Pharmacy Benefit Managers (PBMs) play a large role in deciding which drugs patients receive and how much they pay. Yet their fees, rebates, and contracts remain largely hidden from employers, insurers, hospitals, and pharmacies. Opaque practices have led to PBMs favoring high-cost medicines instead of less expensive options. The solution is transparency: when the rest of the market can see how PBMs operate, competition can encourage real savings.
In today’s market, PBMs profit when list costs and rebates are large. In a practice called spread pricing, PBMs make a profit by charging the insurer or employer the full cost and pocketing the savings from a rebate. If employers and insurers could compare PBMs, the share of low-cost drugs they favor, the discounts they pass through, and fees they charge, lower-cost models could win business and force imitation in the market.
Consider a simple example. A PBM can make a $50 brand name drug the default for prescriptions because it caries a $30 rebate, which the PBM pockets, while a $5 generic offers no rebate. The PBM’s profits rise if the brand name is prescribed, but the patient pays less for the generic. In a healthy market, the PBM would favor the generic tier over the name brand to reduce price. However, in many cases drugs are classified such that the high-cost name brand is given priority.
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Justin Leventhal is a senior policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.