Pharmacy Benefit Managers (PBM) sit in the center of our prescription drug system, coordinating between insurance companies, drug manufacturers, and pharmacies. This gives them a uniquely powerful position in the market. However, a report last year from The House of Representatives and another more recently from the Federal Trade Commission (FTC) argue that PBMs have used this position to drive up drug costs for patients. Without federal action to create transparency in the PBM market consumers will continue to pay higher prices for their medicine.

PBMs act as a middleman between other institutions in the healthcare market. By negotiating discounted prices from manufacturers PBMs are intended to reduce the cost of medicine for patients. This is a lucrative market, with the largest three companies totaling more than $456 billion in 2023, representing 80 percent of the PBM market.

However, as the House report and others note PBMs have numerous sources of revenue that drive up the cost of medicines. These include rebates from manufacturers and charging opaque fees. The FTC reports that from 2017 to 2022 the three largest PBMs took in over $7 billion in drug price mark-ups alone.

PBMs can demand rebates from drug manufacturers by offering better placement on the PBMs formulary tier list. This gives a manufacturer, typically of a brand name drug, an advantage over generic versions or other drug treatments as the preferred prescription. These rebates are supposed to be passed to patients, however, by then providing the drug to patients without the rebate the PBM can pocket the difference through spread pricing.

If a brand name drug is discounted from $100 to $80 the PBM bases its earnings on the $20 saved. But if the PBM chooses the generic which is discounted from $20 to $5 the PBM’s earnings are based on the $15 saved. Even though the generic version is both cheaper and has a greater percent discount, the PBM is incentivized to promote the expensive brand name drug instead. Many name brand drugs cost thousands of dollars each month while their generic competition often cost a fraction of the price, providing a lucrative revenue source at patients expense.

Read the full article here.

Justin Leventhal is a senior policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.

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