PBM Market Dysfunction: Prescription for Patient Exploitation

We know that out-of-pocket drug costs are rising, but too many of us don’t really understand why or how. The process of pricing our medications is not transparent. 

The opacity and complexity of the drug pricing system undermines the possibility for dynamic, price competition between pharmacy benefit managers (PBMs) bidding to win contracts. Government agencies and employee health plans, alike, select PBMs without real understanding or prescription drug costs or ability to compare them. The absence of transparent, price-based competition provides opportunities for PBMs to reap extremely high rates of profits for themselves, rather than passing savings through to purchasers. The dysfunctional PBM marketplace is a prescription for PBM exploitation of prescription drug purchasers: public and private sector health plans, taxpayers, and patients who ultimately pay the price.

PBMs act as middlemen between prescription drug manufacturers and patients’ health plans.  They determine which drugs employee health plans can cover by creating lists of PBM-allowed prescription drugs called “formularies.” By aggregating large numbers of prospective prescription drug purchasers, PBMs are able to leverage a significant discounts or “rebates” from the initial list price that a pharmaceutical company sets for a medicine in exchange, for preferred placement on PBM formularies. At this stage, PBMs amass substantial prescription drug savings, but through complex pricing schemes, they are able obfuscate the true cost of the medicines and avoid passing a large portion of those savings through to public health insurance programs like Medicare and Medicaid, employee health plans, pharmacists and patients, who pay the final price.

In addition, PBMs set reimbursement rates paid to pharmacies for filling patient prescriptions.  As middlemen between pharmaceutical companies and pharmacies, too, PBMs are positioned to run another profitable pricing scheme, known as “spread pricing” through which they reimburse pharmacists substantially less for filling prescription at the counter than they charge health plans for prescription drug purchase. Spread pricing has driven up PBM profit margins substantially while driving independent pharmacists out of business and depriving communities of robust retail competition for prescription drugs that benefits consumers.

The PBM industry was originally launched with the promise of lowering prescription drug prices and ensuring that patients could afford medicines they accessed as health plan benefits. In reality, PBMs are diverting potential prescription drug savings into the highest rates of profit of any corporations in the prescription drug supply chain. Three major PBM companies make up 75% of the market. These PBMs have become so profitable over time, they are among the Fortune 25 companies – ranked higher than the drug manufacturers whose prices they had promised to control.

How PBMs Drive up Costs



PBMs calculate some patients’ out-of-pocket costs based on the list price of a medicine, rather than the lower price the PBM negotiated with the pharmaceutical company. 


Local Pharmacies

PBMs reimburse independent pharmacies for prescriptions at such low rates that it’s hard for some to stay in business. 



Self-insured employers often hire PBMs to manage the prescription drug benefits for their employees. Many employers are not seeing the savings  PBMs have negotiated with pharmaceutical companies for prescription medicines.


States Governments

Many states have discovered that PBMs overcharged their public employee health plans and Medicaid programs for prescription medicines.

The PBM Reverse Auction Solution

State policymakers are examining innovative approaches to lower the out-of-pocket costs of prescription medications. This includes redirecting PBM savings with prescription drug manufacturers to taxpayers, patients, and public and private sector health plans.  One of the most promising and successful of these solutions is the “PBM Reverse Auction,” which helps transform the opaque and uncompetitive process for setting prescription drug prices into a transparent, dynamically competitive marketplace where PBMs would compete with one another for any given state’s business. Three states have already taken action:


The PBM reverse auctions conducted in New Jersey enabled the state to reduce its spending on prescription medicines by an unprecedented...



The state recently enacted signed legislation to create a PBM reverse auction. A recent study shows that the state can expect to save...



Maryland Governor Larry Hogan recently signed into law the Maryland Competitive Pharmacy Benefits Manager Marketplace Act...