There is growing scrutiny about the spend and trend of prescription drugs and the role PBMs play in it. Many view PBMs as part of the problem instead of a solution. PBMs are frequently described in disdain as “middlemen,” blamed for excessive profiteering that drives up the net price of prescription drugs. Calls to regulate them in or, better yet, disintermediate them are in vogue. Let’s dissect the charges against PBMs and motives for them, one by one.
Middleman
PBMs are intermediaries between manufacturers and payers (insurers and self-insured employers), and there’s nothing inherently wrong with being an intermediary. Leonard E. Read’s essay ‘I, Pencil’ posits that the making of a pencil requires the direct and indirect involvement of millions of people. Go ahead, name an organization that does not have both inputs and outputs, whether physical or informational. In essence, all organizations can be viewed as intermediaries, even manufacturers. Are we then at all surprised that the pharmaceutical supply chain includes a few intermediaries, including PBMs? The use of the term middleman to describe PBMs is typically a pejorative act meant to engender negative emotions.
Functional opacity
Payers know what PBMs do for them. Payers (and manufacturers) created the most successful PBMs, figuratively and literally. Critics conveniently ignore or discount PBMs’ transactional and transformational roles, but this functional opacity masks the true nature of PBMs and feeds an appearance of impropriety. PBMs negotiate contracts with drug manufacturers, and these contracts often include rebates in exchange for volume or access or performance. While these rebates have become a political lightening rod, a more rational review of the economic incidence of rebates is beyond the scope of this piece. If fair-balance principles were applied to describing PBMs, then the discussion would include other valued PBM services, such as advising payers, reviewing drug utilization, contracting with pharmacies, managing prior authorization processes and care-management programs, processing claims, and developing and managing formularies. And speaking of formularies — a source of hostility directed at PBMs — payers make the majority of formulary decisions. More often than not, the PBM’s role is to carry them out (e.g., of approximately 60 million lives Express Scripts manages pharmacy benefits, the PBM makes formulary decisions for approximately 20 million lives, whereas payers make the formulary decisions for the remaining 40 million lives).
Transparency equity
A common criticism of PBM behavior is a lack of transparency. But how transparent are those same critics with their own business dealings? Interestingly, some of the smaller PBMs position themselves as being more transparent than the market leaders. But the much greater market share garnered by the supposedly less-transparent, larger PBMs suggests that the lower costs they can deliver via greater purchasing power are valued more than transparency. So much for the claimed desire for greater transparency.
Made-up markup
The claim that PBMs earn too much money appears to be grounded more in emotion than fact. Successful PBMs do make a lot of money, but that is a small fraction of the transactions they are managing. Of the $480 billion spent on prescription drugs in the United States, a recent estimate suggests that PBMs capture $23 billion in gross profits — that’s only about 5 percent. That’s similar to U.S. banks’ net interest margin of 3 percent or so. PBMs’ profits per transaction are, in fact, quite small.
Motives of tomato throwers
Successful intermediaries are a convenient scapegoat for parties frustrated with their own or their clients’ perceived lack of success. The motives behind those stoking the flames should be considered. When PBMs are vilified and labeled an enemy rather than a partner, others may benefit. Benefits consultants who repeatedly refer to PBMs as untrustworthy tricksters may find it easier to sell advisory services to employers that help to select and police PBMs. Sounding the alarm about PBM abuses may help business groups sell meetings that discuss members’ shared perceived problems and solutions associated with PBMs. Analysts who jump on the bandwagon and refer to shady PBM financial transactions may boost sales of their reports and guidance to investors, payers, and manufacturers. Politicians who make PBMs a whipping boy and propose new regulations may score points with constituents who want someone to blame and punish for their rising drug costs. And even some payers who know (or should know) better can point fingers and divert attention away from their inability to bend the vexing health-benefits cost curve.
Proof in the pudding
The continued success of PBMs is evidence that payers think they add value. If payers thought they could do what PBMs do for less, then they would. In general, though, they can’t. Despite profits that make some bristle, PBMs are able to manage prescription drug utilization and costs more efficiently and effectively than payers or other intermediaries. If not, then they would be replaced or disintermediated altogether.
When children play keep away (a.k.a., monkey in the middle), two or more children attempt to keep the ball away from the child in the middle. When payers cover prescription drug benefits, they typically throw the ball to PBMs. While the financial success of PBMs is no proof that all PBMs and their practices are legal and ethical, it is proof that they are valued intermediaries. Competition among PBMs and from potential new entrants (e.g., Amazon) are powerful forces that help manage the PBM market. For those calling for a more regulated PBM market… be careful what you wish for.
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