Pharmacy benefit managers, commonly known as PBMs, are the unseen middlemen of the health care system. They were originally created to negotiate discounts and streamline drug benefits for insurers, employers and government insurance programs. PBMs have evolved into powerful entities with significant influence over how much we pay for medications.

Pharmacy benefit managers negotiate prices with drug manufacturers, decide which drugs are covered by insurance and determine how much pharmacies are reimbursed. While they were created to reduce drug costs, their increasing control over the supply chain and lack of transparency has led to hidden fees, conflicts of interest and anticompetitive practices.

These middlemen do offer important benefits, particularly for smaller health plans and discount services like GoodRx. Some smaller pharmacy benefit managers, such as Capital Rx and Navitus, operate on a transparent, pass-through model. They don’t profit by charging insurers more than they should, a practice called spread pricing. Under spread pricing, some pharmacy benefit managers charge insurers far more for a drug than they reimburse the pharmacy for it, pocketing the difference. Other PBMs, however, instead charge a flat administrative fee for their services.

Companies like GoodRx use PBM-negotiated discounts to provide lower cash prices for people without insurance or those with high insurance deductibles. While GoodRx isn’t a pharmacy benefit manager, it does rely on these networks to deliver discounted drug pricing, which benefits patients.

At the heart of concerns about pharmacy benefit managers are the “Big Three” — CVS Caremark, Express Scripts (owned by Cigna), and OptumRx (owned by UnitedHealth Group). They control nearly 80% of the market. These companies are vertically integrated with insurers and their own pharmacy operations. These pharmacy benefit managers own or are owned by insurance companies. The result is that they negotiate drug prices, steer patients to their own pharmacies, and provide insurance coverage for the drug treatments that are most lucrative to their bottom line.

Employers have a role to play in PBM reform, though they are seldom mentioned when the topic shows up. Many employers sign contracts with insurers that allow pharmacy benefit managers to engage in spread pricing and opaque rebate structures. The contracts restrict which drugs are covered by insurance, without fully considering the financial impact to patients. Employers need to demand more transparency from their insurers and PBMs. Doing so will ensure that rebates and negotiated savings actually lower costs for employees.

With Congress slow to act on PBM reform, states have stepped in. Some states have banned spread pricing in Medicaid programs, forcing pharmacy benefit managers to pass through actual drug costs. Others have required full transparency in rebate negotiations. But states, including Michigan, can do more.

Many state health care plans are self-insured, which means lawmakers have a stake in reform. Here are some ways they can start:

• Require pharmacy benefit managers to pass 100% of rebates to insurers and consumers.
• Ban spread pricing in both Medicaid and commercial plans.
• Encourage the use of other cash and discount prescription drug programs.

Product benefit managers aren’t inherently bad. But the biggest players lack transparency and have engaged in unsavory practices that put their bottom line ahead of patient well-being. State policymakers should adopt reforms to restore the original purpose and benefit of pharmacy benefit managers.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.