Pharmacy benefit managers: why drugs are so expensive

Pharmacy benefit managers (PBMs) are middlemen who are hired by employers and governments to negotiate prices with drug companies. The three largest PBMs—CVS Health, Cigna, and United Health Group—collectively process roughly 80 percent of prescriptions in the U.S. Each would rank among the top 40 U.S. companies by revenue.

When PBMs negotiate with drug companies, the drug companies start out with a sticker price. The drug companies then agree to reduce prices on brand-name medications by giving rebates to the PBMs. (Generic drugs don’t get rebates.) The PBMs share most of those rebates with employers, but they also pocket a portion for themselves. This adds up to billions of dollars.

But here’s the deal: Because the PBMs demand discounts from the drug companies, the drug companies often increase their sticker prices so they can maintain their profit margins. Thus, the patients’ out-of-pocket costs for that drug go up. Example: Bristol Myers Squibb more than doubled the sticker price of Eliquis, a blood thinner, making it possible for PBMs to deliver big rebates to employers. But because out-of-pocket costs are a percentage of the sticker price, many patients are now paying hundreds of dollars more per year for Eliquis.

Even when an inexpensive generic version of a drug is available, PBMs have a financial reason to push patients to take a more costly brand-name product. The higher the original sticker prices, the larger the discounts PBMs can finagle, the fatter their profits. Employers may prefer brand-name drugs because of the discount. (Employers often can’t understand or control how the system works. It’s complicated.)

PBMs also own pharmacies, such as CVS, including mail-order warehouses. PBMs push or force patients to use these pharmacies. To increase profits, such pharmacies may charge thousands of dollars more than what a drug costs. Example: CVS was charging an employer $138,000 a year for a patient’s prescription—the same drug the patient could buy elsewhere for about $14,000.

Finally, in 2018, PBS companies established subsidiaries—group-purchasing organizations (GPOs)—that receive the rebates from drug companies and pass on the rebates to the PBMs, which in turn send the savings to employers. To increase their earnings, the GPOs began imposing new fees on drug manufacturers. Because those were fees, not rebates, and because the fees were technically collected by a different company (the subsidiary), the PBMs weren’t contractually obligated to share them with their clients. Employers are none the wiser. They receive rebates, but they can’t see the billions of dollars in fees that the GPOs take for themselves. In 2022, PBMs and their GPOs pocketed $7.6 billion in fees, double what they were bringing in four years earlier.

Because this subject is complicated, this blog post was no fun to write. It’s probably no fun to read either. Sorry.

For an introduction to this blog, see I Just Say No; for a list of blog topics, click the Topics tab.