Why Are PBMs Bad for Patients and Pharmacies?

Pharmacy Benefit Managers (PBMs) manage prescription drug benefits for health plans, employers, unions, and government entities. They act as intermediaries within the healthcare system, connecting drug manufacturers, pharmacies, and health insurance providers. Their primary functions include processing prescription claims, negotiating drug prices, and establishing formularies, which are lists of covered medications. PBMs also manage pharmacy networks and provide mail-order pharmacy services.

Over time, their role expanded to include various services aimed at managing drug costs and ensuring access to medications. Despite their intended purpose of controlling prescription drug spending, PBMs have faced scrutiny regarding their operational practices and influence on drug pricing.

How PBMs Influence Drug Costs

PBM practices significantly influence prescription drug costs, often leading to higher expenses for patients and health plans. One method PBMs employ is “spread pricing.” This involves charging a health plan one price for a medication but reimbursing the dispensing pharmacy a lower amount, retaining the difference as profit. This practice can obscure the actual cost of drugs, making it difficult for health plans to understand true financial flows and potentially inflate overall expenditures. For instance, a PBM might charge a health plan $100 for a drug but only pay the pharmacy $80, keeping the $20 difference.

Another mechanism affecting drug costs is rebate aggregation. PBMs negotiate rebates from drug manufacturers for preferred placement on drug formularies. While these rebates are intended to lower drug costs, PBMs often retain a portion or the full amount rather than passing them entirely to health plans or patients. This opaque system can result in health plans paying higher net costs for medications, ultimately impacting premiums and deductibles.

Formulary management also impacts drug costs. PBMs develop and maintain drug formularies, which are lists of covered medications often categorized into tiers with varying co-payments. Although formularies aim to manage costs by promoting cost-effective medications, their design can favor drugs with higher manufacturer rebates over clinically similar, lower-cost alternatives. This can steer patients towards more expensive drugs, increasing out-of-pocket costs and overall system spending.

These PBM practices often translate into increased out-of-pocket costs for patients. Higher co-pays, inflated deductibles, and greater overall out-of-pocket expenses can stem from PBMs’ financial models. This can make essential medications less affordable, creating financial burdens for individuals and potentially leading to medication non-adherence due to cost.

PBM Effects on Pharmacies and Patient Choice

PBM practices significantly impact the financial health of pharmacies, especially independent and community pharmacies, and can limit patient choice. PBMs establish pharmacy reimbursement rates for dispensed medications, often setting them below the pharmacy’s cost of acquiring the drug. This low reimbursement creates financial strain, making it challenging for pharmacies to cover operational expenses and maintain profitability. Many pharmacies report filling prescriptions at a loss, which threatens their long-term viability.

Direct and Indirect Remuneration (DIR) fees represent a substantial financial burden on pharmacies. These fees are post-point-of-sale reductions in payment that PBMs retroactively collect from pharmacies, sometimes weeks or months after a prescription has been dispensed. DIR fees can include various charges, and their unpredictability makes financial planning difficult. The clawback of these fees can turn a profitable transaction into a loss, severely impacting pharmacy cash flow and contributing to closures.

PBMs also influence patient choice through preferred pharmacy networks. These networks often favor large chain pharmacies or PBM-owned mail-order pharmacies, directing patients away from local independent pharmacies. This practice can limit a patient’s ability to choose their preferred local pharmacy, disrupting established patient-pharmacist relationships and reducing access to personalized care. This steering diminishes the economic activity of community pharmacies, which often serve as accessible healthcare hubs.

Restricted formularies and step therapy requirements further limit patient choice and access to medications. PBM-managed formularies may exclude certain drugs or require patients to try a less expensive medication first before covering a more expensive alternative. This “step therapy” can delay access to the most appropriate treatment, potentially prolonging illness or leading to adverse health outcomes if the initial drug is ineffective. Patients may be forced to switch medications even when their current drug is working well.

Some PBMs implement mandatory mail-order policies, requiring patients to obtain certain medications through their PBM-affiliated mail-order pharmacies. This practice diverts prescription volume from local retail pharmacies, eroding their revenue streams. While mail-order services offer convenience for some, they may not suit all patients, particularly those who prefer in-person counseling or require immediate access to medication. Such policies can inconvenience patients and undermine the role of local pharmacies as immediate points of care.

Challenges of PBM Opacity

The lack of transparency in PBM operations, contracting, and financial reporting poses significant challenges for oversight and trust within the healthcare system. PBM contracts with health plans and employers are often complex and proprietary, making it difficult for clients to fully understand the true costs and financial flows of prescription benefits. These agreements can obscure how PBMs generate revenue from various sources, including rebates, administrative fees, and drug pricing differences.

A lack of clear financial reporting exacerbates this opacity. PBMs are generally not required to disclose how much they retain from manufacturer rebates, the exact margins from spread pricing, or the full extent of other fees they collect. This absence of detailed disclosure makes it challenging for health plans, regulatory bodies, and the public to assess PBM profitability and determine if they deliver fair value. Without transparent financial data, verifying PBM claims of cost savings or identifying potential conflicts of interest becomes difficult.

Auditing PBM practices also presents considerable difficulty due to this lack of transparency and data complexity. Health plans and regulatory agencies often struggle to conduct thorough financial audits of PBM operations to ensure compliance. The proprietary nature of PBM pricing models and rebate agreements can impede independent verification, making it challenging to pinpoint where costs accumulate or where potential savings are absorbed. This limitation hinders effective oversight and accountability within the prescription drug supply chain.

Ultimately, this pervasive lack of transparency erodes trust among patients, pharmacies, and health plans. When PBM financial mechanisms and revenue streams are not clearly understood, it can lead to perceptions that these entities are not acting in the best interest of all stakeholders. Patients may question high drug costs, and pharmacies may feel financially squeezed by opaque reimbursement practices. This environment of distrust can undermine efforts to manage healthcare costs and improve patient access to affordable medications.