Pharmacy benefit managers are middlemen who work with drug companies and insurers, helping set the retail prices for prescription drugs Americans rely on for their health. They’re now the subject of a number of new bills in Congress.
Robert F. Bukaty/AP
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Robert F. Bukaty/AP
Pharmacy benefit managers are middlemen who work with drug companies and insurers, helping set the retail prices for prescription drugs Americans rely on for their health. They’re now the subject of a number of new bills in Congress.
Robert F. Bukaty/AP
In recent months ominous ads about prescription drugs have flooded the TV airwaves. Perhaps by design, it’s not always clear who’s sponsoring the ads or why.
Or, for that matter, why now?
The short answer is that Congress is paying attention. House and Senate members from both parties have launched at least nine bills, parts of which may be packaged together this fall, that take aim at pharmacy benefit managers, companies that channel prescription drugs to patients. Here’s a primer to help you decipher what’s happening.
What are pharmacy benefit managers?
Known as PBMs, these companies were created in the 1960s to help employers and insurers select and purchase medications for their health plans. The industry mushroomed as prescription drug spending grew about 200-fold between 1967 and 2021. In addition to negotiating discounts with manufacturers, PBMs set payment terms for the pharmacies that buy and dispense the drugs to patients. In effect, they are the dominant middlemen among drugmakers, drugstores, insurers, employers, and patients.
How big is the PBM industry?
There are around 70 PBMs in the U.S. Through mergers, three of them — CVS Caremark, Optum Rx, and Express Scripts — have come to control 80% of the prescription drug market, and each brings in tens of billions of dollars in revenue annually. The PBMs control the drug pipeline from manufacturers to the pharmacy counter.
Their buying power allows them to obtain discounted drugs for health plans while setting prices and terms for sales at drugstores. The big three are part of massive conglomerates with important stakes in almost every sector of health care; each of them owns a powerful health insurer — Aetna, UnitedHealth, and Cigna, respectively — as well as pharmacies and medical providers.
For example, UnitedHealth contracts with 70,000 doctors, making it the biggest employer of physicians in the country. CVS Health, with the big pharmacy chain, also owns Caremark and Aetna. Secret price negotiations and hidden corners of each PBM-linked corporation make it hard to track where the money ends up.
Why am I seeing all these ads about PBMs?
Other sectors of health care are alarmed by the power of the PBMs and are appealing to the Biden administration and Congress to rein them in. Drugmakers are especially up in arms (more on that later), but employers, pharmacies, doctors, and even patients chafe at PBM practices like “spread pricing,” in which the companies pocket money negotiated on behalf of health plans.
Non-PBM-affiliated pharmacists, from mom and pop stores to large chains like Kroger, say the PBMs squeeze their businesses by forcing them to sign opaque contracts that include clawbacks of money long after sales take place. PBMs often steer patients using expensive drugs to their affiliated pharmacies, cutting revenue to independents.
Doctors say PBMs act as gatekeepers for the insurers they represent, blocking or slowing coverage of necessary drugs.
Finally, the pharmaceutical industry has lost a share of sales revenue to PBM middlemen in recent years — even while getting most of the bad publicity for high drug prices. (The median launch price for newly marketed brand-name drugs went from $2,100 to $180,000 a year between 2008 and 2021, yet net revenues for drug companies have stagnated in recent years.)
PBMs in some cases prefer high producer list prices, because the rebates that drugmakers pay the PBMs in exchange for favorable health plan coverage of their drugs often are calculated as a percentage of those list prices.
Who’s paying for the ads?
The Pharmaceutical Research and Manufacturers of America, the trade group for most of the big drug companies, is the top driver of the anti-PBM campaign. Some of the ads are sponsored by the PBM Accountability Project, a pop-up lobby, funded partly by the drug industry, that includes unions and patient advocates whose membership complains of restrictive PBM and insurance industry policies.
In one PhRMA ad, a smarmy guy in a suit snatches away a young woman’s prescription. The Pharmaceutical Care Management Association, the PBM trade group, has responded with its own ads, blaming drug companies for high prices and for “targeting your pharmacy benefits.” AHIP, the health insurance lobby, has piled on with its own campaign.
What’s Congress doing about it?
Members from both parties talk indignantly about PBM behavior and have fired up bills to address it. The Senate Finance Committee, whose jurisdiction over Medicare and Medicaid gives it a lead role, has introduced a bill that would prohibit PBMs from collecting rebates and fees calculated as a percentage of a drug’s list price, to discourage PBMs from favoring expensive drugs.
The committee also plans legislation to require PBMs to pass along discounts directly to seniors, allow patients to use the pharmacy they prefer, and release more information about where their money ends up.
Sen. Bernie Sanders, who leads the Senate Health, Education, Labor and Pensions Committee, introduced a bill that bans spread pricing, while measures in the Senate and House would crack down on PBM practices seen as harming independent and rural pharmacies. Other measures require more transparency or limit patient waits for drug approvals.
Meanwhile, several states have taken a pragmatic path to lower PBM-related costs, using high-tech auctions to get the best deals for their employee health care plans.
What’s the bottom line?
While the PBMs’ secrecy, ubiquity, and power make them a target of outrage, they generally operate on behalf of their customers, which are insurance plans and employers, whose goal is to hold down prices. PBMs do that by extracting painful concessions, a double-edged sword.
“PBMs are the only thing we have to lower brand-name drug prices and prevent the drug industry from charging whatever they want,” said Benjamin Rome, an internist and health policy researcher at Harvard Medical School.
If those drug prices were 100% covered by insurance, that might sit fine with consumers, but it would further blow up health care spending, already nearly a fifth of the economy. Hospitals, insurers, the drug industry, and PBMs all point fingers at one another to shift blame, but they all benefit from the system. The smarmy PBM guy in the suit may prevent you from getting the drug your doctor ordered, but that’s only because the maker of another drug gave him — and therefore your insurance company — a better deal.
On the other hand, the vertical integration of the PBMs enables unfair competition — it’s an issue the Federal Trade Commission is studying but that is not the subject of any bill in Congress. “My concern with any bills is the unintended consequences,” Rome said. “Will the new structures they create be any better for patients?”
KFF Health News, formerly known as Kaiser Health News (KHN), is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF — the independent source for health policy research, polling, and journalism.
