Joe Biden’s administration has made reforming drug pricing a signature policy goal. His Inflation Reduction Act’s Medicare drug price negotiations will bring $7.5 billion in savings for seniors beginning in 2026. He has not stopped there.
Last Friday, the U.S. Federal Trade Commission, led by Lina Kahn, whom 60 Minutes profiled this past Sunday, sued the country’s three largest Pharmacy Benefit Managers (PBMs), accusing them of steering diabetes patients toward higher-priced insulin to reap millions of dollars in rebates from pharmaceutical companies.
The case accuses UnitedHealth Group’s Optum unit, CVS Health’s CVS Caremark, and Cigna’s Express Scripts of unfairly excluding lower-cost insulin products from lists of drugs covered by insurers.
How did we get here? And what are PBMs, anyway?
First, how did we get here?
The PBM industry was born in the late 1960s when Pharmaceutical Card System, Inc., (PCS) invented the plastic benefit card. By the mid-1970s, PCS was serving as a fiscal intermediary by adjudicating drug claims. In other words, it was a prescription Third Party Administrator (TPA). By working for insurers and health plans, PCS (later, AdvancePCS) and others figured out that they could leverage the buying power of their clients to negotiate lower drug prices. And until around 1992, that’s what they did. During that approximately 20 year period, PBMs saved insurers, health plans and consumers money by driving physicians and patients to use lower cost generic drugs. This was a valuable service for all.
In 1992, however, PBMs began to change their focus. As noted by the Wall Street Journal in August, 2002, from 1992 through 2002, PBMs had “quietly moved” into marketing expensive brand name drugs, not generics. This has created an incestuous relationship between PBMs and pharmacy companies, which occurred over three periods.
From 1968 through 1994, pharmaceutical companies acquired PBMs. For example, in 1994 Eli Lilly bought PCS for $4 billion and SmithKline Beecham bought Diversified Pharmaceutical Services (from insurer UnitedHealth) for $2.3 billion. But the FTC saw anti- trust implications in these deals and ordered the acquisitions to stop and the pharmaceutical firms to divest the PBMs.
So, Eli Lilly sold PCS Health Systems to Rite Aid for $1.5 billion, SmithKline Beecham sold Diversified Pharmaceutical Services to Express Scripts for $700 million, and Merck spun off Medco Health Solutions, the PBM for 68 million Americans at the time.
The third PBM evolutionary period, the one we’re now living in, has seen mergers between PBMs and PBMs with pharmacy chains. Those long and winding acquisition roads have resulted in three PBMs — Caremark, Express Scripts and OptumRX — cornering 78% of the nation’s PBM business, serving 266 million Americans.
In 2023, total revenue for these three firms had grown to nearly $400 billion, with CVS Caremark reporting more than $175 billion, Exoress Scripts more than $100 billion and OptumRX slightly more than $116 billion.
Second, what do PBMs really do?
The first thing one has to understand in trying to answer this question is that PBMs quintessentially define the word “opaque.”
PBMs claim they serve consumers by negotiating lower prices with drug manufacturers, which result in rebates and discounts that are applied when a health care consumer pays for prescription medication. Sounds simple, but it’s not. It is ridiculously complicated, as this chart from the Drug Channel Institute’s 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers shows.
Let’s see if we can simplify the obscura using this scenario.
Imagine for a moment you are a pharmaceutical company CEO. You produce drugs that help sick people be healthy. Trouble is, the great big US healthcare system in which you operate is a labyrinthian rabbit warren. And in the center of your part of it sit PBMs.
Here’s your issue as a drug company CEO: You know, regardless of what price you set for your super-duper drug, you’re going to have to give a lot of it back as a discount to the PBM so it can give rebates to its clients. What’s a busy CEO to do?
Well, one answer is to set the price, the list price, so high that you’ll be able to provide a generous discount and still make what your finance folks say you must have for a profit.
In a weird sort of way, this works most of the time for patients, but only if they have health insurance. What happens if they don’t? This is where things get sticky. Uninsured people, who mostly don’t have enough money to afford insurance, even the Affordable Care Act variety, get stuck paying the full list price, the one you inflated in order to provide the discount that allows you to make a profit and PBMs to (kind of) save money for their customers. And let’s not forget that even people who have insurance will pay full price until they get past their deductibles. This has been especially difficult for some uninsured Type 1 diabetics, who, as I have written previously (here and here), have had great difficulty paying for the insulin they need to take every day ─ just to stay alive.
And that is why Lina Kahn’s Federal Trade Commission has sued the big-three PBMs, accusing them of steering diabetes patients toward higher-priced insulin to reap millions of dollars in rebates from pharmaceutical companies. In its lawsuit, the FTC contends this conduct hurts patients, such as those with no insurance, as well as those with coinsurance and deductibles, who were not eligible for the rebated price.
Kaiser Family Foundation health policy expert Larry Levitt described the FTC action as a “shot across the bow.”
“Insulin is an extreme case of PBMs extracting bigger and bigger rebates from drug manufacturers and driving list prices up at the pharmacy counter, but this is a dynamic that plays out with many medications,” he said.
As you would expect, the three Pharmacy Benefit Managers have criticized the FTC’s approach to the industry, accusing it of bias. Early last week, Express Scripts sued the FTC seeking to force it to withdraw a report that said PBMs enrich themselves at the expense of smaller pharmacies.
The Drug Channel Institute’s Adam Fein, Ph.D., has measured total rebates and discounts paid by drug manufacturers in 2023 as $334 billion. He calls it the “gross-to-net bubble.” One way of looking at that is to say Doctor Fein’s figure is the amount drugs were overpriced in 2023.
Of course, the Occam’s Razor solution here is for drug companies to set prices precisely at the point they end up at after discounts and rebates are applied, thereby establishing a realistic list price and eliminating the middleman.
In our Rube Goldberg health care world, that has as much chance of happening as rain has of suddenly beginning to fall up, instead of down.
