Stopping pharmacy benefit managers from “gaming the system”

People around the country say they are paying too much for their prescription medicines. State policymakers could help address this problem now. Doing so starts with stopping pharmacy benefit managers (PBMs) from taking advantage of the health system and patients. 

PBMs Serve as an Influential Middleman for Health Insurance Companies

Health insurance companies use middlemen called pharmacy benefit managers to negotiate prescription drug prices and develop the formularies that determine what medicines people can get and how much they pay.

The Problem: PBMs’ Compensation is Tied to the Price of Medicine

Drug prices are growing at historic lows, but it doesn’t feel that way for the many people who continue to pay more out of pocket at the pharmacy counter each year as PBM profits soar. This doesn't add up. One problem with the current system is that PBM compensation is typically tied to the price of a medicine. Because of this, government agencies, economists and other experts have noted that this model may create misaligned incentives, as PBMs may favor medicines with high list prices and larger rebates to maximize their revenue.

PBMs often bill health plans, employers and government health programs more than what they pay to the pharmacy for medicines and pocket the difference. For example, the state of Ohio was overcharged nearly $225 million in a single year due to PBM spread pricing. More than 20 states have taken action to rein in spread pricing, and prohibiting the use of spread pricing in Medicaid would save taxpayers an estimated $900 million over 10 years.

The Solution: Fix How PBMs are Paid

State policymakers can fix this problem by banning spread pricing and requiring that PBMs are paid based on the value of the service they provide, not the price of the medicine.

Several states have started taking steps to do this:

• Legislation proposed in Nevada would require PBMs be paid administrative fees only and prohibits them from getting reimbursed based on how much they negotiate in rebates off the list price of a medicine.
  
  
• Other states have begun requiring PBMs contracting with a state employee health plan or Medicaid program to pass through 100% of rebates to the plan sponsor. By wielding their large purchasing power, states could minimize the misaligned incentives that result in higher costs for them and their taxpayers.
  
  
• At least 21 states have banned the practice of spread pricing in Medicaid and/or commercial health insurance plans regulated by states, meaning PBMs can’t bill more than what they pay to the pharmacy and keep the difference. 

PBMs play an important role in negotiating coverage and cost for medicines, and they should be compensated for it. Their compensation, however, should not be tied to the price of a medicine and should instead be based on the value of the service the PBM provides.

State policymakers who want to lower out-of-pocket costs for patients should fix the way PBMs are paid and finally stop these middlemen from taking advantage of the system.

Download our factsheet for key takeaways or learn more about how states can help patients access and afford the medicines they need at PhRMA.org/States.