What Is a PBM, And Why Is It Making Your Prescriptions More Expensive?

What a PBM Does

A Pharmacy Benefit Manager is a company that administers prescription drug benefits on behalf of health insurers, self insured employers, Medicare Part D plans, and government programs. When your employer offers health insurance with a prescription benefit, a PBM is almost certainly managing that prescription benefit, even if the insurance card in your wallet says something else entirely.

The PBM’s stated functions include:

Processing prescription drug claims. When you fill a prescription at a pharmacy, the claim goes to the PBM, which adjudicates it, determines whether the drug is covered, at what tier, for what copay, and how much the pharmacy will be reimbursed.

Negotiating drug prices with manufacturers. PBMs negotiate rebates with pharmaceutical manufacturers, essentially discounts paid by manufacturers in exchange for preferred placement on the PBM’s formulary. The manufacturer pays a rebate. The drug gets placed on a preferred tier. Patients are steered toward that drug.

Managing formularies. The formulary is the list of drugs covered by your plan and at what tier, generic, preferred brand, non preferred brand, specialty. The PBM creates and manages this list, and the decisions about which drugs appear on which tier are influenced significantly by the rebates manufacturers pay.

Reimbursing pharmacies. The PBM sets the rates at which pharmacies are reimbursed for filled prescriptions. These rates, which are not publicly disclosed and which vary by contract, are one of the primary determinants of what it costs to run a pharmacy and what prices pharmacies can offer patients.

How PBMs Make Money

This is where the explanation becomes important for understanding why prescription prices are the way they are.

PBMs make money through several mechanisms that are not always transparent:

Spread pricing. This is the practice of charging the insurance plan more for a prescription than the PBM reimburses the pharmacy. The difference, the spread, is retained by the PBM as profit. Example: the PBM charges your insurance plan $40 for a generic medication and reimburses the pharmacy $12. The $28 difference is the spread. The patient’s copay is set based on the $40 charge, not the $12 actual cost. Spread pricing has been the subject of significant state and federal investigations and has been banned for Medicaid programs in some states.

Rebates retained from manufacturers. When a drug manufacturer pays a rebate to a PBM for preferred formulary placement, the PBM is contractually obligated to pass some portion of that rebate back to the insurance plan, but not all of it. The portion retained by the PBM is profit. The rebate structure has been widely criticized for creating incentives to keep high list price drugs on preferred formulary tiers because higher list prices generate larger rebates, even when lower cost alternatives are clinically equivalent.

DIR fees from pharmacies. As discussed in our previous post, PBMs charge clawback fees to pharmacies after prescriptions have been filled. These fees are collected by the PBM and not passed on to patients or plans in a transparent way.

Mail order pharmacy profits. Two of the three largest PBMs own their own mail order pharmacies. When your plan steers you toward mail order, through lower copays or mandatory mail order for maintenance medications, the PBM’s affiliated mail order pharmacy fills the prescription and the PBM collects the dispensing profit. This vertical integration means the entity deciding which pharmacy gets your business has a financial interest in directing that business to itself.

The Three Companies That Control Most of American Prescription Drug Access

The PBM market is highly concentrated. Three companies, CVS Caremark, Express Scripts (now Cigna’s Evernorth), and OptumRx (UnitedHealth Group), manage prescription drug benefits for the majority of insured Americans.

Each of these companies is part of a larger healthcare conglomerate:

CVS Caremark is the PBM subsidiary of CVS Health, which also operates approximately 9,000 CVS Pharmacy retail locations, CVS Specialty Pharmacy, and Aetna health insurance.

Express Scripts / Evernorth is owned by Cigna, a major health insurance company, which also owns Cigna Pharmacy.

OptumRx is owned by UnitedHealth Group, which also owns UnitedHealthcare insurance, a large and growing network of physician practices, and significant hospital and clinical laboratory interests.

The vertical integration of insurance, PBM, pharmacy, and increasingly physician practice under single corporate parents is one of the most consequential and least publicly understood developments in American healthcare. It means that the company that insures you, the company that decides which drugs are covered, the company that reimburses your pharmacy, and in some cases the pharmacy that fills your prescriptions may all be subsidiaries of the same corporation.

This concentration of market power has drawn increasing scrutiny from the Federal Trade Commission, Congress, and state attorneys general. Whether meaningful regulatory reform will follow remains to be seen.

What This Means for Independent Pharmacies

Independent pharmacies occupy a structurally disadvantaged position in the PBM system.

Chain pharmacies, CVS, Walgreens, Walmart, have sufficient market leverage to negotiate more favorable reimbursement contracts with PBMs. Independent pharmacies do not. The result is that independent pharmacies are frequently reimbursed at rates that chain pharmacies would not accept, and in some cases at rates that are below the actual cost of dispensing the medication.

This structural disadvantage is one of the primary drivers of the closure of independent pharmacies across the country. Pharmacies that cannot cover their operating costs through PBM reimbursements close. Patients in communities where the only pharmacy was an independent

Pharmacies that cannot cover their operating costs through PBM reimbursements close. Patients in communities where the only pharmacy was an independent one lose access to local pharmacy care entirely, a phenomenon called pharmacy deserts that is accelerating in rural areas across Mississippi and the rest of the country.

When an independent pharmacy closes, patients typically transfer their prescriptions to a chain pharmacy, which is often owned by the same corporate family as the PBM that made the independent pharmacy’s reimbursement rates untenable. The competitive elimination of independent pharmacies by PBM reimbursement structures that favor chain affiliates is not an accident. It is a predictable consequence of vertical integration in a market with no meaningful price transparency.

What You Can Do About It

The PBM system is structural and largely outside the control of any individual patient. But there are practical steps that reduce the amount the system extracts from you:

Use a pharmacy that is transparent about all pricing options. An independent pharmacy with no PBM affiliation has a financial interest in keeping you as a patient, not in steering you toward a corporate mail order affiliate. Ask your pharmacist directly: what is the best price available for this medication at this pharmacy, using any pricing method?

Understand your formulary. Your plan’s formulary is available, your insurer is required to provide it. Knowing which tier your medications are on and whether therapeutic alternatives are available at lower tiers gives you the information to have productive conversations with your prescriber about switching to a covered equivalent.

Ask your prescriber about formulary alternatives. When a medication is not on your plan’s preferred tier, ask your prescriber whether a clinically equivalent alternative is available that is preferred. In many cases it is, and a simple prescription change can reduce your copay from a non preferred tier to a generic tier cost.

Support legislative reform. PBM transparency legislation has been introduced at both the federal and state level. Mississippi has considered PBM reform legislation. Patients who understand the system are the most effective advocates for the transparency and accountability reforms that would make the system work better for everyone except the PBMs themselves.

This article is for general information only and is not a substitute for personalized medical advice. Before starting or changing any medication, including over the counter products and supplements, talk with your pharmacist or physician about your specific situation.