Pharmaceutical benefit managers, or PBMs, have been around since the 1960's. As initially conceived, they provided a service needed by many insurance companies that had started to become overwhelmed with the processing of claims as increasing numbers of Americans began taking prescription drugs. The PBMs processed the claims for insurers, negotiated drug prices for consumers and thereby solidified their place as the middleman in the prescription drug transaction.

Fast forward several decades, however, and PBMs have morphed into far more than a middleman in the drug company-to-consumer pharmaceutical pipeline. PBMs now touch nearly every aspect of prescription drug purchasing in the U.S. and have, therefore, become the biggest beneficiary of soaring drug prices - with the profits of the largest PBMs doubling in recent years. While the record profits are known, the mechanisms by which PBMs are earning those profits are starting to draw the attention of Congress and some of the largest U.S. employers due to their role as the chief providers of health insurance products to their employees. Congress has, and continues to hold hearings on the subject of soaring drug costs while companies like Macy's and Coca-Cola have joined together in an alliance with the stated aim of breaking "existing marketplace practices that are costly, wasteful, and inefficient…." PBMs are being specifically targeted by these companies, who plan to use their combined leverage to rewrite PBM contracts to eliminate undisclosed drug-price markups and rebates. 

A detailed exposé of the opaque pricing practices of PBMs, and the ways in which those practices are contributing to the distortion of drug prices in the U.S., are set out in a recent Business Insider article, "These companies you've never heard of are about to incite another massive drug price outrage." The author cites several major factors in her analysis:

PBMs are controlling information about pricing all along the drug pipeline. 

As discussed in more detail in the Business Insider article, PBMs are keeping everyone in the dark about drug pricing by the opacity of their "spread" – the difference between what the insurer is paying for the drug via its agreement with the PBM and the amount that the dispensing pharmacy receives. That difference is the PBM's profit (on top of the fees they earn to administer the drug prescription programs for insurers). In virtually all cases, the pharmacy has no idea what the insurer is paying for the drug and the insurer doesn't know how much the pharmacy receives for dispensing it – all of that information is known only to the PBM. 

In addition to the mysteries of the spread, the "list price" of any given drug is rarely the price received by a drug maker. Drug price increases are often rebated to PBMs in a deal that keeps those drugs on the PBM formularies and insurers in the dark as to exactly what the PBM is getting back over-and-above what the insurer is paying the PBM for the drug.

PBM control of formularies and MAC lists may be distorting the market. 

PBMs develop formularies (lists of drugs for which patients will be reimbursed under a given plan) and maximum allowable cost (MAC) lists (which tell pharmacies and drug companies what the PBM will pay for a medication). The control of what drugs appear on which formularies gives PBMs a great deal of leverage over drug manufacturers, and they often negotiate lower drug costs and rebates to keep a given drug on their formularies. PBM control of MAC lists, which often show different prices for the same drug, based on whether it is on the insurance company's list or the pharmacy's list, provides PBMs with a ready-made mechanism to increase profits as drug costs rise. Many PBMs fail to update MAC lists with any frequency, meaning that even if a drug increase is hitting a pharmacy hard, the PBM is still paying a lower cost under the MAC. The Centers for Medicare and Medicaid Services, in addition to 26 states, have ordered that PBMs update their MAC lists with greater frequency in an attempt to address the issue.

PBMs have gotten into the pharmacy business. 

An increasing number of PBMs are now operating their own specialty pharmacies, focusing particularly on the mail-order delivery of drugs that are generally more difficult to distribute. This means that not only are PBMs controlling the formularies, they are also negotiating the prices of drugs that they themselves are distributing – essentially buying drugs from themselves.

PBMs are managing patient assistance programs. 

PBMs have another hand in the trough via their management of patient-assistance programs (PAPs) set up by drug companies. PBMs administer the programs and pick up a fee from the drug company for their services. The drugs on the PAP lists are often provided through the PBM-owned pharmacies. 

In addition to congressional hearings and concerted action by major U.S. companies, a number of cases are working their way through the courts that may spell trouble for PBMs and their record profits. The FisherBroyles Pharmacy Law team will continue to track issues of importance to pharmacies, including matters related to PBM litigation.