Pharmacy Benefit Managers (PBMs) are a major source of dysfunction in the distribution and pricing of prescription medications. PBMs negotiate prices with drug manufacturers on behalf of insurance plans and determine what drugs go on the plans’ drug formularies, the list that determines what drugs the insurance plan will cover for its insureds. It is important for a drug manufacturer that its products be on as many plan formularies as possible. The more formularies your drugs are listed on, the more you will sell.
PBMs came into existence as a way for the health plans to control the amount they pay for prescriptions for their members. The system was set up so that PBMs got a portion of the discounts they negotiated with drug manufacturers. The larger the discounts a PBM could negotiate, the more money it could make. Unfortunately, the role of PBMs has not turned out the way the health insurance plans intended.
The role of PBMs as middlemen working on behalf of the insurance plan that hired them has been roundly criticized as driving up costs rather than reducing them. They take billions out of the system each year. It did not take long for the system to go sideways. Manufacturers began to raise their prices so that they had a higher price from which to discount when they negotiated with the PBMs. For their part, this suited the PBMs just fine as a higher starting price meant that they could negotiate a larger discount and increase the amount of money they made. This worked out well for everyone but the health insurance plans and especially the poor plan members who had to satisfy deductibles or absorb co-pays.
PBMs claim that they are being blamed unfairly for price increases initiated by the drug companies. They claim that, regardless of what number the drug companies start at in the negotiations, the overall cost to the insurance plan is less than it would be if the PBMs were not around to negotiate. Even if this were true, and this is much like the tobacco companies telling us that smoking was not that bad for us, it does not address the problems of the poor plan members who must pay the inflated list price to satisfy their deductibles.
The folly of this arrangement is plain for all to see in the pricing structure established by Eli Lilly, a major drug manufacturer, for its insulin product Humalog. Lilly and other insulin manufacturers were under terrible pressure from all sides because of large increases in the price of insulin for no apparent reason. Lilly wanted to reduce the price of insulin to satisfy its critics but did not want to upset its arrangement with the PBMs. Its solution was to market a cheap version to those who had no insurance and a much more expensive version to those with insurance and whose prices were negotiated by PBMs.
PBM’s are further hurting the system by creating their own mail order pharmacies and threatening the brick and mortar pharmacies with withholding drugs from them, if they don’t pay hefty “performance fees” to the PBMs. Here is a link to an article about the performance fees and the attempts of the Biden administration to rein in the PBM’s. As the administration recognizes, we have to get a handle on the PBMs, if we are going to have any chance of reducing our drug costs.
