On the heels of the FTC’s investigation into pharmacy benefit managers for what many regard as anti-competitive business practices, legal pressure is continuing to mount. At least six state Attorneys General, including California, Ohio and most recently Vermont, have initiated lawsuits against PBMs. Additionally, recent House oversight investigation findings bolster these claims, revealing that these drug middlemen–who claim to control costs–have instead “steered patients toward higher-priced medicines and affiliated pharmacies.”
As these inquiries, investigations and lawsuits keep PBM practices in the public eye, it’s important that lawmakers, employers and the general public understand not just what these practices are but how they relate to the larger healthcare market. PBMs are one piece of the jigsaw puzzle of healthcare, and they affect consumers’ cost and quality of care. For employers, the relationship with PBMs is complex and often opaque, impacting their ability to provide cost-effective and high-quality healthcare benefits to their employees.
As I’ve outlined in previous columns, pharmacy benefit managers are powerful intermediaries in the healthcare industry that administer prescription drug insurance benefits. They serve as middlemen connecting insurers, pharmacies, drug manufacturers and employers/plan sponsors. And they play a role in managing prescription drug prices by establishing drug formularies, negotiating prices with pharmaceutical manufacturers, contracting with pharmacies, processing claims and determining pharmacy reimbursements.
PBMs market themselves to employers as essential partners in managing prescription drug benefits. They promise cost containment through their negotiating power with drug manufacturers and pharmacies, streamlined benefit administration and data-driven insights from their vast claims databases. This value proposition casts PBMs as experts who can simplify the complex world of healthcare benefits while driving down costs. According to PCMA, the PBM lobbying organization: “PBMs will save health plan sponsors and consumers more than $1 trillion on prescriptions over 10 years.”
PBMs also argue that their large scale is a necessary counterbalance to the large drug companies and enables them to better negotiate on behalf of their customers. David Joyner, president of CVS Caremark, said in a recent New York Times report: “size and scale really matters in order to be able to influence and be able to lower the overall cost of branded pharmaceuticals.” This line of reasoning has led to today’s consolidated landscape, in which the three biggest PBMs handle nearly 80% of all prescription drug claims in the United States.
On the surface, partnering with PBMs seems like a smart move for employers–a classic case of outsourcing expertise to create value. The promise of cost savings, simplified administration, advocacy against other large healthcare players and data-backed decision-making is compelling. Why wouldn’t employers want to work with them?
While PBMs present themselves as indispensable allies in managing prescription drug benefits, reality reveals a stark contrast to their promises. One concern is the lack of transparency in pricing and rebates. Employers are kept in the dark about the true costs and savings, making it difficult to assess whether PBMs are delivering on their cost-containment assurances.
More importantly, the incentives that motivate PBMs often conflict with the interests of employers and patients. Pharmaceutical manufacturers pay PBMs rebates to put their drugs on a health plan formulary–the list of drugs that the insurer will reimburse–in a category with a low co-pay. The rebate the manufacturer pays is typically a function of the price of the drug. The higher the price of the drug, the larger the rebate. That’s why PBMs prefer higher-priced drugs that yield them larger rebates, rather than opting for more cost-effective alternatives that would benefit employers and their employees. What appears to be significant savings for employers may result from artificially inflated prices, allowing PBMs to claim credit for cost reductions, while increasing their own profit margins and raising out-of-pocket costs for health plans members.
The theoretical advantages of partnering with PBMs–cost savings, simplified administration, and data-driven decision-making–frequently fail to materialize. Instead, employers find themselves facing hidden costs, restricted drug choices and pharmacy networks, and overall higher expenses, which starkly contrasts with the PBMs’ purported value proposition.
So why do employers partner with PBMs? As I’ve written about in a previous column, market consolidation means there’s no easy way out. Options are limited and each of the powerful PBMs participate in the same complex system, leaving employers with few viable alternatives.
PBM practices have a profound impact on the healthcare ecosystem, often driving prices up, reducing competition and worsening market consolidation. Even for those who don’t take prescription drugs, healthcare premiums rise for employers and employees in this environment.
As I’ve explained in my book, Bringing Value to Healthcare, addressing the root of the healthcare crisis means changing the system as a whole. While actions to check the power of PBMs by the FTC, state Attorneys General and news media are a step in the right direction, lasting change requires an understanding of how various components of the industry work together. No single investigation or lawsuit will be sufficient. Instead, there needs to be a concerted, industry-wide effort to promote transparency, increase competition and realign incentives. Even changing the whole PBM segment, without making broader system-level changes–to healthcare delivery, payers, pharmaceuticals and wholesalers–would not fix American healthcare. Doing so would be like patching a hole in a tapestry that’s rapidly unraveling.
Looking forward, regulatory shifts and alternatives to the current PBM model may emerge, offering hope for a more balanced industry. Aligning incentives and creating a transparent system that genuinely serves employers and empowers patients is imperative. For decades, the healthcare model has been increasingly disinterested in prioritizing patient care and cost-effectiveness. With renewed national attention to how the business model functions and its effect on employers and consumers, the time is ripe for change. Only then can we establish a healthcare delivery ecosystem that works for all stakeholders.
