Pharmacy Benefit Managers Explained: Debates Surrounding PBM Practices

The role of PBMs in the pharmaceutical chain has been subject to debates in light of rising prescription drug spending. Advocates note that, by negotiating with manufacturers and managing formularies, PBMs can reduce the cost of certain medications, making them more affordable for health plans and patients. Because PBMs manage formularies for multiple health plans, they can leverage the number of health plan members, and the corresponding volume of prescriptions filled for those members, in their negotiations to receive rebates or other price concessions from manufacturers. Formulary management is another area where PBMs can exert significant influence. By deciding which drugs are covered and at what tier, PBMs can steer plan beneficiaries toward certain medications. This can lead to cost savings, through approaches such as promoting the use of generics or lower-cost alternatives.

In comparison, critics argue that certain PBM practices contribute to high drug prices and reduced access to medications, while PBM proponents believe that these practices are key to the PBMs’ ability to negotiate lower drug prices. Below is an overview of some of these debates:

• Lack of Transparency: One of the most significant criticisms of PBMs is a lack of transparency in their operations. Critics argue that PBMs operate with a lack of transparency particularly in the allocation of rebates and the use of pricing strategies, such as spread pricing. PBMs acknowledge the importance of transparency but caution that excessive transparency requirements that include disclosing details of the contract terms with drug manufacturers and health plan clients could weaken their ability to compete and negotiate the best pricing terms for their clients.
• Conflict of Interest: Critics argue that—because the rebates paid to PBMs are typically a percentage of a drug’s list price and a portion of those rebates for some drugs may be kept by the PBMs themselves—PBMs have an incentive to encourage list price increases for prescription drugs in order to increase rebate revenue. While the prices paid by the PBMs’ health plan customers can be reduced by rebates, critics point out that other types of individual consumers—for example, patients who do not have prescription benefit insurance coverage—are directly affected by the resulting price increases.
• Drug Exclusions: Since the early 2000s, PBMs increasingly adopted the practice of formulary exclusions—where manufacturers of two or more branded medications that are considered therapeutically equivalent are asked to bid to be the only drug covered by a PBM for a given therapeutic area. Proponents point to the cost controls, such as higher rebates, that this competition between drug manufacturers can generate. Critics, however, argue that the practice forces beneficiaries to grapple with greater uncertainty and unpredictability when it comes to their prescription medication, as the change of a drug to excluded status can cause a substantial increase in the out-of-pocket cost for these customers. They argue that beneficiaries are forced to abandon or switch away from a medication that is working for them, which may lead to potential complications.
• Horizontal and Vertical Integration: Some claim that the consolidation over time within the PBM space has led to a few large remaining competitors. While increased firm size can improve increase their economies of scale and negotiation power, it may also discourage market entry, as a new entrant may not be able to compete effectively. PBMs are also questioned for their ownership of or affiliation with other entities in the healthcare supply chain, such as pharmacies or insurance companies. Critics argue that these corporate relationships can create incentives for PBMs to provide their affiliated entities more favorable terms than others and engage in practices that benefit their own affiliates but drive up prescription drug prices or reduce patient access. For example, independent pharmacies have argued that PBMs engage in practices that harm their businesses, such as low reimbursement rates, delayed payments, and mandatory mail-order requirements. Others are concerned that PBMs are steering more prescriptions towards their affiliated specialty pharmacies, and away from retail pharmacies and independent specialty pharmacies.

These debates highlight the complex, central role that PBMs play in the pharmaceutical supply chain. Their ability to negotiate rebates and design formularies can lower costs for health plans, but the same mechanisms raise concerns about transparency, incentives, and patient access. The ongoing debate reflects a fundamental tradeoff: policies that increase oversight and transparency may address some concerns but could also affect how PBMs negotiate prices. The final installment of Pharmacy Benefit Managers Explained delves into how policymakers have attempted to balance the benefits of PBMs’ cost-containment strategies with reforms that attempt to promote transparency and safeguard access to medications.