Pharmacy benefit managers, which long ran under the public radar, now have President Trump’s attention. In a recent speech on drug pricing, he called out “the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”
Pharmacy benefit managers (PBMs) buy drugs from manufacturers, distribute them to patients, and manage drug benefits for insurers and employers. Once an obscure segment of the health care financing landscape, pharmacy benefit managers have become industrial behemoths with revenues and profits that have outstripped those of the pharmaceutical companies that develop the drugs they distribute.
As intermediaries, these companies profit twice on each transaction: They get fees from insurers and employers while obtaining rebates from manufacturers that are entirely hidden from public view. Across the industry, payments from pharmaceutical manufacturers to intermediaries now exceed $100 billion per year.
Echoing the proverbial wisdom to cut out the middleman, the president has targeted these intermediaries. Recent developments in the health sector appear intended to do the same. Over the past several years, health insurers have aimed to manage drug benefits themselves, often by purchasing pharmacy benefit managers. In theory, this would reduce administrative costs and optimize health benefits. Those are the stated motivations behind some of the largest mergers now under review by regulators: Aetna’s $69 billion merger with CVS (CVS) and Cigna’s (CI) $52 billion acquisition of Express Scripts.
But when a health insurer merges with a pharmacy benefit manager, who controls whom? If you’re an optimist, you’d say that such a union would allow the insurer to take control over drug purchases. The insurer would want to get the best deal for its subscribers to keep premiums down and attract the greatest market share for their insurance products, so it would buy drugs that are cost-effective and avoid lower-value drugs.
The problem with this view is that it neglects the possibility that the pharmacy benefit manager might be the tail that wags the dog. These companies generate more revenue and higher profits than the insurers. Aetna, for example, in 2017 reported revenue of $60.5 billion and profits of $1.9 billion. In the same year, CVS’s pharmacy benefit manager business alone generated $130.6 billion in revenue and profits of $4.8 billion. So when insurers and pharmacy benefit managers combine, we might see insurers adjusting their strategies to pursue pharmacy-benefit-manager-type profits, not the other way around.
If pharmacy benefit managers call the shots, patients would be directed by their insurers toward drug treatments that generate the highest profit margins and the largest rebates. They would pay more for drugs and health insurance premiums and receive less efficacious medical treatments to boot. Looking forward, the relentless pursuit of rebates could spill over into new markets, including specialty pharmaceutical products and cancer therapies.
Under this nightmarish scenario, pharmacy benefit managers would be far worse than costly middlemen. They would control health care and pharmaceutical innovation, and direct patients toward high profit margins rather towards high-value care.
This could be why the pharmaceutical industry is celebrating the president’s attack on these intermediaries. His speech sent drug stocks soaring. Industry insiders know that eliminating the middleman through acquisitions by payers does not necessarily eliminate the pharmacy benefit manager business model. Instead, it just might enshrine it into the heart of the delivery system.
The only solution is for the public to place heavy scrutiny on how the drug distribution system unfolds. Payments in the form of rebates that manufacturers give pharmacy benefit managers for distributing their drugs remain the primary profit engine underlying the pharmacy benefit manager business model. But these rebates are hidden from public view. If the pharmaceutical market remains as nontransparent as it is today, then patients might unwittingly be prescribed medicines that designed primarily to pad profits of middlemen.
Alternatively, if consumers and payers aggressively demand that the perverse aspects of the current business model be eliminated, attentive management of pharmacy benefits can spur sorely needed price competition in the drug market and produce real benefits for patients.
One lesson from the president’s announcement — and perhaps the central lesson from 30 years of unsustainable health care cost inflation — is that costs go up when consumers, purchasers, and policymakers stop paying attention to the details of the “complicated” health care marketplace. Evidently, the stock market knows this all too well.
Barak Richman, Ph.D., is a professor of law and business administration at the Duke University School of Law. Kevin Schulman, M.D., is a professor of medicine, business administration, and global health at Duke’s School of Medicine.