Your PBM is the Problem

August 24, 2023

Josh Golden, SVP, Strategy

Your PBM is the Problem was published by Validation Institute and featured in its Valid Points newsletter on August 23, 2023.

It’s 2023.  Plan sponsors are struggling with the relentless increase in prescription drug prices.  Specialty pharmaceutical costs continue to skyrocket, and the entire system is becoming unsustainable.

But let’s be honest… we were singing the same song in 2022.  And 2015.  The truth is that traditional PBMs have had 20 years to resolve the drug pricing crisis in the United States.  This is the year that we collectively admit that they have failed.

Of course, what we see as a failure to manage drug pricing, most PBMs view as a multi-billion-dollar success.  Despite their rhetoric, traditional PBMs have no interest in seeing drug prices decrease.  Two of the biggest sources of traditional PBM profit are dispensing margin on specialty drugs and retention of manufacturer rebates.  Both are calculated as a factor of list prices – and as those list prices increase, so does your PBM’s profitability.  Make no mistake:  traditional PBMs want drug prices to go down about as much as you want your 401(k) balance to decrease.  

When challenged about their role in drug price inflation, traditional PBMs often point to forces outside their control.  After all, pharmaceutical companies control average wholesale price (AWP), so they are responsible for drug price inflation, right?  But a closer look at supply chain economics reveals that pharma’s net profit on brand drugs may actually be shrinking,1 and generic drugs have been steadily deflating for 10 years or more.2  If prices at the counter continue to rise while manufacturers’ profits fall, where are those dollars all going?  They are quietly absorbed by the world’s most sophisticated middleman, the traditional PBM.

Drug Utilization > Drug Price

We know that price is just one part of the drug cost equation.  The other part – utilization – has an even greater impact on the total cost that plan sponsors and patients pay.  

In fact, prices can be a distraction.  Yes, those discounts and rebate guarantees may look good in a spreadsheet.  But your plan costs over the coming year will largely be determined outside the spreadsheet, driven by the thousand tiny decisions your PBM will make on your behalf.  Will they approve that prior authorization (PA) for cosmetic use of a weight-loss medication?  Will they add an overpriced drug to the formulary just to chase a retained rebate on the back end?  Will the PBM auto-refill a mail order prescription just a bit earlier than needed to sneak in an extra 90-day delivery at the end of the year?  

As a PBM’s hidden profits accumulate, they inevitably influence corporate behavior.  Could this be why traditional PBMs who rely on dispensing as a primary source of profit frequently have specialty drug PA approval rates north of 90%?  Asking a traditional PBM to serve as a steward of your specialty drug budget is like handing a toddler a bag of candy and asking them to only eat one piece.  Left unattended, that bag will be empty in no time, and so will your budget.

The Big Squeeze

The PBM industry is heavily consolidated, both horizontally (three entities control 80% of the PBM market3) as well as vertically (those same three vendors are aligned with the three largest medical carriers). After countless mergers and acquisitions, the largest vendors in the industry face an interesting dilemma: they’ve run out of room to expand their PBM membership, effectively reaching a growth plateau.  With no real prospects for material organic membership growth, they’re left trying to figure out how to squeeze more profit from their existing books of business.

This is where the traditional PBM’s ability to influence price and utilization has really paid dividends.  Despite flat or modest membership growth, the PBM divisions of the major carriers have generated tremendous increases in net revenue over the past several years.  They’ve managed to expand their profit on the backs of a relatively stable population, but you can only squeeze so much before plan sponsors, patients, and politicians start asking where all the juice is going.

A Turning Point for the Industry…?

2024 might just be the year that this all gets turned on its head.  The FTC’s investigation of the largest traditional PBMs is well underway.  The Consolidated Appropriations Act and other state and federal disclosure rules have many PBMs squirming.  And Congress seems poised to enact fresh legislation to further regulate traditional PBMs.  

Most importantly, plan sponsors – the true influencers of the supply chain – are continuing their migration away from traditional PBMs.  Interest in alternative PBM models is at an all-time high.  And employers are now pushing their consultants to look “beyond the spreadsheet,” seeking to better understand how PBM profit models can impact drug mix and total costs over time.  

Maybe you’re one of the lucky few employers that experienced some pharmacy cost trend relief last year.  But if you’re like the vast majority of plan sponsors I speak to, your costs have continued their relentless upward climb, despite the barrage of programs and solutions your PBM has sold you.  

The problem is not your members or the conditions they are trying to manage.  It’s not your copays or your deductibles.  The problem is your PBM.  

To view Capital Rx’s Validation Reports for Savings and Contractual Integrity, CLICK HERE.

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1 Tales of the Unsurprised: Brand-Name Drug Prices Fell for the Fourth Consecutive Year. Pembroke Consulting, Inc. d/b/a Drug Channels Institute. January 4, 2022.

2 As CMS drug pricing data remains missing, 46brooklyn finds solace in deflating generic drug costs. 46brooklyn Research. March 23, 2022.

3 The Top Pharmacy Benefit Managers of 2022: Market Share and Trends for the Biggest Companies. Pembroke Consulting, Inc. d/b/a Drug Channels Institute. May 23, 2023.

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