What Is the Pharmacy Benefit Management (PBM) Industry?
Pharmacy benefit management (PMB) companies serve as the middlemen between insurance companies, pharmacies and manufacturers securing lower drug costs for insurers and insurance companies. PBMs do this through negotiating with pharmacies and drug manufacturers to secure discounts on drug prices, then pass these discounts along to insurance companies, slightly up-charging the drugs or retaining portions of rebates in order to secure profit.
- Pharmacy benefit managers negotiate with drug makers to secure a discount and then pass the cost savings onto insurers.
- These companies make money by up-charging the drugs or keeping some of the rebates.
- The top players in the industry include Express Scripts, CVS Health, and UnitedHealth Group’s OptumRx.
- The biggest criticism of PMBs is the lack of transparency in their business models.
How the Pharmacy Benefit Management Industry Works
Pharmacy benefit management (PBM) companies collectively bring in over $350 billion in revenues each year. Since drug costs have exploded over the years, insurance companies have relied more on PBMs to control costs.
Insurance companies rely on PBMs to manage costs, and PBMs leverage this backing to negotiate with drug manufacturers by demanding discounts on drugs in exchange for putting the manufacturer’s drugs in front of millions of customers. Furthermore, PBMs negotiate contracts with pharmacies to create networks of retail pharmacies for drug distribution.
Source: The Wall Street Journal
How PBMs Make Money
PBMs exploit several revenue streams. They charge service fees for negotiating with pharmacies, insurance companies, and drug manufacturers, and for processing prescriptions and operating mail-order pharmacies. Contracts with the largest insurance companies can quickly change the prospects of a PBM, giving it huge power when negotiating with drug manufacturers and pharmacies. Thus, signing a new contract usually results in a double-digit boost to the stock price, so it is no surprise that competition is fierce, with PBMs working to optimally position themselves for contract negotiation with insurance companies.
Such competition has led to a large number of M&A deals in this space—consolidation allows PBMs to increase in size, and thus their negotiation power. Economies of scale explain the importance of consolidation and why the majority of market share is currently occupied by only a few major players, namely Express Scripts, CVS Health, and UnitedHealth Group’s OptumRx.
In addition to M&A deals among PBMs, there has also been consolidation between pharmacies and PBMs due to the inherent synergies between the two. Rite Aid bought out EnvisionRX in 2015, and CVS Caremark has long had direct access to CVS’s retail pharmacy network.
Criticism of Pharmacy Benefit Managers (PBMs)
As the sheer nature of the business likely implies, PBMs are common targets of lawsuits and government scrutiny. As third-party negotiators, many of their business practices are opaque, so PBMs haven’t always disclosed rebates, discounts, itemized billing statements or the percentage of savings passed on to insurers.
State legislatures have been pushing for greater transparency and disclosure provisions to better regulate these companies. In addition, there has been pressure to force fiduciary duty onto PBMs which would require them to act in the best interest of insurers and insurance plans, similar to financial advisors' legal obligation to act in the best interest of their clients. All of this serves to indicate possible regulation of the PBM industry that could affect future profitability.