Pharmacy Benefit Managers

Pharmacy Benefit Managers (PBMs) Under Pressure

Most people get their insulin or other diabetes medication in one of two ways. Some buy their drugs directly from a pharmacy at list price (which can be extremely expensive). Most, however, will get their prescriptions paid for, at least in part, by their health care plan. The price of diabetes medications has skyrocketed in recent years, and that directly harms anyone paying out of pocket for their prescriptions. Pharmacy Benefit Managers, or PBMs, may be to blame.

PBMs Are Increasingly Active Middlemen

The first PBMs emerged in the 1970s to serve as intermediaries between pharmacies and insurance companies. Back then, they were called "pharmacy claims processors," and that is still their most basic role.

How do PBMs work?

A PBM is associated with a health plan, and a pharmacy will notify the relevant PBM whenever a patient leaves a prescription with that pharmacy. The PBM will verify that the patient has coverage and tell the pharmacy what copay/coinsurance is needed. The PBM will also flag any other approvals or additional information that may be needed before the prescription can be filled.

Over time, health insurers began to expect more. PBMs began to provide safety limitations, such as preventing certain drugs from being given to children. Cost control soon became a priority as well, as PBMs helped push patients to generic drugs. In the late 1980s, online claims systems began to roll out nationally and PBMs gained both large market shares and a wealth of information about their patents and their suppliers.

By the late 1990s, claims processing was still the main source of revenue for PBMs, but it was becoming a commodity service with declining profitability. PBMs had to look elsewhere for revenue and began selling drugs directly to patients through mail-order pharmacies, for example. Express Scripts is the country’s largest PBM, and this is how they describe their work today:


Spread Pricing is the Name of the Game

Much of the revenues for PBMs today come from negotiating the price spreads between the cost of the drugs they buy from manufacturers and the price they charge patients. PBMs represent millions of consumers, and therefore they have tremendous leverage to force concessions from drug manufacturers or pharmacies. For example, PBMs may pressure pharmacies to reduce their fees and reimbursement levels in order to have access to the PBMs’ plan beneficiaries.

Perhaps more importantly, PBMs can take a hard line with drug manufacturers by purchasing huge amounts of drugs while demanding deep rebates. They will, in turn, charge health plans to use their processing services, while taking a cut of each transaction. Meanwhile, list prices creep higher and higher, forcing those who have high deductibles or no insurance to face list price at the pharmacy counter.


There is a lot of debate over whether these price spread negotiations actually help patients. The U.S. Health and Human Services Inspector General has found that these types of negotiations earned PBMs about $275 per beneficiary per year in Medicare Part D programs, a savings of about 10% of the total drug costs. This helped patients to a degree.

Some credit PBM’s with dramatically driving down health care costs overall. Unfortunately, these savings may not always be passed on to the customers. There is an increasing belief that drug makers are raising their list prices so that they can turn around and cut huge discounts to PBMs. The problem is that while the list price is not the real price paid by most companies in the market, many patients will be slammed with the sticker price.

EpiPen example

The controversy with the emergency allergy treatment EpiPens highlighted this problem. EpiPen’s manufacturer jacked their sticker price up to $608 but claimed it was only collecting $274 on the average sale. Health insurers were still paying closer to $608, while the PBMs pocketed most of the difference through rebates. Meanwhile, many patients were stuck paying the $608 sticker price.

Cutting PBMs Out of the Process

A challenge PBMs currently faces is coming from companies that are seeking to cut PBMs out of the process altogether. Several years ago, Caterpillar started paying close attention to the PBM on its employee health plans. The company created its own list of approved drugs that promoted generics. It also pushed employees away from expensive heartburn and cholesterol medicines. Caterpillar says this has saved tens of millions of dollars each year, and many other companies are following suit and switching away from the big PBMs to smaller “transparent PBMs” that just charge flat fees for processing claims. Caterpillar has also joined forces with numerous other large companies to form the Health Transformation Alliance to seek out these types of opportunities for employers to cut costs by cutting out middlemen.


Patients Must Stay Vigilant

The 30.2 million Americans with diabetes need to know what impact PBMs are having on the treatments they need to survive. Sen. Ron Wyden (D-OR) has teamed with three other Senators to introduce legislation that he says would “lift the veil of secrecy” around drug prices by requiring PBMs in Medicare to disclose their rebates and how much of those rebates are passed on to health plans and patients.

We covered the Examining the Drug Supply Chain hearing in front of the Energy & Commerce Health Subcommittee and shared our key takeaways as patient advocates.DPAC also has a statement regarding access, including prescription drugs.

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