Pharmacy benefit management

Administration of prescription drug programs in the United States

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In the United States, a pharmacy benefit manager (PBM) is a third-party administrator of prescription drug programs for commercial health plans, self-insured employer plans, Medicare Part D plans, the Federal Employees Health Benefits Program, and state government employee plans.[1][2] According to the American Pharmacists Association, "PBMs are primarily responsible for developing and maintaining the formulary, contracting with pharmacies, negotiating discounts and rebates with drug manufacturers, and processing and paying prescription drug claims."[3][4] PBMs operate inside of integrated healthcare systems (e.g., Kaiser Permanente or Veterans Health Administration), as part of retail pharmacies (e.g., CVS Pharmacy), and as part of insurance companies (e.g., UnitedHealth Group).[1][4]

As of 2016, PBMs managed pharmacy benefits for 266 million Americans. In 2017, the largest PBMs had higher revenue than the largest pharmaceutical manufacturers, indicating their increasingly large role in healthcare in the United States.[5] However, in 2016 there were fewer than 30 major PBM companies in this category in the US,[1] and three major PBMs (Express Scripts, CVS Caremark, and OptumRx of UnitedHealth Group) comprise 78% of the market and cover 180 million enrollees.[1][6]

## Business model[edit]

In the United States, health insurance providers often hire an outside company to handle price negotiations, insurance claims, and distribution of prescription drugs. Providers which use such pharmacy benefit managers include commercial health plans, self-insured employer plans, Medicare Part D plans, the Federal Employees Health Benefits Program, and state government employee plans.[1] PBMs are designed to aggregate the collective buying power of enrollees through their client health plans, enabling plan sponsors and individuals to obtain lower prices for their prescription drugs. PBMs negotiate price discounts from retail pharmacies, rebates from pharmaceutical manufacturers, and mail-service pharmacies which home-deliver prescriptions without consulting face-to-face with a pharmacist.[7]

Pharmacy benefit management companies can make revenue in several ways. First, they collect administrative and service fees from the original insurance plan. They can also collect rebates from the manufacturer. Traditional PBMs do not disclose the negotiated net price of the prescription drugs, allowing them to resell drugs at a public list price (also known as a sticker price) which is higher than the net price they negotiate with the manufacturer.[8] This practice is known as "spread pricing".[9] Savings are generally considered trade secrets.[10] Pharmacies and insurance companies are often prohibited by the PBM from discussing costs and reimbursements. This leads to lack of transparency. Therefore, states are often unaware of how much money they lose due to spread pricing, and the extent to which drug rebates are passed on to enrollees of Medicare plans. In response, states like Ohio, West Virginia, and Louisiana have taken action to regulate PBMs within their Medicaid programs. For instance, they have created new contracts that require all discounts and rebates to be reported to the states. In return, Medicaid pays PBMs a flat administrative fee.[11]

### The formulary[edit]

Main article: Formulary (pharmacy)

PBMs advise their clients on ways to "structure drug benefits" and offer complex selections at a variety of price rates from which clients choose. This happens by constructing a "formulary" or list of specific drugs that will be covered by the healthcare plan. The formulary is usually divided into several "tiers" of preference, with low tiers being assigned a higher copay to incentivize consumers to buy drugs on a preferred tier. Drugs which do not appear on the formulary at all mean consumers must pay the full list price. To get drugs listed on the formulary, manufacturers are usually required to pay the PBM a manufacturer's rebate, which lowers the net price of the drug, while keeping the list price the same.[12] Pharmaceutical manufacturers say that in order to cover the cost of these rebates, they are forced to raise the price of drugs. For example, the president of Eli Lilly and Company claims the cost of discounts and rebates accounts for 75% of the list price of insulin. PBMs such as Express Scripts claim rebates are a response to rising list prices, and are not the cause of them.[13]

The complex pricing structure of the formulary can have unexpected consequences. When filing an insurance claim, patients usually are charged an insurance copayment which is based on the public list price, and not the confidential net price. Around a quarter of the time, the cost of the insurance copayment on the list price is more than the entire price of the drug bought directly in cash. The PBM can then pocket the difference, in a practice known as a "clawback".[14] Consumers can choose to buy the drug in cash, but in their contracts with pharmacies, PBMs would forbid pharmacists from telling consumers about the possibility of buying their medication for a cheaper price without an insurance claim, unless consumers directly ask about it.[15] Since 2017, six states have passed legislation making such "gag clauses" illegal.[16] This has recently been followed by a federal bans on gag orders[17] for private insurance effective Oct 2018,[18] and for Medicare effective Jan 2020.[19]

### Net effect on consumers[edit]

Overall, the PBM industry claims to provide significant cost savings for end users. For example, in 2015, CVS Caremark said that it reduced its plan members' prescription drug spending to 5%, down from 11.8% in 2014.[20] However, such conclusions can be controversial. A 2013 investigation of PBM marketing from Fortune Magazine showed: Drug pricing is difficult to untangle and customers have no way of knowing how much they are saving.[21]

## History[edit]

In 1968, the first PBM was founded when Pharmaceutical Card System Inc. (PCS, later AdvancePCS) invented the plastic benefit card.[1] By the "1970s, [they] serve[d] as fiscal intermediaries by adjudicating prescription drug claims by paper and then, in the 1980s, electronically".[22]: 34

By the late 1980s, PBMs had become a major force "as health care and prescription costs were escalating".[23] Diversified Pharmaceutical Services was one of the earliest examples of a PBM which came from within a national health maintenance organization United HealthCare (now United HealthGroup).[24]: 304 [25] After SmithKline Beecham acquired DPS in 1994, Diversified played a pivotal role in its Healthcare Service division and by 1999 UnitedHealth Group accounted for 44% of Diversified Pharmaceutical Services's total membership.[25] Express Scripts acquired Diversified in April 1999 and consolidated itself as a leading PBM for managed care organizations.[25]

In August 2002, the Wall Street Journal wrote that while PBMs had "steered doctors to cheaper drugs, especially low-cost generic copies of branded drugs from big pharmaceutical companies" from 1992 through 2002, they had "quietly moved" into marketing expensive brand name drugs.[26]

In 2007, when CVS acquired Caremark,[1] the function of PBMs changed "from simply processing prescription transactions to managing the pharmacy benefit for health plans",[22]: 34 negotiating "drug discounts with pharmaceutical manufacturers",[22]: 34 and providing "drug utilization reviews and disease management".[22]: 34 PBMs also created a formulary to encourage or even require "health plan participants to use preferred formulary products to treat their conditions".[22]: 34 In 2012, Express Scripts and CVS Caremark transitioned from using tiered formularies, to those that excluded drugs from their formulary.[1][27]

## Market and competition[edit]

As of 2004, the Federal Trade Commission found PBMs operated in a marketplace with "vigorous competition".[28] And as of 2013, in the United States, a majority of the large managed prescription drug benefit expenditures were conducted by about 60 PBMs.[29] Few PBMs are independently owned and operated. PBM's operate inside of integrated healthcare systems (e.g., Kaiser Permanente or Veterans Health Administration), as part of retail pharmacies, major chain drug stores (e.g., CVS Pharmacy or Rite-Aid), and as subsidiaries of managed care plans or insurance companies (e.g., UnitedHealth Group).[1][4] However, in 2016 fewer than 30 major PBM companies were in this category in the US,[1] and only three major PBMs (Express Scripts, CVS Health, and OptumRx of UnitedHealth Group) comprised 78% of the market, covering 180 million enrollees.[1][6]

In 2015, the three largest public PBMs were Express Scripts, CVS Health (formerly CVS Caremark) and United Health/OptumRx/Catamaran.[30][31][32] As of 2018, the three largest PBMs controlled more than 80% of the market.[33]

### Express Scripts[edit]

In 2012 Express Scripts acquired rival Medco Health Solutions for $29.1 billion and became "a powerhouse in managing prescription drug benefits".[34] As of 2015, Express Scripts Holding Company was the largest pharmacy benefit management organization in the United States.[35] with 2013 revenues of $104.62 billion.[36]

In October 2015 Express Scripts began reviewing pharmacy programs run by AbbVie Inc and Teva Pharmaceuticals Industries Ltd regarding the potential use of tactics that "can allow drugmakers to work around reimbursement restrictions" from Express Scripts and other insurers. These reviews resulted from investigations into "questionable practices" at Valeant Pharmaceuticals International Inc's partner pharmacy, Philidor Rx Services.[35]

### CVS Health[edit]

In 1994, CVS launched PharmaCare, a pharmacy benefit management company providing a wide range of services to employers, managed care organizations, insurance companies, unions and government agencies.[37] By 2002 CVS' specialty pharmacy ProCare, the "largest integrated retail/mail provider of specialty pharmacy services" in the United States,[38]: 10 was consolidated with their pharmacy benefit management company, PharmaCare.[38][39]: 4 Caremark Rx was founded as a unit of Baxter International and in 1992 spun off from Baxter as a publicly traded company. In March 2007, CVS Corporation acquired Caremark to create CVS Caremark, later re-branded as CVS Health.[40]

In 2011 Caremark Rx was the nation's second-largest PBM. Caremark Rx was subject to a class action lawsuit in Tennessee, which alleged that Caremark kept discounts from drug manufacturers instead of sharing them with member benefit plans, secretly negotiated rebates for drugs and kept the money, and provided plan members with more expensive drugs when less expensive alternatives were available. CVS Caremark paid $20 million to three states over fraud allegations.[41]

### UnitedHealth Group[edit]

OptumRx, one of the Optum businesses of UnitedHealth Group Inc, has been a leading PBM.[42] In March 2015 UnitedHealth Group acquired Catamaran Corporation for about $12.8 billion to extend this PBM business.[43][44]

## Advocacy and lobbying[edit]

Many Pharmacy benefit managers are represented by the trade association the Pharmaceutical Care Management Association.

### Biosimilars[edit]

Main article: Biosimilars

PBMs have been strong proponents in the creation of a U.S. Food and Drug Administration pathway to approve biosimilar versions of expensive specialty drugs which treat conditions like Alzheimer's, rheumatoid arthritis and multiple sclerosis.[45] PBM's support so-called biosimilar legislation which does not grant brand name drug manufacturers monopoly pricing power.[46] In 2015 the Federal Trade Commission found that patents for biologic products already provide enough incentives for innovation and that additional periods of exclusivity would "not spur the creation of a new biologic drug or indication" and "imperils" the benefits of the approval process.[47]

## Controversies and litigation[edit]

In 1998, PBMs were under investigation by Assistant U.S. Attorney James Sheehan of the federal Justice Department, and their effectiveness in reducing prescription costs and saving clients money was questioned.[23]

In 2004, litigation added to the uncertainty about PBM practices.[41][48] In 2015, there were seven lawsuits against PBMs involving fraud, deception, or antitrust claims.[1][6]

State legislatures have been using "transparency," "fiduciary," and "disclosure" provisions to improve the business practices of PBMs.[48] In 2011, the Mississippi Board of Pharmacy formed a new division of the Pharmacy Benefit Managers, with a mandate to license and regulate PBMs.[49]

A 2013 Centers for Medicare & Medicaid Services study found negotiated prices at mail order pharmacy to be up to 83% higher than the negotiated prices at community pharmacies.[50]

A 2014 ERISA (Employee Retirement Income Security Act of 1974) hearing noted that vertically integrated PBMs may pose conflicts of interest, and that PBMs' health plan sponsors "face considerable obstacles in...determin[ing] compliance with PBM contracts including direct and indirect PBM compensation contract terms".[51]

In 2017, the Los Angeles times wrote that PBMs cause an inflation in drug costs, especially within the area of diabetes drugs.[52]

United States Secretary of Health and Human Services Alex Azar stated regarding PBMs, "Everybody wins when list prices rise, except for the patient. It’s rather a startling and perverse system that has evolved over time."[53]

On January 31, 2019, Health and Human Services released a proposed rule to remove Anti-kickback Statute, safe harbor protections for PBMs and other plan sponsors, that previously allowed PBMs to seek rebates from drug manufacturers.[54]

Ron Wyden said in April 2019 that they were as “clear a middleman rip-off as you are going to find”, because they make more money when they pick a higher priced drug over a lower priced drug.[55]

## See also[edit]

* Online pharmacy
* Preferred pharmacy network

## References[edit]

1. ^ a b c d e f g h i j k l Feldman, Brian S. (March 17, 2016). "Big pharmacies are dismantling the industry that keeps US drug costs even sort-of under control". Quartz. Retrieved March 29, 2016.
2. ^ Gryta, Thomas. "What is a 'Pharmacy Benefit Manager?'". Wall Street Journal. ISSN 0099-9660. Retrieved March 29, 2016.
3. ^ "Pharmacy Benefit Management" (PDF). American Pharmacists Association. July 9, 2009. Retrieved November 4, 2015.
4. ^ a b c Danzon, Patricia (June 29, 2014). "2014 ERISA Advisory Council: PBM Compensation and Fee Disclosure" (PDF). Retrieved March 29, 2016.
5. ^ Schulman, Kevin A.; Richman, Barak D. (2018). "The Evolving Pharmaceutical Benefits Market". JAMA. 319 (22): 2269–2270. doi:10.1001/jama.2018.4269. ISSN 0098-7484. PMID 29625496. S2CID 4655676.
6. ^ a b c Balto, David A. (November 17, 2015). "The State of Competition in the Pharmacy Benefits Manager and Pharmacy Marketplaces" (PDF). House Judiciary Subcommittee on Regulatory Reform, Commercial, and Antitrust Law. Retrieved March 29, 2016.
7. ^ "Pharmaceutical Care Management Association". www.spcma.org. Retrieved March 29, 2016.
8. ^ "The Prescription Drug Landscape, ExploredA look at retail pharmaceutical spending from 2012 to 2016". Pew Charitable Trusts. March 8, 2019. Retrieved April 12, 2019.
9. ^ Jack Torry (April 9, 2019). "Bipartisan leaders of Senate panel call for federal probe of PBMs' pricing methods". The Columbus Dispatch. Retrieved April 9, 2019.
10. ^ Sarpatwari A, Avorn J, Kesselheim AS. An Incomplete Prescription.President Trump’s Plan to Address High Drug Prices. JAMA. 2018;319(23):2373–2374. doi:10.1001/jama.2018.7424
11. ^ Riley, Trish; Lanford, Sarah (April 3, 2019). "States on the Front Line: Addressing America's Drug Pricing Problem". Journal of Legal Medicine. 39 (2): 81–93. doi:10.1080/01947648.2019.1645544. ISSN 0194-7648.
12. ^ Laura Entis (April 9, 2019). "Why Does Medicine Cost So Much? Here's How Drug Prices Are Set". Time. Retrieved April 12, 2019.
13. ^ Rachel Bluth (Kaiser Health News) (April 11, 2019). "The Blame Game: Everyone and no one is raising insulin prices". NM political Report. Retrieved April 13, 2019.
14. ^ Megan Thompson (August 19, 2018). "Why a patient paid a $285 copay for a $40 drug". PBS Newshour. Retrieved April 12, 2019.
15. ^ Susan Jaffe (May 29, 2018). "To Lower Your Medicare Drug Costs, Ask Your Pharmacist For The Cash Price". NPR. Retrieved April 12, 2019.
16. ^ Richard Cauchi (March 14, 2018). "Prohibiting PBM "Gag Clauses" that Restrict Pharmacists from Disclosing Price Options Recent State Legislation 2017-2018" (PDF). National Conference of State Legislatures. Archived from the original (PDF) on March 21, 2018.
17. ^ Maegan Vazquez (October 10, 2018). "Trump signs bills aimed at increasing drug price transparency". CNN. Retrieved April 13, 2019.
18. ^ Pub. L.Tooltip Public Law (United States) 115–263 (text) (PDF)
19. ^ Pub. L.Tooltip Public Law (United States) 115–262 (text) (PDF)
20. ^ Health, CVS. "CVS Health Reports Dramatic Drop in Prescription Drug Trend to 5 Percent, Despite Rising Drug Prices". www.prnewswire.com (Press release). Retrieved March 29, 2016.
21. ^ Eban, Katherine (October 28, 2013). "Painful Prescription" (PDF). Fortune Magazine. 168 (7): 202–7. PMID 24340878. Archived from the original (PDF) on May 3, 2017. Retrieved January 28, 2018.
22. ^ a b c d e Allison Dabbs Garrett; Robert Garis (2007). "Leveling the Playing Field in the Pharmacy Benefit Management Industry". Valparaiso University Law Review. 42 (1): 33–80. Retrieved October 31, 2015.
23. ^ a b Brierton, Janet (December 24, 2003). "Pharmacy Benefit Managers". Hartford, CT: Connecticut General Assembly. Retrieved December 27, 2015.
24. ^ Peter Reid Kongstved (1995). Essentials of Managed Health Care. Vol. 1. `{{cite book}}`: `|work=` ignored (help)
25. ^ a b c "Express Scripts to Acquire Diversified Pharmaceutical Services", PRNewswire, St. Louis, February 9, 1999, archived from the original on January 27, 2018, retrieved October 31, 2015
26. ^ Martinez, Barbara (August 14, 2002). "Pharmacy-Benefit Managers at Times Toil for Drug Firms". The Wall Street Journal. Retrieved December 27, 2015.
27. ^ "Drug Channels: Here Come the 2016 PBM Formulary Exclusion Lists!". www.drugchannels.net. Retrieved March 29, 2016.
28. ^ US Federal Trade Commission & US Department of Justice Antitrust Division, "Improving Health Care: A Dose of Competition," July 2004
29. ^ Shepherd, Joanna (July 2013). "Is More Information Always Better? Mandatory Disclosure Regulations in the Prescription Drug Market". Cornell Law Review Online. 99. SSRN 2234212.
30. ^ "OptumRx". OptumRx. Retrieved June 20, 2018.
31. ^ Catamaran. "Catamaran Shareholders Approve Acquisition by UnitedHealth Group". www.prnewswire.com (Press release).
32. ^ "Pharmacy-Benefit Managers – The Short Answer". Wall Street Journal. March 30, 2015.
33. ^ Kang, So-Yeon; Bai, Ge; DiStefano, Michael J.; Socal, Mariana P.; Yehia, Farah; Anderson, Gerard F. (April 2, 2020). "Comparative Approaches to Drug Pricing". Annual Review of Public Health. 41 (1): 499–512. doi:10.1146/annurev-publhealth-040119-094305. ISSN 0163-7525. PMID 31874070.
34. ^ Sierra, Michelle (July 22, 2011). "Express Scripts takes $14 billion bridge loan". Reuters. Retrieved October 31, 2015.
35. ^ a b Beasley, Deena (October 30, 2015). "Exclusive: Beyond Valeant, U.S. payers scrutinize other drugmaker ties to pharmacies". Los Angeles: Reuters. Retrieved November 1, 2015.
36. ^ "Express Scripts Holding Company FORM 10-K". 2013. Retrieved October 31, 2015.
37. ^ "CVS Caremark, Form 10-K, Annual Report, Filing Date Mar 29, 1995". secdatabase.com. Retrieved March 29, 2013.
38. ^ a b "CVS Annual Report" (PDF). CVS. 2001. Retrieved October 17, 2015.
39. ^ "Overview of the Specialty Drug Trend" (PDF). IMS Health. 2014. p. 11. Retrieved October 5, 2015.
40. ^ "CVS Caremark, Form 8-K, Current Report, Filing Date Mar 23, 2007" (PDF). secdatabase.com. Retrieved March 29, 2013.
41. ^ a b Pfeifer, Stuart (December 16, 2011). "Money & Company". Los Angeles Times. Retrieved January 17, 2014.
42. ^ New Optum Product Helps Companies Better Manage Pharmacy Costs, Irvine, California, October 18, 2012, archived from the original on June 20, 2018, retrieved October 31, 2015`{{citation}}`: CS1 maint: location missing publisher (link)
43. ^ Trefis Team (April 1, 2015). "What The UnitedHealth-Catamaran Deal Means For Walgreens". Forbes. Retrieved October 31, 2015.
44. ^ "The Short Answer: Pharmacy-Benefit Managers". The Wall Street Journal. March 30, 2015. Retrieved October 31, 2015.
45. ^ Schouten, F. (July 29, 2009), "Lobbyists battle over drug sales", USA Today, retrieved October 31, 2015
46. ^ "Our view on generic medications: Drugmakers seek excessive monopolies on 'biologics'", USA Today, August 12, 2009, retrieved October 31, 2015
47. ^ "Follow-on Biologic Drug Competition", Federal Trade Commission, June 2009, retrieved October 31, 2015
48. ^ a b Stan Finkelstein; Peter Temin (2008). Reasonable Rx: Solving the Drug Price Crisis. Upper Saddle River, New Jersey, USA. p. 208. ISBN 978-0-132344494. `{{cite book}}`: `|work=` ignored (help)CS1 maint: location missing publisher (link)
49. ^ "Newsletter" (PDF), Mississippi Board of Pharmacy, Madison, MS, April 2012, retrieved October 31, 2015
50. ^ "Article" (PDF). www.cms.gov.
51. ^ "PBM Compensation and Fee Disclosure". www.dol.gov. Retrieved March 29, 2016.
52. ^ Hiltzik, Michael (June 9, 2017). "How 'price-cutting' middlemen are making crucial drugs vastly more expensive". Los Angeles Times.
53. ^ "Do prescription drug middlemen help keep prices high?". PBS NewsHour. August 11, 2018. Retrieved August 12, 2018.
54. ^ "Public Inspection: Fraud and Abuse: Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees". Federal Register. Retrieved January 31, 2019.
55. ^ "Pharmacy benefit managers face bipartisan criticism". Financial Times. April 9, 2019. Retrieved June 4, 2019.

## External links[edit]

* Pharmacy Benefit Management Institute list of PBM companies

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