What Is the Pharmacy Benefit Management (PBM) Industry?
The term pharmacy benefit management (PBM) industry refers to a group of companies that serve as the middlemen between insurance companies, pharmacies, and drug manufacturers. PBMs are responsible for securing lower drug costs for insurers and insurance companies. They accomplish this by negotiating with pharmacies and drug manufacturers. The discounts are then passed onto insurance companies. Profits are generated through the slight up-charging of drugs or retaining portions of rebates.
- Pharmacy benefit managers serve as the middlemen between drug companies and insurers.
- They negotiate discounts with drug makers and pass the cost savings on to insurers.
- These companies make money by up-charging the drugs or keeping some of the rebates.
- This sector of the industry is highly competitive and is characterized by consolidation.
- The biggest criticism of PMBs is the lack of transparency in their business models.
Understanding the Pharmacy Benefit Management (PBM) Industry
Just like other subsectors of the economy, insurance is a multilayered business with many players serving a variety of interests and purposes. This means that insurance companies aren't the only entities that operate in this industry. In fact, it also includes reinsurers, underwriters, and pharmacy benefit management companies.
Insurance companies rely on PBMs to manage costs making them the middleman. PBMs leverage this role by negotiating discounts with drug manufacturers for insurance companies in exchange for putting the manufacturer’s drugs in front of millions of customers. These companies also negotiate contracts with pharmacies to create networks of retail pharmacies for drug distribution.
PBMs exploit several revenue streams. For instance, they charge service fees for:
- Negotiating with pharmacies, insurance companies, and drug manufacturers
- Processing prescriptions
- 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. So it should come as no surprise that competition is fierce, with PBMs working to optimally position themselves for contract negotiation with insurance companies.
The majority of pharmacy benefit management market share is currently occupied by only a few major players, namely CVS Health (32%), Cigna (24%), UnitedHealth Group’s OptumRx (21%), and Humana Pharmacy Solutions (8%).
Source: The Wall Street Journal
The cost of drugs has exploded over the years, leading insurance companies to rely heavily on PBMs to control and reduce their liabilities. As such, the industry has seen increased competition among PBMs as well as consolidation. Mergers and acquisitions (M&A) allow PBMs to increase in size and boost their negotiation power.
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.
The amount brought in by the global pharmacy benefit management industry in revenues each year as of 2020. This amount is expected to reach $735.05 billion by 2027.
Criticism of the PBM Industry
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.