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Pharmacy benefit managers: The middlemen who decide what you pay for medications

Chart from Erin Trish’s presentation/Adapted from The Flow of Money Through the Pharmaceutical Distribution System/USC Schaeffer.
Chart from Erin Trish’s presentation/Adapted from The Flow of Money Through the Pharmaceutical Distribution System/USC Schaeffer.

Americans pay too much for prescription drugs. Big Pharma has gotten most of the blame. But there’s a middleman between you and the pharmaceutical companies.

That ‘middleman’ is a set of companies making huge profits from drug prices. They’re called pharmacy benefit managers, or PBMs.

“It’s remarkable the number of ways in which the PBMs are using this market to make money for themselves in ways that are not transparent to you or your employer or the American public,” Kevin Schulman, a professor of medicine at Stanford, says.

Today, On Point: The middlemen who decide what you pay for medications.


Erin Trish, co-director of the USC Schaeffer Center for Health Policy Economics.

Also Featured

David Balto, former attorney advisor to the chairman of the FTC.

Marion Mass, urgent care pediatrician in Philadelphia and co-founder of Practicing Physicians of America.

Related Reading

USC Schaeffer: “Flow of Money Through the Pharmaceutical Distribution System” — “US spending on prescription drugs has been growing rapidly, prompting calls for government intervention to slow the upward trend.”


Part I

MEGHNA CHAKRABARTI: Given the news, earlier this month might have as well been last century since there’s so much happening in the world and it’s hard to remember or keep track of what’s going on. So let’s dust off our memories and pull up a clip from a show we did on December 4th. It was about the staffing crisis at America’s pharmacies.

Sara Sirota, a policy analyst at the American Economic Liberties Project, told us why that crisis is happening, including this reason.

SARA SIROTA: And then on the other end is the way that they get reimbursed through entities called pharmacy benefit managers that represent the insurance industry. And they too are represented by three major companies.

Express Scripts, Caremark, and OptumRx, and they, too, hold monopoly power and are systemically under reimbursing pharmacies, potentially even below their costs.

CHAKRABARTI: So let me ask you one quick thing. So just to be clear, because the world of pharmacy services, anything related to American health care is extremely confusing. I’m a visual learner, so I want to be sure I understood what you said.

So that we’ve been seeing sort of a consolidation in the end point pharmacies, right? The corporate pharmacies, because as you said, they’re driving the smaller independent ones out of business. Then regarding the pharmacy benefit managers, did I hear you right when you said there’s only three companies there?

There’s three companies that pretty much own about 80% of the market.

CHAKRABARTI: Okay, pausing there because as I listen back to that cut. It was still confusing. Now even though that hour was about end point pharmacies, the places where you actually go to pick up or get your prescription drugs, these things called pharmacy benefit managers kept coming up over and over again in that hour.

So let’s jump back into the show. This is a little bit later and you’re going to hear from Shane Jerominski, practicing pharmacist.

SHANE JEROMINSKI: It’s very difficult to have an independent pharmacy. And that’s the reason why I would say if we don’t have wide scale PBM reform, 10 years from now, there’ll be very little independent pharmacies left.

CHAKRABARTI: Pharmacy benefit managers are one of the sort of less understood parts of the American health care system that I haven’t gotten my head fully around yet, so I’m thinking we need to do some explainer shows about that.

CHAKRABARTI: I’m Meghna Chakrabarti, and at On Point, we like to think of ourselves as a promise made, promise kept outfit.

So today, what are pharmacy benefit managers, and why do they have such a huge influence on your prescription drug prices? And by the way, today’s show doesn’t just come out of the blue. CVS Caremark, one of those PBMs, recently announced some major changes to their service in order to get ahead of increasing scrutiny on PBM Practices.

We’ll talk about that more in a couple of minutes. But joining us today to disentangle this web of pharma prices is Erin Trish. She’s co-director of the USC Schaeffer Center for Health Policy and Economics. Erin Trish, welcome to On Point.

ERIN TRISH: Thank you for having me.

CHAKRABARTI: I’m going to rely on you a lot to help us disentangle this web.

So as I said earlier in that clip from December 4th, I am a very visual learner. And I’m actually looking at a chart that you wrote here about how, what the relationships are like between the different organizations that lead to you picking up a prescription drug at a pharmacy. So can we pretend like we’ve got a big whiteboard in front of us?

Right now, Erin? You and I.

TRISH: Yes indeed.

CHAKRABARTI: And let’s help me trace the path of how a drug comes from, let’s start all the way back from the development in a pharmaceutical company and then its manufacturer. Where does it go then?

TRISH: So if we’re talking about one, one reason why this is complex is that there are different sets of boxes and arrows that talk about the physical product, the physical flow of the product itself versus the financial flow.

CHAKRABARTI: So we’re considering, we’re all about the financial flow today, right? Given what PBMs are.

TRISH: Indeed, yes. PBMs sit in the middle of the financial flow of it.

CHAKRABARTI: Alright, so let’s follow the money. What happens, what’s the first place that we should think about?

TRISH: So you’re right that the kind of physical drug is manufactured by a drug manufacturer, goes through a wholesalers and distributors to land at the pharmacy where the patient picks it up.

And so in that sense, that’s a market like any other good. What gets complicated is when you think about how do we determine the price of that? And the way that the dollars flow, and follow the money, as you say, and that’s where it starts to get extra complex and excessively complex in some ways.

So PBMs sit in the sort of center of several different pricing transactions. One that you and your previous guests referred to is that they’re the ones deciding how much a pharmacy is actually going to get paid for dispensing that drug to a patient, when the patient picks it up. But there’s two other key kind of pricing negotiations or decisions that they’re involved in.

One of the others is that they’re also contracting with health insurers or employers or Medicare Part D plans to determine how much they’re going to charge the end insurer when that patient picks it up. So there’s nothing that actually guarantees that how much they’re charging the insurer is the same as how much they’re paying the pharmacy.

CHAKRABARTI: Okay. So Erin, if I may, I am just really very determined to understand this well enough by the end of the year that I could write a paper on it, not like a university paper, but at least a high school level paper. So you’ll have to forgive me if I keep going over some questions just to be sure that we’re rock solid on them.

TRISH: Of course.

CHAKRABARTI: So in the somewhat linear flow of money here, I’m actually looking at the chart that you made, okay back in last year, last summer. And it says there’s a green line that goes from manufacturer to PBMs to pharmacy benefit managers. And in that green line that says formulary payments, market share payments, and rebates.

What is that?

TRISH: So this is the third kind of arm of the financial negotiation that PBMs are doing. And this is with the drug manufacturers themselves. So you may have heard of something called a list price of a drug, or essentially the price that is set by the drug manufacturers. So in particular, this is for manufacturers of branded drugs.

When they’re selling their product into the market, they’re selling it at a list price. And so when you go to the pharmacy, that’s the kind of price that you would see if you look at the receipt. But what PBMs are doing is they’re going to that manufacturer and saying, “Look, I want a discount.

I’m here to negotiate a discount off of that list price with you.” And in exchange for that, I’m going to construct something called a formulary, which is a list of drugs that are covered by this PBM. And I, the PBM, have the ability to puts your drug on a preferred tier where the patients will pay be encouraged to use your drug over a competing product.

And in exchange for that, I want a bigger discount, or what’s called a rebate, and it’s paid after the fact. And so this is one of the reasons why it’s so complicated to talk about drug prices in the U.S. Because there’s these list prices that you see on the receipt, but then the net dollars that the manufacturer is receiving, or the net price from the drug manufacturer’s perspective, is something quite different.

Because there’s all of these other after the fact rebates and discounts.

CHAKRABARTI: Is it lower or higher?

TRISH: So the net price is generally lower than the list price, right? On average, rebates vary quite widely across different types of drugs. But if you look at, for example, the Medicare Part D program, which is the program that provides prescription drug coverage for the elderly, about 50 million Americans, there, the average rebate off of the list price is about 30%.

So PBMs are negotiating on average about 30% discounts off those drugs. But like I said, there’s some drug classes where that’s upwards of a 70% or 80% discount off the list price, or a huge wedge between the list and the net price of the drug.

CHAKRABARTI: Okay, so let’s introduce a fictional drug here, and add some fictional numbers, okay?

Say I am drug manufacturer MeghnaTech. And my list price for drug X we’ll call it, Vita Awesome is $100. So I say, hey PBM, pharmacy benefit manager, here’s my list price, and they say, we’re going to put you on a preferred one, the customer is going to see that $100 list price, but instead what I’m going to give you is $80.

Is that plausible?

TRISH: So essentially it would be, after the fact, you, as the drug manufacturer are going to send a $20 per drug check back to the PBM.

CHAKRABARTI: Oh, okay. Okay. I had that all wrong. Okay. Got it. So I’m sending the PBM MeghnaTech is sending 20 to the pharmacy benefit manager. Okay.

Okay. Got it. Now looking at your chart. This is going to take up the whole hour, but I swear I’m determined to understand this. There’s a line that goes from the PBM, there’s several, but the PBM to the pharmacy itself, so your neighborhood pharmacy, and there it says negotiated payment. What is that?

So this is the PBM is determining when that patient goes and picks up the drug that you manufactured at the pharmacy in their community or through some other pharmacy. The PBM is also negotiating or setting a contract with that pharmacy about how much they’re going to pay the pharmacy when the patient picks up the drug there.

CHAKRABARTI: How much they’re going to pay the pharmacy. Okay, so back to Vita Awesome made by MeghnaTech. We have a net price from the manufacturer of $80. And so then the PBM tells the pharmacy, what?

TRISH: So the pharmacy is essentially acquiring the physical drug from typically a wholesale or a distributor and they’re acquiring that at a given price.

Now they separately have this contract with the PBM about how much the PBM is going to pay them for that drug. And so the PBM, the amount that it’s going to pay the pharmacy, when the patient actually picks up the product there, that’s its own kind of transaction or contract in and of itself.

And so the manufacturer, the contract between the PBM and you, the drug manufacturer, is completely separate from the contract between the PBM and the pharmacy. And so those two different prices are not directly tied together.

This article was originally published on WBUR.org.

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