The Perverse Incentives Created by PBM Rebates

The Perverse Incentives Created by PBM Rebates
Josie Norris/The Saginaw News via AP

Recently, Sens. Tina Smith (D-Minn.) and Elizabeth Warren (D-Mass.) wrote letters to several pharmacy benefit managers questioning their role in rising drug prices. The senators are right to be concerned.

PBMs, which act as intermediaries between drug insurance plans, drug manufacturers and pharmacies, negotiate rebates from drug manufacturers in exchange for giving the manufacturers' drugs preferred formulary status (which channels more customers to the drug). Rebates are generally calculated as a percentage of list prices, and PBMs keep a share of the rebates they negotiate. Although this setup gives PBMs the incentive to negotiate larger rebates for their drug plan clients, it also gives them the incentive to encourage list price increases (or at least not discourage decreases) in order to increase their profits.

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