The role of Pharmacy Benefit Managers in US drug pricing


  • Payment flow and pricing structure are highly complex and nontransparent within the US pharmaceutical industry. No single entity having a complete view of how much a drug actually costs;
  • Fideres has identified a number of issues with the role of Pharmacy Benefit Managers (“PBMs”) that warrant further investigation: potential conflicts of interest, complex and confidential rebate structures and a general lack of regulation. 

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The hidden role of PBMs and insurers in the supply chain

While not a direct link in the physical supply chain, PBMs play an integral part of most consumer purchases. As is the case with manufacturers, wholesalers and pharmacies, the market for PBMs is highly concentrated. Following years of M&A activity, the top five PBMs account for more than 80% of all prescriptions dispensed in the U.S.

PBMs provide services to insurers including claims processing, record keeping, reporting programs, utilization review, disease management and consultative services. Their main role is to: 

  • Establish and maintain a benefit structure, including drug formularies
  • Develop a network of pharmacy providers

Manufacturers pay rebates retroactively to PBMs based on their ability to include drugs on a health insurer’s formulary and increase a manufacturer’s market share. These rebates are kept private and confidential. PBMs profit by taking a percentage of the spread between the list price and the “Net Price”. The “Net Price” generally means the true costs of the drug that insurers will pay, taking into account discounts and rebates. Pharmacies contract with PBMs to join their pharmacy network, which provides pharmacies with access to a greater number of customers, buying power and stable reimbursement.

The hidden incentives of the PBMs

Substantial conflicts of interest arise when a PBM owns their own pharmacy operations as incentives shift from negotiating the lowest cost method of drug distribution to driving profits from its own pharmacy operations.

The two biggest PBMs, Express Scripts and CVS, also own the two largest specialty pharmacies, These pharmacies have been rapidly expanding and now accounts for over 31% of all prescription drug spending1. PBMs also own a number of mail order and retail pharmacies. For example, the CVS retail chain pharmacy accounts for nearly 14% of all prescription revenues2 

Due to the non-transparent and secret nature of rebates between manufacturers and PBMs it is difficult to know what percentage of these rebates are passed on as savings to insurers and how much is kept by the PBM. 

  • There have been a number of complaints that allege the PBMs are accepting undisclosed incentives from manufactures and not passing rebates through to insurers3
  • A more recent complaint alleges that manufacturers increased list prices while keeping net prices for insurers unchanged in order to incentivize PBMs (through profiting on the spread) to promote their products over competing products. 

Towards the end of 2016 Express Scripts received subpoenas from the DOJ and United States Attorney's Office requesting information about its relationship with pharmaceutical companies, specialty pharmacies, prescription drug plan clients and payments made to and from those entities4.

Open questions

With most consumers at some stage having to pay the list prices for drugs, the questions is, how much are the PBMs profiting from the “Spread”?

To date PBMs have received surprising little scrutiny over drug price increases, however is it time to start taking a deeper look into their business model?

To read a full overview of the pharmaceutical market, including detailed overviews of the full supply and payment chain, please click here

1The Express Scripts 2014 Drug Trend Report

2The 2016 Economic Report on Retail, Mail and Specialty Phamacies

3“Federal and State Litigation Regarding Pharmacy Benefit Managers”

4http://www.reuters.com/article/express-scripts-subpoena-idUSL1N1CV29S