Pharmacy Benefit Managers (PBMs) are powerful intermediaries in the U.S. pharmaceutical system, managing prescription drug benefits for health insurers, employers, and government programs. While they claim to reduce costs and streamline access to medications, PBMs are increasingly criticized for their lack of transparency and their role in inflating drug prices. Here’s a closer look at how PBMs operate, their impact on drug pricing, and what can be done to address the problem.
What Are PBMs?
PBMs negotiate drug prices on behalf of insurers and other payers. They determine which medications are included on formularies—the lists of drugs covered by insurance plans—and set the terms for reimbursement to pharmacies. The “Big Three” PBMs—CVS Caremark, Express Scripts, and OptumRx—control about 80% of the market, giving them enormous power over drug pricing and access.
PBMs earn revenue through rebates from drug manufacturers in exchange for preferred placement on formularies, spread pricing where they charge insurers more than they reimburse pharmacies for the same drug, and administrative fees for managing prescription benefits. These practices often prioritize PBM profits over affordability for patients or efficiency in the system.
The Effects of PBMs on Pricing
PBMs’ reliance on rebates incentivizes higher list prices for drugs. Manufacturers must set artificially high prices to accommodate the rebates PBMs demand, which increases costs across the healthcare system. Patients often pay out-of-pocket costs based on the list price, not the net price after rebates, leaving many with unaffordable medication costs. Independent pharmacies are also squeezed by low reimbursement rates from PBMs, and many have been forced out of business.
Even taxpayer-funded programs like Medicare and Medicaid are not immune to these inflated prices. A report from HHS highlights the substantial savings patients have experienced under new price caps, but these savings often come at the expense of taxpayers who fund Medicare subsidies.
Medicare vs. Private Insurance Pricing
PBMs influence drug pricing differently in Medicare and private insurance markets. For Medicare beneficiaries, the Inflation Reduction Act introduced a $35 monthly cap on insulin costs, a move that has significantly lowered out-of-pocket expenses for patients. According to HHS data, approximately 1.5 million Americans who use insulin under Medicare have benefited from this cap, collectively saving hundreds of millions of dollars annually. However, the costs of these savings are shifted elsewhere. Manufacturers must offer steep rebates to PBMs, and taxpayers ultimately subsidize the difference through federal funding.
In the private insurance market, PBMs negotiate smaller rebates than they do with Medicare but still prioritize drugs with high list prices because larger rebates yield more revenue. Patients with private insurance often face higher out-of-pocket costs, such as copays or coinsurance, which are based on the inflated list price. Employers and insurers absorb the remaining costs but pass them on to employees and customers through higher premiums.
Uninsured patients fare the worst, as they pay the full list price without access to rebates or discounts, effectively subsidizing the system by paying the highest prices.
How Costs Are Shifted
The U.S. drug pricing system relies on cost-shifting to maintain profitability for manufacturers and PBMs. Manufacturers inflate list prices to accommodate rebates demanded by PBMs. PBMs, in turn, share a portion of these rebates with insurers while keeping a significant cut as profit. Patients pay inflated costs based on these list prices, particularly in private insurance and cash markets. Taxpayers cover the gap for Medicare beneficiaries through federal subsidies. Ultimately, the financial burden is distributed unevenly, with patients, taxpayers, and employers bearing the brunt of the system’s inefficiencies.
Potential Solutions
Addressing the inefficiencies created by PBMs requires systemic reform. Transparency is a critical first step. Requiring PBMs to disclose rebate amounts and how much of the savings are passed to insurers or patients would shine a light on their practices. Reforming the rebate system itself, such as replacing it with direct pricing models or flat discounts, could eliminate incentives for high list prices.
Federal regulation of PBM practices, particularly around spread pricing and formulary design, would ensure these intermediaries prioritize patient affordability and access. Breaking up the dominance of the “Big Three” PBMs through antitrust enforcement could foster competition and reduce the market distortions caused by their control.
Expanding Medicare’s price cap policies to include other drugs and encouraging similar reforms in the private insurance market would also help lower overall costs. These changes would ensure the financial benefits intended for patients are not offset by higher costs elsewhere in the system.
The Bottom Line
PBMs were created to control drug costs, but their profit-driven practices have turned them into key drivers of price inflation. By demanding large rebates and prioritizing high-list-price drugs, PBMs ensure their profits while increasing costs for patients, taxpayers, and employers. Reforming this system requires transparency, accountability, and a move away from rebate-driven pricing models. Without these changes, the cost of life-saving medications will remain out of reach for millions of Americans.
Dave Soulia | FYIVT
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