Much has been written about the role Pharmacy Benefit Managers (PBMs) play in driving up the cost of prescription brand named drugs. However, far less has been written about how PBMs current business practices lead U.S. consumers, employers, and the government to pay too much for what should be low-cost drugs.

Now a new paper, released by researchers at the University of Southern California’s (USC) Schaeffer Center for Health Policy & Economics, examines this worrying trend. It offers lawmakers concrete policy solutions needed to improve competition and lower prices for consumers that will help reform PBMs and increase public transparency surrounding the generic prescription drug market.

The paper details three primary strategies employed by PBMs and insurers, designed to drive up the price of generics and lead consumers to overpay for prescriptions. They include copay clawbacks, spread pricing, and profit-oriented formulary designs.

Copay clawbacks are when the patient’s copay exceeds the value of the drug they are purchasing, and PBMs recover the difference. Spread pricing is when PBMs reimburse “the pharmacy one price when a beneficiary fills a prescription while charging the health plan a higher price, and then pocketing the difference.” Profit-oriented formulary designs are formularies (lists of prescription drugs covered by a prescription drug plan) where PBMs prioritize more expensive brand-named drugs over their generic equivalents so that they can take advantage of manufacturer rebates.

In recent years, all three strategies have been consistently utilized by PBMs, often to the detriment of consumers who are left to pick up the tab.

There are a number of reasons for this. Part of the problem is a recent trend towards vertical integration and consolidation among major PBMs. The three largest firms, CVS Health (Caremark), Cigna (Evernorth/Express Scripts), and United Health (OptumRx), now collectively account for 80% of all retail prescription claims. This gives them undue influence over price setting. Another significant issue is a general lack of public transparency necessary for effective accountability. In essence, PBMs employ anticompetitive practices because they can. They have a monopoly on information that allows them to maximize profits at the expense of everyone else.

This Schaeffer Center paper helps bring long overdue attention to these issues.

This is important because generic medications continue to play a significant role in the lives of millions of Americans. Due to problems with accessibility and the high cost of brand name drugs, generics account for 90% of all U.S. prescription drugs. Yet, they add up to only 18% of drug expenditures, and just 3% of all U.S. healthcare expenditures. In fact, research shows that generic and biosimilar drugs saved consumers $338 billion in 2020 alone, and nearly $2.4 trillion over the last decade.

Despite these cost savings, consumers should be paying even less than they are. The authors of this paper attempt to determine how much less should be paid. According to at least one recent analysis of Medicare claims, patients paid billions of dollars more in out-of-pocket costs for generics than they should have. This amount represents anywhere from 13% to 20% in lost savings for consumers. A different Schaeffer Center study found that “Medicare Part D standalone drug plans paid $2.6 billion more in 2018 for 184 common generic medications compared with prices for the same drugs available to cash-paying Costco members.”

Other research has found similar financial costs paid by consumers. For instance, an audit by the state of Ohio in 2018 revealed that CVS Caremark and United Health’s Optum RX utilized spread pricing to make $223.7 million in profit by “overcharging Medicaid managed care plans, underpaying pharmacies, and pocketing the difference.” Examples such as these illustrate the need for reforms.

The paper concludes by proposing a range of policy solutions that fall into two categories.

First, policies should be put in place to more effectively regulate PBMs business practices. These policies should include provisions like restricting rebate contracting, where PBMs prioritize more expensive brand name medicines for consumers when it provides them financial rebates, requiring PBMs to design formularies that list prescriptions drugs according to cost, and transparent reporting. 

Second, policies should be established that improve the PBM consumer market. For instance, researchers suggest providing employers and government purchasers “audit rights” so they can determine the true market value of a given prescription and the price PBMs and insurers pay to pharmacies. PBMs should be encouraged to enact transparency measures such as “pass-through” pricing reforms that require them to pass on any savings from health insurance carrier rebates to consumers. Competitive cash markets can also be established that allow consumers to decide whether they prefer to fill a prescription using insurance or cash, depending on what provides them the greatest savings. While each of the policy solutions just described should be evaluated according to its own merits, it is clear that acting on even a few of this paper’s recommendations would go a long way towards generating additional cost savings for consumers in the generic drug market. The price of generics has long been an area that was overlooked in the scheme of other PBM abuses. This is, at least in part, due to the fact that generics are already considerably cheaper than brand-named drugs. However, that does not mean consumers are paying a fair price for generics. More often than not, consumers pay far above the market value of their medication. Lawmakers should take note of this injustice and act on some of the policy solutions this paper recommends.