PBMs, The Invisible $500 Billion Per Year Industry

Anyone who has a regular medication regimen is usually quick to lament how costly it is. Well, you know, drugs are expensive, especially in America! But, what is the industry structure that determines and manages the price? The answer is found in a middleman enterprise known as the PBM, an acronym for Pharmacy Benefit Manager. This acronym can also double as an oxymoron for patients who need medications because they are not benefiting from this interference in the system. Profit By Middlemen might be a more honest label.

Most Americans have no awareness of the methods used to control and manage the cost of drugs they are prescribed. Their normal routine is to inform their doctor what pharmacy locations they visit to acquire their medications. And that is where their knowledge of the pharma industry ecosystem stops. Their doctor calls in the script, and they just drop by to pick it up. The process in the past of being handed a piece of paper from a prescription pad with a scribbled signature are long behind us.

PBM definition
The definition of PBMs can vary greatly depending on the source. It is by any measure a controversial element of the Medical-Industrial Complex. Industry advocates will claim without a means of proof that the purpose of a PBM is to reduce the cost of medications to insurance companies, that ultimately passes through to patients. That may have been the original intention and purpose, but there is no visible transparency that can clearly verify that fact. PBMs are middleman businesses that opaquely work both ends against the center. Study the graphic at the end of this article.

In essence, their role is to negotiate drug pricing directly with the pharmaceutical manufacturer. They have contracts with the giants in the insurance industry who hire them to perform this task, and that gives PBMs considerable pricing leverage with the pharma manufacturers.

Do PBMs Actually Benefit Patients?
Theoretically, this service should lower the final cost to the patient, but as it turns out, it often causes price increases. The PBM earns money by charging their customer, the insurance company, a fee. They also mark up the cost they negotiate for the drugs to create a margin that results in additional income. To the tune of $500 billion per year. There is no transparency in this process. I will share more about that later in this article.

Origin and History
PBMs first came on the medical industry scene in 1968, but they were not called that initially. The first iteration was called the Pharmaceutical Card System. United Healthcare was involved from the start, and therein lies one of the problems with this concept. The clear conflict of interest is a major and unavoidable factor. And it has proven to be obscenely profitable for them.

Today, due to a continuous progression of industry consolidation there are three giants in this space that control about 80% of the total PBM market. They are Caremark owned by CVS, OptumRX owned by United Healthcare, and Express Scripts owned by Medco Health Solutions.

The MIDDLEMAN issue
It is often not wise to trust any middleman source on the surface. There may be instances and examples in business that prove middlemen to be beneficial. But more often than not, it is usually a rent-seeking enterprise that results in elevating the cost of a service or product to the end user.

There is no sufficient way to verify if savings of any consequence are passed on to the consumer. An industry lobbying organization claims that roughly $43 billion per year will be saved by the PBM business model over the next ten years. Even if that can be proven, earnings of $500 billion per year only yielding ten percent in cost reduction is not an impressive ratio.

Transparency, as in not any…
The PBM industry has attracted much controversy, leading to a substantial volume of litigation due for the most part to the opaqueness of the business model. PBMs demand pharmaceutical manufacturers and pharmacies keep their cost amounts confidential. The margins PBMs realize in their pricing structure are closely held secrets. PBMs also do not permit pharmacies to recommend lower cost alternatives unless they are specifically asked to do so by their customers. The margins are much more profitable for the PBMs when the drugs are higher priced.

Another contentious factor between PBMs and pharmacies relates to control of dispensing fees. It is dictated to pharmacies what they can add to the cost of filling a prescription. PBMs have seemingly captured too much control over the entire industry that has resulted in higher costs rather than savings passed on to the end user.

A Voice From Behind the Pharmacy Counter

I questioned a friend who has been a practicing pharmacist for several decades. He has seen a vast alteration of the pharmacy landscape during his years in the business. Moreover, his father was also a pharmacist who practiced for 50 years, and owned drugstores in multiple towns, back when that was the definitive definition of what they were. His experience spans a variety of pharma business verticals, from independent pharmacies to national corporate chain stores, clinical pharmacies within hospitals, and managing clinical trials. During his career, he has seen and experienced the full spectrum of the pharmaceutical ecosystem. He had a lot to say about PBMs and their unwelcome effects.

Some examples include; a lack of transparency, rebate practices, spread pricing, limited pharmacy networks, high out-of-pocket costs for some patients, the Impact on independent pharmacies (low reimbursement rates and restrictive networks), and some PBMs are vertically integrated with health insurers or pharmacy chains, which can create potential conflicts of interest and reduce competition in the market.

Before the advent of PBMs, pharmacies acquired their inventories either through major distribution channels that served as the original intermediaries between the manufacturer and the drugstore, or directly from the manufacturer. There were, and still are, pharmacists who are skilled in compounding medications. You can probably find one in your area if you search carefully enough. Compounding pharmacists create personalized medications by combining, mixing, or altering ingredients to meet the specific requirements of a patient’s medical condition, age, weight, allergies, or other factors.

Many aspects of practicing pharmacy changed when PBMs seized control of these earlier business methods, and not in a positive manner. A formulary today is not what it was decades ago, the PBM dictates what the formulary is today. The remuneration aspect of formularies, according to my friend, can absolutely and negatively impact the profitability of the business in a number of ways. It explains why a drugstore today is more like a mini-mart where the customer can also buy a gallon of milk, a quart of motor oil, and even toy wagon for a child. How about that candy aisle? There’s some health-conscious products for you!

About that income from filling a prescription? A medication costing $50.00 versus one that costs $500.00 results in virtually no difference in earnings for the pharmacy. The only difference is the burden of maintaining inventory. The margins are captured and controlled by the PBM, not the business where drugs are dispensed.

Patient Stories
What about from the patient perspective? Buying a prescription is a minefield today. It can feel like being a con man’s mark in far too many cases. But fortunately, conscientious pharmacists are siding with the patients more every day. Since pharmacists behind the counter are discouraged by PBMs from advising the customer regarding more economical alternatives to what has been prescribed, they have found ways to help the medication customer save money. One example is to provide a discount card they have on hand for the customer’s benefit.

Medication customers are learning not to accept the first price they are quoted. They are finding more affordable options by asking the pharmacist if a generic version is available. Pharmacists are instructed by PBMs not to volunteer that information, but to provide it when asked. People are also searching on line for lower cost options when beginning the regimen does not require urgency or expediency.

I was recently told a story by a friend who diligently explored every option available and was able to reduce an initially quoted price of $50.00 down to $2.00. That is an extreme example, but it reveals the benefit of making the effort whenever possible.

Alternatives and Solutions
When the balance between efforts to monopolize any business sector and the customer base being served becomes too lopsided, it inevitably opens the door for disruption and new competition. Two present day disruptors to emerge are Mark Cuban Cost Plus Drugs, and Amazon Pharmacy. Mark Cuban aggressively negotiates with drug manufacturers and then adds 15% to the cost. This can result in remarkable savings in some cases. Amazon Pharmacy is accomplishing the same outcome due to the leverage they can exercise because of the size of their existing customer base.

It is highly likely there will be imitators entering the market in large numbers as they watch these two sources capture more and more market share over time. Also, it has been common practice for years for American pharmaceutical consumers to order their drugs from Canadian and Mexican sources when possible.

Study this innocuous appearing graphic carefully. When you read it closely, you may feel it obfuscates as much or more than it clarifies. Nevertheless, you can see the power PBMs have over the industry because they embed their business process into the most critical touch-points in the retail drug eco-system.

Sources: investopedia.com, wikipedia.com