8 Things Employers Should Know About Their Pharmacy Benefit Managers

1. The higher the drug price, the more money the PBM makes.

Like drug manufacturers and wholesalers, PBMs are paid as a percentage of retail drug prices. That means they’re incentivized to exclude lower-cost drugs and promote higher-cost medications in their approved drug lists or formularies.

2. Industry consolidation is contributing to reduced transparency and higher cost of care.

The three leading PBMs are all controlled by national health care enterprises and make up 80% of the PBM market. These organizations have taken steps to further integrate vertically in recent years by incorporating specialty pharmacy and provider services. This consolidation not only creates potential conflicts of interest between business units but also makes it far more difficult to trace the flow of drug cost funds.

3. Traditional PBMs are creating new layers of cost and opacity with GPOs that contract directly with drug manufacturers.

Large, traditional PBMs all have or soon will implement new group purchasing organizations (GPOs) to serve as intermediaries between drug manufacturers and their respective PBM operations. Even though it’s not clear what, if any, value the GPOs will create, they’re expected to extract 5-8% in fees from the drug supply chain. Additionally, because they’re replacing PBMs as the manufacturer contracting entity, GPOs will help insulate PBM operations from audits and potential legislative cost remedies while reducing the PBM’s ability to share cost data with purchasers.

4. Rising fees are major contributors to PBM profits.

In response to criticism of the longtime practice of keeping drug manufacturers’ rebates to boost their profitability, PBMs increasingly distribute all or most of drug rebates to purchasers. At the same time, however, the number and dollar volume of fees paid by manufacturers to PBMs continues to increase. In 2015, rebates contributed to 27% of PBM gross profit; by 2021, that percentage had fallen to 7%. But over the same period, fees as a profitability percentage have nearly doubled, from 15% to 29%.

5. Total manufacturer revenue is more important for purchasers to focus on than rebates.

In PBM contract negotiations, large purchasers typically seek provisions that will entitle them to 100% of manufacturer rebates. Given the growth in fees collected by PBMs from drug makers, purchasers should instead push to receive a major percentage of all manufacturer revenues. This compels the PBM to include fee revenue and rebates in their purchaser refunds and can help reduce overall drug spend. What’s more, rebates are a reflection of drug costs. Thus, higher rebates typically translate into purchasers paying higher drug prices.

6. Drug manufacturer price increases are largely driven by internal revenue targets and earnings goals, not by increasing rebates and discounts paid to PBMs, as the drug industry has long claimed. 

In a recently published investigation into drug pricing, the U.S. House Committee on Oversight and Reform found that manufacturers of top-selling drugs repeatedly and significantly raise prices, with many companies hiking prices 20 or more times on a single drug.

“The Committee’s investigation revealed that executives made decisions to raise prices in order to reach aggressive corporate revenue targets and earnings goals, taking more frequent and steeper price increases as drugs approached the loss of patent protection and market exclusivity,” the report states. 

The study also revealed that compensation structures incentivized executives to raise prices to meet bonus targets. Between 2016 and 2020, annual executive compensation at the 10 companies examined by the committee increased 19% to $2.6 billion. 

7. Most formulary decisions are driven by the PBM’s financial interest, not clinical ramifications for patients nor the cost implications for purchasers.

Since PBMs make more money with high-cost drugs, they routinely work to include in their formularies higher-priced drugs while excluding lower-cost, equally efficacious medications. Therefore, purchasers must conduct a third-party audit of the PBM’s formulary to help ensure that the lowest-cost, highest-efficacy drugs are included.

8. Each PBM follows its own definitions of brand and generic drugs.

Conducting a formulary audit can be challenging, given the widely varying definitions PBMs use for categorizing drug types and the resultant pricing and rebate strategies these definitions dictate.