The evolution of PBMs over the past 2 decades

A ViewPoint by Richman and Adashi in JAMA this week provides a nice overview of the pharmacy benefit manager (PBM) marketplaces as well as some considerations for the Federal Trade Commission (FTC) to consider.  Below I summarize some of the developments in the PBM market in recent decades.

Of particular note is that PBMs have grown in size largely due to market consolidation.

FTC approved numerous mergers between PBMs, including the 2004 combination of 2 of the largest PBMs (Caremark and AdvancePCS Inc), the acquisition by CVS of Caremark in 2007 and Omnicare in 2015, and most notably, the $29 billion merger in 2012 of Medco and Express Scripts, 2 of the largest PBMs at that time.

This consolidation has lead to three huge behemoths.

Fueled by the uninterrupted spate of mergers, the PBM market came to be dominated by the “big 3,” ie, CVS Health, Express Scripts, and OptumRx, which together controlled 80% of all the prescription drug claims in 2021…CVS Health, UnitedHealth (owner of the PBM OptumRx), and Cigna (owner of the PBM Express Scripts) have grown to constitute the 4th-, 5th-, and 13th-largest companies, by revenue, in the entire US.

The PBM is a relatively low risk business as the serve as a middleman between payers and drug manufacturers.  The article notes that while drug spending is high $586 billion in 2021, more than 30% of this figure ($179 billion) was captured by intermediaries such as PBMs.  Reducing drug cost is problematic since purchasers are inattentive (employers are focused on their core business, not health care; government doesn’t pay as much attention to cost as an individual would of their own money), uninformed patients (medicine is complex and insured patients bear a small share of cost), and highly complex products (not only are the products complex, but new products are developed every year).

The authors note that rebates are the core issue.  PBMs are typically paid as a percentage of rebates received.  Thus, PBMs don’t aim to minimize costs, but to maximize rebates.  While one may believe these are the same things, in practice, PBMs benefit most when gross (i.e., list) drug prices are high, and the difference between gross and net (i.e., post-rebate) is large.  In short, PBMs likely inflate gross prices, but may have a positive or negative impact on net prices. 

PBMs are poorly understood by many but currently they play a pivotal role in the US pharmaceutical marketplace.