Bloomberg Law
March 3, 2022, 10:45 AM

The Driver Dictating Prescription Drug Benefits: PBMs Explained

Sara Hansard
Sara Hansard

Pharmacy benefit managers — liaisons between pharmaceutical companies and health insurers that run patients’ prescription benefits — are one focal point in the debate over why drug prices are so high in the U.S.

PBMs initially were formed in 1968 to process claims and negotiate lower prices with drugmakers. Now, PBMs administer prescription drug plans for more than 266 million Americans who have health insurance.

The Federal Trade Commission is expected to probe the PBM industry this year about the fairness of their reimbursement policies.

1. What do PBMs do?

PBMs manage patient drug benefits for health insurers, large employers, Medicare prescription drug plans, and other entities that provide health benefits.

They negotiate price discounts from drug manufacturers and determine how pharmacies get reimbursed for distributing prescriptions. They design formularies, lists of preferred drugs within a health plan. They also determine the amount patients pay through copayments.

The Pharmaceutical Care Management Association, which represents PBMs, says they save 40% to 50% on prescription drugs, an average of $962 per person per year.

Where possible, PBMs substitute cheaper generic drugs that are equivalent to brand name drugs,

Three PBMs control up to 85% of the market. They are UnitedHealth Group Inc.’s OptumRx, CVS Health Corp.’s CVS Caremark, and Cigna Corp.’s Express Scripts.

2. Which of their practices have sparked criticism?

There are questions about how much PBMs keep of the discounts they negotiate with drugmakers and how much is passed on to consumers or health insurers and employer plans.

Critics say PBMs also may have misaligned incentives. Since they profit from rebates and discounts, that could lead them to favor more expensive drugs in formularies.

Drug manufacturers argue that having to pay PBMs rebates and discounts results in higher initial list prices. Health insurers, on the other hand, argue that high drug prices are set by manufacturers, not by middlemen such as PBMs.

Independent pharmacies say the supply chain structure puts them at a disadvantage because PBMs steer patients to pharmacies or mail-order services owned by the insurers that own the PBMs.

Another tactic called “spread pricing,” in which PBMs charge an insurer or employer more for a drug than they reimburse the pharmacy and retain the difference, has raised eyebrows with lawmakers. The Congressional Budget Office estimated that eliminating spread pricing just in the low-income health program Medicaid would lead to some $900 million in federal savings over 10 years.

Another tactic that some observers say pads the PBM bottom line is the use of “direct and indirect remuneration fees,” or DIRs. These are after-sale fees assessed by PBMs to network health providers (oncology practices say they’re hit particularly hard here) or pharmacies, sometimes months after the drug is distributed to the patient.

The PBM industry counters that they actually lower drug costs by negotiating directly with the drugmakers for discounts to high list prices. PCMA says the pharma industry is at fault for keeping drug prices high through “coupons, copay cards, direct-to-consumer advertising, and physician payments.”

3. What do the courts say about PBMs?

The PBM industry has long argued that any state attempts to regulate it are preempted by the Employee Retirement Income Security Act. Over the last two years, courts have chipped away at that argument.

In 2020, the Supreme Court ruled in favor of an Arkansas law that requires PBMs to reimburse state pharmacies at a price equal to or higher than the pharmacy’s wholesale cost. The justices said state law is a basic form of cost regulation and doesn’t infringe on ERISA-covered plans.

There are similar laws in at least 36 states, and courts are still weighing in on them. In November, the U.S. Court of Appeals for the Eighth Circuit partially upheld a North Dakota law. The decision allowed the state to require PBMs to disclose certain information to pharmacies upon request and limit the conditions they can impose on in-network pharmacies.

PBMs have also faced legal challenges over “clawbacks” of consumer copayments that are higher than the pharmacy’s cost for the drug, fraud, misrepresentations, kickbacks, and failure to meet ethical and safety standards.

4. What can the government do?

So far, government actions around PBMs are focused on transparency. In November, the Biden administration published an interim final rule requiring health plans to submit to the government health-care spending information, including prescription drug rebates, fees, and other remuneration paid by drug manufacturers.

There are also a few legislative proposals seeking information. The Democrats’ stalled Build Back Better Act (H.R. 5376) would require PBMs to report detailed rebate, fee, and other compensation information to employers and insurers. A Republican-sponsored bill (H.R. 19) calls for making public PBMs’ generic dispensing rates, drug discounts and rebates, and their payments between health plans and pharmacies.

Advocates want the government to go further by banning price spreading or requiring PBMs to pass on all rebates to patients or health plans, for example.

Read More

Drug-Pricing Debate Resurfaces Amid Pressure From Pharmacies
Pharmacy Liaison Probe Must Be More ‘Rigorous’ to Get FTC Vote
Pharmacy Middlemen Dodge FTC Competition Probe in Split Vote
HHS Seeks Information on Prescription Drug Price Reporting
North Dakota Pharmacy Benefit Law Gets Mixed Results in Court
High Court Upholds State Law Reining in Pharmacy Drug Middlemen (2)

To contact the reporter on this story: Sara Hansard in Washington at

To contact the editor responsible for this story: Fawn Johnson at