What are Pharmacy Benefit Managers? A health economist explains how a scarcity of competition is driving up drug prices for everybody

Wegovy and Ozempic are weight-loss drugs that promise to rework the treatment of obesity, heart disease and other chronic conditions that afflict thousands and thousands of Americans. But while everyone agrees that these drugs have the potential to alter lives, nobody can agree on the most effective approach to pay for them.

Wegovy sold for a List price – or price before discounts – from $1,349 per thirty days within the US. In Canada the identical drugs cost $265 and within the UK they cost lower than half. These dramatic differences illustrate a bigger problem: the list prices of patented drugs within the United States are far higher than in other wealthy countries.

US Senator Bernie Sanders spoke in favor of it many Americans when he said the high drug costs in America are “not just an economic issue” but “an profound moral question.”

Moral outrage results in the seek for villains. Joe Kernan, host of the CNBC business show “Squawk box“, summed it up when he asked: “Who’s kidding us here?” The PBMs? The drug manufacturers?”

As Health Economist Who writes about it? Innovations within the healthcare sectorI actually have spent much of the last five years excited about these questions. What I've learned is that prime list prices for drugs don't say much about who's screwing whom. To truly understand the drug pricing problem within the United States, it’s worthwhile to start with the tricky economics PBMs or pharmacy profit managers.

What are Pharmacy Benefit Managers?

More and more pharmacy profit managers were popping up Late Nineteen Sixties as a provider of claims processing and administration services for health insurers. Over time, they became key intermediaries between drug manufacturers and the various insurers, employers, and government entities that purchase drugs on behalf of their members, constituents, and beneficiaries.

Mergers between PBMs have resulted in a market dominated by a small variety of very large players. In 2023, the three largest – OptumRx, Express Scripts and CVS Caremark – have made it 79% of US prescription claims and served around 270 million customers.

The primary role of those corporations is to barter prices, affordability, and access to prescribed drugs. You do that through Operating and designing formsthese are lists of medicines covered by insurers.

Forms also assign medications different levels which determine what patients should pay out of pocket to get the medication. Generic medications are typically assigned to the tier with the bottom out-of-pocket costs. Patented drugs which might be preferred by insurers are placed in a higher-cost tier, and non-preferred drugs are placed in a tier that requires patients to pay much more. Some medications may even be excluded from the drug list entirely, meaning they will not be covered by insurance.

Tiering determines how inexpensive a drug is for consumers and the actual drug price insurers pay. Drug manufacturers compete with one another for placement at the specified formulation levels by offering PBMs significant discounts from their list price. The price at which the PBM obtains the drug for its customers is the web price – the list price minus the drug manufacturer's rebate.

When a drug manufacturer increases its rebate, the web price falls, even when publicly advertised list prices remain high. For this reason, specializing in list prices when determining the price of a drug might be misleading.

The price is correct?

Drug list prices are public knowledge, but drug manufacturers' rebates on PBMs are closely guarded secrets. That makes it difficult to know exactly how much insurers pay for many prescribed drugs.

This secrecy raises difficult questions. Are PBMs using their size and bargaining power to extract lower net prices from drug manufacturers? Or are PBMs using their dominant market positions and opaque business practices to counterpoint themselves on the expense of their customers and the remaining of society?

Surprisingly, the reply to each of those questions is yes. When competition for drug placement works because it should, competition forces drug manufacturers to supply significant discounts to the published list price. As a result, insurers and consumers profit from a reduced net price for medicines. However, formula competition might be undermined in various ways.

For example, in a 2024 report, the US Federal Trade Commission found evidence that the manufacturer was producing a patented type of insulin higher discounts offered to a PBM if competing insulins were placed at a less favorable level of a formulation or excluded entirely. This regulation limits consumer alternative. By excluding a less expensive generic equivalent, the agreement would also favor a dearer drug, increasing patient costs. The widespread use of such exclusion discounts could even discourage latest generics and reduce competition.

Introduction of biosimilar drugs made specifically for PBMs Substituting expensive biologics manufactured elsewhere can even undermine formulation competition. When PBMs favor their proprietary products in formulations, this reduces the inducement for other drugmakers to introduce competing products. The result’s each less competition and better prices.

Competition throughout the formulation can be distorted when drug manufacturers publish contributions very high list prices. This artificially increases rebates for PBMs without reducing net prices for insurers and other parties. Inflated list prices also increase drug costs for some patient groups – particularly those that would not have medical insurance or have high deductibles.

Market competition

Just as fair competition can break down throughout the PBM forms, it may also break down available in the market for PBM services.

The current regulatory environment within the US tolerates overly large PBMs that engage in anti-competitive practices to build up excessive profits. Without strong competitors, dominant PBMs can charge customers high fees and keep a bigger portion of drugmaker rebates for themselves.

In theory, this problem should correct itself. High profits are intended to draw latest competitors into the industry. Competition from these latest entrants is prone to drive down fees and reduce the share of discounts these corporations retain. However, things are different in practice as the biggest PBMs have done this merged with the biggest health insurers. CVS merged with Aetna. Express Scripts and OptumRx merged with Cigna and UnitedHealthcare, respectively. These mixtures reduce the variety of potential customers for brand spanking new PBMs and thus prevent latest competitors from entering the market.

Even belligerent upstarts who could upend the establishment are at a drawback because of ordinary contracting practices. Large PBMs, for instance, often insist on “Most-favored-nation agreements that require drug manufacturers to match or exceed the costs they provide to other buyers. These contracts eliminate the competitive advantage that a brand new PBM could gain by achieving higher prices than incumbents.

There is growing concern amongst experts that dominant PBMs are also using formularies to funnel profitable “specialty prescriptions” to pharmacies with which they’re affiliated. Pharmacies affiliated with the three largest PBMs increased their share of the specialty drug market 55% to 67% between 2016 and 2023. Concerns about such anti-competitive practices have led to this non-partisan laws to force PBMs to sell their retail or mail-order pharmacies.

Who are the villains?

So, are PBMs ripping us off? If we didn't have PBMs, we might should invent them – or something similar – to get reasonable prices for patented drugs. But the concentration of market power in a couple of corporations threatens to destroy the worth they create.

Increasing competition within the PBM market will likely require a bigger variety of smaller PBMs, and enormous insurers might also have to divest their PBM units.

Contrary to popular belief, smaller PBMs are prone to be just as capable of negotiate a low net price for Wegovy and other patented drugs as larger PBMs. Once a certain minimum size is reached, the competition for the position of the forms and never the PBM size is vital. A more competitive and transparent marketplace for PBM services will help be sure that this competition stays fair and transparent – for the Benefits for patrons and society.

In this sense, PBMs will not be the villain. Too much market power in too few hands is the issue, and that may very well be fixed with more competition, sensible regulation and vocal consumers.