Pharmacy Benefit Managers: The Root Cause of High Healthcare Prices

Healthcare prices in the United States are much higher than compared to the rest of the world. There are many factors which can be held responsible for this high price. However, one of the most important factors is the presence of unscrupulous middlemen.

Pharmacy benefit managers (PBMs) are one such class of middlemen which act as the link between the customers, insurers and the pharmacies. The presence of middlemen is not a problem if they add value by reducing costs or providing some services. However, the pharmacy benefit managers (PBMs) in the United States add very little to value and a lot to costs.

In this article, we will have a closer look at what pharmacy benefit managers (PBMs) are and how their actions result in the exorbitant increase of pharmacy drug prices in the United States.

What Are Pharmacy Benefits Managers?

In developing countries, people but their own medications. This means that once doctors prescribe a drug, the patient is expected to pay cash and acquire the drug. However, the case is different in the United States. Most patients in the United States have insurance. This is the reason why insurers have contracts with third party middlemen called pharmacy benefit managers (PBMs). The idea is to have group buying. Instead of every patient buying their own individual drugs, pharmacy benefit managers (PBMs) buy drugs in bulk. Hence, they have more bargaining power and are able to negotiate better prices.

In theory, the presence of pharmacy benefit managers (PBMs) should provide benefits to the patients as well as to the insurers. However, the system has been completely hijacked. These same pharmacy benefit managers (PBMs) are the reason that the United States has one of the most expensive healthcare system in the entire world.

Another problem related to pharmacy benefit managers (PBMs) is the fact that the top 3 PBMs in the United States account for almost 75% of the market share. Hence, they enjoy a lot of influence in the market. If there are many manufacturers who make the same drug, pharmacy benefit managers (PBMs) are capable of drastically reducing the cost of the drug by pitting the competition against each other.

Spread Based Pricing

Repackaging: The pharmacy benefit managers (PBMs) in the United States have been practising a technique which is legal but blatantly immoral. Under this technique, pharmacy benefit managers (PBMs) buy generic drugs from mail order pharmacy. Once these drugs have been purchased, they are then merely repacked by the pharmacy benefit managers (PBMs). However, once the drugs get repacked, the pharmacy benefit managers (PBMs) put a new price on the drug which is much higher than the original price of the generic drug. These middlemen are essentially selling the same old wine in a new bottle and are charging their customers a lot of money to do so. There is nothing wrong with repacking medicines from a legal standpoint. However, from an ethical standpoint, this is just robbery. The three pharmacy benefit managers (PBMs) which hold the majority stake in the market are padding their bottom lines at the expense of poor people who have to shell out more in co-pay.

Rebates: The issue of rebates being used by pharmacy benefit managers (PBMs) to blackmail drug manufacturers. Since PBM’s are so big in size and they command so much market share, they are able to negotiate better prices with the drug companies. However, instead of passing on the benefits to the consumers, PBMs tend to keep the difference as profit. There are several studies which have shown that even if the PBM’s passed one-third of their rebates to the consumers, the total out of pocket costs paid by patients (mostly senior citizens) would be reduced by as much as $2 billion per year.

The PBM’s literally control the entire market of consumers. Unless a drug company deals with PBM’s its drug would not be on the list of recommended medicines for patients with the particular PBM. Also, since about three PBM’s dominate the entire market, they have much more bargaining power than the drug companies. The end result is that PBM’s are in complete control about how much money should be paid to pharmacies in order to acquire a drug. At the same time, the PBM’s themselves decide what amount needs to be billed to the insurance plan for the same drug.

At the present moment, there is no regulation preventing PBM’s from making exorbitant sums of money while providing their service.

The bottom line is that Pharmacy Benefit Managers (PBMs) need to be tightly regulated to ensure that they are not benefitting off other people’s problems. This is exactly what Trump and his team of advisors are trying to do. The entire healthcare industry would simply be better off if the compensation structure of the PBM’s was changed. Instead, of allowing them to charge differential prices and pocket the difference, the government must make in mandatory for PBM’s to only charge a flat fee. If the current system is left unchanged, it is highly unlikely that the prices of drugs will be reduced in the near future.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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