The Evolution of PBMs
Pharmacy-Benefit Managers (PBMs) play an important role in the U.S. healthcare system. They sit between insurers, drug manufacturers, and pharmacies - negotiating drug prices, designing formularies, and managing drug benefits for millions of Americans. But given their complex relationship with different parts of the landscape and the ever-increasing costs of healthcare in America, PBMs are under ever-increasing scrutiny.
The Dawn of PBMs
PBMs emerged in the 1960s as insurance companies started to offer prescription drugs as a health plan benefit. They addressed the very real need for these insurers to manage increasing prescription drug costs. Early on, they determined which drugs were available in formularies, and performed claims processing and various administrative tasks. In the 1970s, their role grew as began to adjudicate prescription drug claims. Things changed in the 1990s, as drug manufacturers began to acquire PBMs. This caused significant federal concern, resulting in FTC-driven divestment. In turn, a wave of PBM M&A ensued that changed the landscape. Today there are three very large PBMs that together control the vast majority of the market. Express Scripts (acquired by Cigna), CVS Caremark (a unit of CVS Health), and OptumRX (a unit of UnitedHealth).
Value Add and Criticism
PBMs have served a valuable role in controlling prescription drug costs. They have aggregated purchasing power to negotiate rebates and discounts from drug manufacturers - creating real value to their clients through cost savings. PBMs also manage formulary design, often encouraging the use of lower-cost or generic alternatives. This has had an impact on the overall prices of drugs. However, their impact in this regard is muted to some degree, since generics, account for approximately 90% of prescriptions filled but less than 20% of total pharmaceutical costs.
PBMs also received some criticism. Many argue the rebates and discounts do not always end up in the pockets of the consumers, meaning total healthcare costs are not always reduced. Additionally, they operate with some degree of opacity, leading to questions about their overall impact on the healthcare value chain. PBMs even used to institute “gag clauses” whereby pharmacists were prohibited from telling patients when the cash price of a drug was less than the insurance copay price - though these were banned in 2018.
Alternatives to the Current Model
Given the scale of the dollars that flow through PBMs and some of the concerns outlined above, alternative models have emerged. One is the fee-for-service model, where PBMs are compensated directly for services they provide, rather than through savings they negotiate. The benefit is improved transparency and alignment. Another alternative is the insurer-led model, in which insurers manage pharmacy benefits themselves.
Companies like Mark Cuban Cost Plus Drug Company have garnered significant publicity in their move to create more transparency in drug pricing. This model focuses on partnerships within the drug supply chain, across manufacturers, wholesalers, and pharmacies, to manufacture drugs and distribute them at a transparent margin.
Challenges in Changing Models
Change, while necessary, comes with its own set of challenges. Changes to the PBM require recalibrating an intricate ecosystem with multiple stakeholders. Ultimately employers need cost control, patients need access to medication, and pharmaceutical companies need incentive to innovate and distribute their medications at scale.
In the case of well-intentioned models like Cost Plus Drug Company, the problem remains that only a small percent of total pharmaceutical costs derive from the category of drugs that can be distributed by these PBMs. They are now distributing Invokana, for diabetes - at around $400 less than alternative pharmacies - and are making YUSIMRY (a Humira biosimilar) available. But this remains a very small portion of the overall market, and with tight margins and deep-pocketed and entrenched competitors, impact on healthcare costs may be muted for some time.
The Pathway for Different PBM Models
The ability of alternative PBM models in controlling drug prices, particularly those of patented medications where most of the cost is concentrated, is yet to be fully understood. As we move forward, it will be crucial to evaluate these models based on their ability to balance cost savings, transparency, access to necessary medications, and incentives for pharmaceutical innovation.
