The Middlemen in Higher Drug Prices

A consumer needs a prescription filled and goes to their local pharmacy. The pharmacist asks for your prescription benefits card, does some paperwork, gives you a generic drug and charges you according to your plan’s standard deductible, say $15.

That may seem like a typical experience, but what this consumer may not have known is that the generic drug could have been purchased for less than $5. In fact, there are many cases where generic drug prices are lower than plan deductibles. The practice is called clawbacks, and it’s just one of several ways that some pharmacy benefits managers (PBMs) are increasing drug costs and lining their pockets.

PBMs are third-party administrators of prescription drug programs, operating as intermediaries or “middlemen” between insurance companies and pharmacies. They contract with pharmacies, negotiate discounts and rebates with drug companies, maintain the formularies (the menu of drugs offered to patients for their prescription plans), and process and pay prescription drug claims. Plan sponsors, including private and public employers, hire PBMs to run their prescription insurance plans and manage healthcare costs. PBMs get paid by the plan’s sponsors for running the plan. Because consumers, sponsors and pharmacists have no idea what PBMs are actually paying manufactures for your prescription drugs, some PBMs can use this lack of transparency to make a lot of money as middlemen.

Besides sponsors paying PBMs directly to manage their plans, PBMs can also make money from side deals with drug manufactures. For instance, a PBM could promise to give manufacturers higher volumes of drug sales in return for discounts or rebates. The specific terms and conditions agreed between PBMs and manufacturers are unknown by either the pharmacies or the plan sponsors.

While it is logical to conclude that consumers and sponsors benefit when PBMs reduce prescription plan costs, the end result is not necessarily so. Because PBMs work with manufacturers to change their formulary in exchange for higher discounts, rebates and kickbacks from the drug manufacturers, these added incentives drive PBMs toward maximizing profit, which may not necessarily minimize benefit plan costs.

For example, if a manufacturer gives a PBM a financial incentive to offer a higher cost generic drug, by adding the drug to the plan’s formulary, the sponsor’s costs increase, as will the PBMs profits. Essentially, any additional savings from negotiations goes to the PBMs and not employers or consumers.

PBMs can squeeze pharmacies too and keep the money. With the top two PBMs accounting for over 50% of the market, PBMs have a lot of negotiating leverage, which has enabled them to cut the fees that pharmacists are paid for filling prescriptions. This permits PBMs to make additional profits over and above what plan sponsors pay them for managing their plans.

As middlemen, PBMs profit from the spread between plan sponsors and pharmacies. This profiting occurs without the sponsors knowing the various wholesale prices paid by various parties or the recovery of pharmacy fees. So, any savings is not passed along to consumers or sponsors in the form of lower prices.

To summarize, PBMs are paid by sponsors to manage their benefit plans, but they also profit when sponsors pay a bit more and when consumers pay a bit more, as is the case for clawbacks. They also make money by funneling sales to favored manufacturers in return for kickbacks and discounts, and there is nothing illegal about it. PBMs can also make money when they threaten to drop qualified pharmacies in order to squeeze concessions for prescriptions filled at pharmacies – all when running their own mail-order prescription services.

If public policies were in place to add more transparency to wholesale and retail pricing, PBMs would have the right incentives to work on behalf of sponsors and consumers. Instead, nowhere are the prices between the various parties published or known – not to the drug manufacturers, not to the consumers, not to the pharmacies and not to the sponsors who hire PBMs to provide their employees more affordable prescription plans.

Consumers, pharmacies and sponsors are all getting squeezed – all while prescription prices continue to rise faster than the general rate of inflation. It is not always clear who PBMs actually represent. What we do know, as middlemen, they are making a lot of money on all sides and that is driving higher prescription drug prices for all.