for nearly 70 percent of all specialty drug revenue.”
“Only 1% of the prescriptions [are] specialty drugs, but 53% of the prescription dollars go to specialty drugs,” Hoey added.
“You have patient steering, where the PBMs and the insurance companies are steering their patients toward their pharmacy, and they reimburse their pharmacies more than they reimburse independent retail pharmacies,” Carter said.
Another FTC report from January found that the big three PBMs raised prices on specialty drugs at their affiliated pharmacies, generating $7.3 billion in added revenue from 2017 to 2022.
But not everyone agrees with the FTC’s findings.
“It’s clear this report again fails to consider the entirety of the prescription drug supply chain and makes sweeping assertions about the role of PBMs disconnected from a full appreciation of their critical cost-saving role for employers, unions, taxpayers, and patients,” the Pharmaceutical Care Management Association, a trade group representing PBMs, told Straight Arrow News after the report was released.
How PBMs maximize profits
Hoey gave Straight Arrow News an example of how pharmacy benefit managers make money. He used the example of covering insulin made by Novo Nordisk and Eli Lilly.
“So Express Scripts, as an example, could go to Lily and say, ‘If you want your insulin to be covered by my insurance company, then you’re going to have to pay me 50% of the list price of the drug.’” he explains. “So Lily agrees to that and then Express Scripts in this example, goes to Novo and says, ‘Lily is going to pay me 50%. How much are you going to pay me to make your drug be put on the formulary and bump theirs off?’ ‘Well, we’ll pay 60%.’ So it’s like this auction process.
“The PBMs would keep those rebates,” Hoey continued. “The PBMs then began to share some of that rebate back with the employer. So the employer would say, ‘Hey, this is a good deal for me, because even though I’m paying a lot more for insulin than I normally would, I’m getting some of those dollars back, and I can use that to pay for my employees’ premiums.’ So as time has gone on, the big employers, they get a lot of those rebates back. The patient, though, is still paying the list price.”
Pharmacy closures are threatening one of the first lines of health care. In the third part of this series Straight Arrow News dives into pharmacy deserts and the lack of access to medicine.
