Concept photo of prescription bottle with hammer
Following the FTC’s investigation into pharmacy benefit managers for what many consider anti-competitive business practices, legal pressure continues to mount. At least six attorneys general, including California, Ohio and most recently Vermont, have filed lawsuits against PBMs. Moreover, recent findings from the House oversight investigation support these claims. reveal that these drug middlemen – who claim to be controlling costs – have instead “sent patients to more expensive drugs and affiliated pharmacies.”
As these investigations, investigations and lawsuits keep PBM practices in the public’s attention, it is important that lawmakers, employers and the general public understand not only what these practices are, but also how they relate to the larger healthcare market. PBMs are one piece of the healthcare puzzle, impacting the cost and quality of care for consumers. For employers, the relationship with PBMs is complex and often opaque, impacting their ability to provide cost-effective and quality health care benefits to their employees.
As I have detailed in previous columns, pharmacy benefit managers are powerful healthcare intermediaries that manage prescription drug insurance benefits. They act as intermediaries connecting insurers, pharmacies, drug manufacturers and employers/plan sponsors. And they play a role in controlling prescription drug prices by setting drug formulations, negotiating prices with pharmaceutical manufacturers, contracting with pharmacies, processing claims and setting pharmacy reimbursements.
PBMs market themselves to employers as essential partners in managing prescription drug benefits. They promise cost containment thanks to their bargaining power with drug manufacturers and pharmacies, streamlined benefits administration, and data-driven insights from their massive claims databases. This value proposition turns PBMs into experts who can simplify the complex world of healthcare benefits while lowering costs. According to PCMAthe PBM lobbying organization: “PBMs will save health plan sponsors and consumers more than $1 trillion in prescription costs over ten years.”
PBMs also argue that their large scale provides a necessary counterbalance to big pharmaceutical companies and allows them to better negotiate on behalf of their customers. David Joyner, president of CVS Caremark, recently said in a New York Times report: “size and scale really matter to influence and reduce the overall cost of branded medicines.” This reasoning has led to the current consolidated landscape, in which the three largest PBMs operate almost 80% of all prescription drug claims in the United States.
On the surface, partnering with PBMs seems like a smart move for employers; a classic case of outsourcing expertise to create value. The promise of cost savings, simplified administration, advocacy against other major healthcare players, and data-driven decision making is compelling. Why wouldn’t employers want to work with them?
Although PBMs present themselves as indispensable allies in managing prescription drug benefits, the reality is that they stand in stark contrast to their promises. One concern is the lack of transparency regarding prices and discounts. Employers remain in the dark about actual costs and savings, making it difficult to assess whether PBMs are delivering on their cost containment guarantees.
More importantly, the incentives that motivate PBMs often conflict with the interests of employers and patients. Pharmaceutical manufacturers pay PBM rebates to place their drugs on a health plan formulary – the list of drugs the insurer will cover – in a low co-payment category. The discount paid by the manufacturer usually depends on the price of the drug. The higher the price of the drug, the greater the discount. That’s why PBMs prefer more expensive drugs that give them bigger discounts, rather than opting for more cost-effective alternatives that would benefit employers and their employees. What appears to be significant savings for employers may be the result of artificially inflated prices, allowing PBMs to claim credit for cost savings while increasing their own profit margins and increasing out-of-pocket costs for health plan participants.
The theoretical benefits of partnering with PBMs – cost savings, simplified management and data-driven decision making – often fail to materialize. Instead, employers face hidden costs, limited drug choices and pharmacy networks, and generally higher costs, which are in stark contrast to the PBMs’ perceived value proposition.
So why do employers work with PBMs? As I wrote in a previous column, market consolidation means there is no easy way out. Options are limited and each of the powerful PBMs participates in the same complex system, leaving employers with few viable alternatives.
PBM practices have a profound impact on the healthcare ecosystem, often increasing prices, decreasing competition, and worsening market consolidation. Even for those who don’t use prescription drugs, health insurance premiums are rising for employers and employees in this environment.
As I explained in my book, Adding value to healthcareAddressing the root of the healthcare crisis means changing the system as a whole. While actions to check the power of PBMs by the FTC, state attorneys general, and the news media are a step in the right direction, lasting change requires an understanding of how different components of the industry work together. No investigation or lawsuit will be enough. Instead, a concerted, industry-wide effort is needed to promote transparency, increase competition, and realign incentives. Even changing the entire PBM segment, without making broader changes at the system level—across healthcare, payers, pharmaceutical companies, and wholesalers—wouldn’t save America’s health care system. That would be like repairing a hole in a carpet that is quickly falling apart.
Looking ahead, regulatory shifts and alternatives to the current PBM model may emerge, offering hope for a more balanced industry. It is imperative to align incentives and create a transparent system that truly serves employers and empowers patients. For decades, the healthcare model has been less and less interested in prioritizing patient care and cost-effectiveness. With renewed national attention on how the business model functions and its impact on employers and consumers, the time is ripe for change. Only then can we create a healthcare delivery ecosystem that works for all stakeholders.