Pharmacy Benefit Managers (PBMs) have been under the microscope. In the U.S., PBMs serve as middlemen between insurers, drug manufacturers and pharmacies, primarily by negotiating rebates on medications and promoting the use of generic drugs. PBMs claim these activities help lower drug costs and increase access to affordable care; however, their pricing model, lack of transparency and market dominance have been attracting scrutiny—and increasingly, competition.
The Business Model
On the revenue side, PBMs get paid by insurance companies to secure rebates from drugmakers in exchange for favorable placement in the insurers’ health plans. On the cost side, PBMs reimburse pharmacies for dispensing medications to patients—that is, pharmacies create claims and PBMs establish reimbursement rates based on a complex formula. PBMs seek to make money by charging insurance companies more for drugs than what the PBMs pay to the pharmacies—a practice known as “spread pricing.”
The Controversy
In theory, all that haggling with drugmakers should reduce costs for both insurance plans and patients. Yet critics argue that the pricing arrangements are notoriously opaque, and that PBMs may not always pass along negotiated savings to their customers.
Key concerns include:
- The rebate-driven pricing model. Critics warn that calculating rebates based on a percentage of a drug’s listed price incentivizes PBMs to favor higher-priced medicines over lower-priced ones, potentially harming patients who pay co-insurance or out-of-pocket based on those inflated prices.
- Vertical integration. Insurance companies have acquired major PBMs and pharmacies, creating potential conflicts of interest when deciding which drugs to make available and ultimately what patients will pay for them.
- Market concentration. The PBM industry is currently dominated by a handful of players—including CVS Caremark, Cigna Express Scripts and OptumRx (a unit of United Healthcare). Critics worry that these giants—which account for over 80% of the market—exert significant influence over which drugs are covered by insurance and how much they cost.
In one case, reported in the Wall Street Journal,1 a Type-1 diabetes patient was paying $630 out-of-pocket for a 100-day supply of branded insulin because his insurance plan only covered that version of the drug; meanwhile, an identical, unbranded version was available. According to the story, when the patient decided to forego insurance coverage and purchase the unbranded insulin directly, he found he was able to purchase 125-day supply for just $105.
The Future
In our view, the traditional PBM model will continue to be under threat—including from President Trump2—and increasingly vulnerable to disruption.
Two potential challengers include Cost Plus Drugs (headed by billionaire Mark Cuban) and Amazon Pharmacy. These companies aim to avoid rebates, spread pricing and other controversial practices by offering medications directly to consumers at transparent prices, potentially delivering meaningful savings to patients.
While we expect the big PBMs will do what they can to protect their franchises, we believe mounting regulatory scrutiny and competitive pressures could catalyze broader industry reform and potentially diminish their market power and profitability. At the same time, we expect these reforms will help improve access to more affordable care and ultimately translate into better long-term returns for healthcare investors.
