There is one thing that most Americans understand, regardless of political differences: prescription drugs are too expensive.
According to a report published by the U.S. Department of Health and Human services earlier this year, in 2022, prices for all prescription drugs in America were nearly 2.78 times higher than those in comparable countries. This comes at a time when Americans are more reliant on prescription drugs than ever before, with the final figure estimated to be more than 131 million Americans. However, because of high drug costs, around 1 in 3 Americans now say that they will not be able to take their medication as prescribed.
Given the impact of high prescription drug costs on everyday Americans, it is no surprise that policymakers in Washington and interest groups are all looking for someone to blame. With the large number of actors in the pharmaceutical supply chain, the answer of who is actually responsible is complicated. However, one entity has gained more control over the prescription drug industry than any other actor: pharmacy benefit managers, or PBMs.
What are PBMs?
PBMs are middlemen responsible for managing the drug prices covered by health insurance plans. In an interview with the HPR, Angela Banks, Vice President of Policy at the Pharmaceutical Care Management Association, an interest group representing PBMs, explained that “the PBM is negotiating discounts just like, you know, you see a pair of shoes and you’re like, ‘Oh, they’re 40% off.’ The same type of thing.”
By themselves, PBMs are supposed to be good for health insurance plans and, most importantly, consumers. Merith Basey, Executive Director at the interest group Patients For Affordable Drugs, told the HPR that historically, “the idea was that [PBMs] would try to negotiate deals or agreements that would benefit patients to help lower the cost of prescription drugs.” Furthermore, PBMs are extremely well suited for this role because of their leverage. As Vice President Banks detailed, “When you’re trying to convince a drug manufacturer to discount their product and you only have 50 lives, you have a lot less leverage than if you have several million lives. So that’s why [insurance plan sponsors] aggregate that buying power by getting with a PBM.”
Where Is the Problem?
On the surface, PBMs seem to be a genuine force for good. In reality, PBMs are not independent actors. A July 2024 report published by the Federal Trade Commission indicated that many PBMs have vertically integrated with pharmacy chains and health insurers through massive conglomerates. For example, the three biggest PBMs in the country, CVS Caremark, Express Scripts, and OptumRX, have integrated with the insurance companies Aetna, Cigna, and UnitedHealth Group, respectively. Additionally, all of the top six PBMs in the country operate their own specialty and affiliated pharmacies. For example, CVS Caremark operates the largest chain of retail pharmacies in America, with over 9,000 CVS pharmacies located in the United States, including over 1,600 pharmacies and clinics in popular retail chains such as Target.
This vertical integration is what policymakers in Washington and interest groups are so concerned about. This is reflected in a statement from the office of Senator Chuck Grassley, R-IA, who has worked for decades to lower prescription drug costs. In an email sent to the HPR, Senator Grassley’s office stated that, “Market consolidation and a lack of transparency have … enabled PBMs to abuse their power, undercut rural and independent pharmacies, and pad their pockets with unknown profits — money that could be passed on to patients as savings.”
This sentiment was corroborated by Basey, who stated “So we see that with like the top six [PBMs] in particular … because they have begun to integrate with the insurance companies, there’s a conflict of interest now in place, which means that they are not necessarily favoring patients in their negotiations, that they are benefiting themselves.”
Rebates and “Secret Deals”
One of the major roles that PBMs play in increasing prescription drug prices is through favorable placement of costly brand name drugs on health insurance plans in return for higher rebates. As Basey explained, PBMs “steer [patients] towards higher priced drugs, where they can get rebates that are not going back to the patient any longer.”
Yet, representatives for PBMs do not believe that PBMs are to blame since most PBMs do not make significant profits from rebates. For example, Angela Banks notes, “Cigna and CVS’s CEOs testified last year at a hearing that it was 95 or 98 percent [of rebates] returning to health plans in the commercial market.”
This argument would make sense if PBMs and health insurers acted as separate entities, but that is not the case in America. With PBMs and health insurers being vertically integrated, PBMs operate with the interests of health conglomerates that benefit from higher rebates that PBMs put in place. Therefore, as Senator Grassley’s office argued, transparency surrounding the deals PBMs negotiate with drug manufacturers is all but imperative.
The Spread Pricing Discrepancy
High rebates are not the only mechanism PBMs use to turn profits at the expense of consumers. As Senator Grassley’s office reported, a PBM can also employ a technique called “spread pricing,” in which a PBM “charges a health insurance plan more to process a prescription than it reimburses the pharmacy,” keeping the difference.
PBMs call spread pricing contracts “risk mitigation contracts,” which allow health plan sponsors to pay a fixed rate for a certain quantity of a drug, regardless of which pharmacy is being reimbursed for the drug. Since different pharmacies have different prices for the same drugs, PBMs claim that spread pricing is not a factor in high prescription drug prices. This is because pharmacies often charge more than health plan sponsors pay. In fact, Vice President Banks stated, “that’s why [plan sponsors] choose spread pricing in that model. The PBM could win or lose, and actually we know that in many cases, they do lose.”
The numbers say otherwise. In 2018, state auditors in Ohio found that the state’s Department of Medicaid paid PBMs spreads totaling $224.8 million between April 2017 and March 2018. Furthermore, in an independent study published in Jama Health Forum, in 2021, for an average claim costing Medicare Part D $22.50, PBM gross profits were $9.18, representing 40.8% of the claim. PBMs argue that their use of spread pricing and risk mitigation contracts help the plan sponsor, not the PBM, but when looking at the numbers, it is clear that PBMs use spread pricing for mostly their own profit.
The problem with spread pricing reflects a simple truth: in today’s America, PBMs simply possess too much power. As the FTC reported in July, PBMs have slowly increased the number of drugs they classify as “specialty drugs,” requiring health plans to pay higher costs at pharmacies that are affiliated with the PBM.
PBMs also reimburse affiliated pharmacies at much higher rates compared to unaffiliated pharmacies. In 2022, commercial health plans paid PBM-affiliated pharmacies 80% to 90% more than unaffiliated pharmacies, while Medicare Part D paid PBM-affiliated pharmacies 30% more, for drugs such as abiraterone acetate and imatinib mesylate, which are used to treat cancer.
Conclusion
Can we replace PBMs? Not really.
The services that PBMs provide are necessary. However, the vertical integration between health insurers, PBMs, and pharmacies grant PBMs disproportionate control over how much Americans spend on prescription drugs.
That does not mean PBMs are the sole reason for high prescription costs in America, either. When asked whether PBMs or drug manufacturers were to blame, Basey responded, “Both are definitely responsible, and both contribute to increasing prices here in the United States for patients, right? That is why one in three people in this country cannot afford their medication.”
While PBMs often deflect the responsibility for the problem of high drug prices to drug manufacturers, both actors are to blame. If one in three Americans cannot afford their medication, the way the American pharmaceutical industry is designed represents a threat to the fundamental right to healthcare.
The onus is on lawmakers to enact policies that demand transparency over the deals and transactions conducted by PBMs, as well as prevent the continued tight, vertical integration between health insurers, PBMs, and pharmacies. As complicated as understanding the issue of high drug costs is, the stakes of addressing the issue is a simple matter of life or death.
