Today we continue our coverage of Pharmacy Benefit Managers (PBMs) here at the ‘Mine, using hashtag #PBMsExposed. Special thanks to our correspondent Dan Fleshler in New York for his work digging into this important topic.

The media has *finally* been shining a spotlight lately on Pharmacy Benefit Managers (PBMs), the key middlemen in the drug supply chain that Big Pharma and a bevy of experts are currently blaming for skyrocketing prices. Since PBMs are vitally important to the health and bank accounts of people with diabetes (PWDs), we need to understand exactly what they do and how they make money.

But that’s a very tough job, unless you have the patience and stamina to wade through nap-inducing articles with tedious details. Be honest. Can you understand the following chart? I can’t:

To most of us in the Diabetes Community, PBMs and their involvement in the insulin pricing system are a “black box,” a term used by techno types for complex equipment whose inner workings are mysterious.

Fortunately, I found an expert who could help open up the PBM box and shed some light on it: Rujul Desai, Vice President of consulting firm Avalere Health in Washington, D.C. He has broad experience in the Pharma industry, including a gig with CVS and a healthcare law practice.

With his help, we’ve put together the following primer on where PBMs came from, the sources of their profits, and the part they play in today’s irrational, infuriating drug pricing system:

Who Are the PBMs and What Do They Do?

PBMs come in different shapes and sizes (Think “YPBMV” – Your PBM May Vary). The biggest ones are Express Scripts, CVS Caremark and United Health Care’s OptumRx. They control about 80% of the market and manage drugs for 180 million Americans. Each has annual revenue of more than $15 billion. Other PBMs like Argus, Prime Therapeutics, Citizens Rx and Cigna focus more on small and medium size businesses.

They all administer prescription drug plans. Their clients include health insurance companies, other businesses, unions, state governments, managed Medicaid plans and others. PBMs provide their customers with, among other things:

  • Mail-order pharmacies
  • Networks of independent pharmacists
  • Benefit plan designs – the PBMs establish “formularies,” those all-important classifications that determine which drugs are “preferred” by insurance plans and, therefore, cheaper than competitive drugs
  • Drug utilization reviews (DUR)structured, ongoing reviews of prescribing, dispensing and use of meds against predetermined criteria, which is meant to curb costs and improve clinical outcomes

One reason it’s difficult to assess their value to consumers is that the deals they make are confidential, obscured even from state and federal regulators. But here’s a sunny, cheery description of what they supposedly accomplish from their trade association, the PCMA (take it with a grain of salt, please):

Enough salt with that marketing?

History of PBMs

The evolution of PBMs is a fascinating story, really.

They first appeared in the late 1960s to process insurance claims. At the time, more Americans were starting to take prescription drugs and insurance companies were overwhelmed by all the paperwork, so PBMs stepped in to help. After a business boom in the ’80s, Pharma companies began buying PBMs en masse during the ’90s to get control over much of the drug supply chain. But the Federal Trade Commission quashed those deals, citing conflicts of interest. That led the early 2000’s when hungry pharmacy chains began merging with PBMs, sparking similar concerns from some advocates.

From these humble beginnings and through the years, PBMs gradually added other functions and evolved into the corporate behemoths that exist today.

What’s the PBMs Role in Insulin Pricing?

These organizations jump into the pricing process after the insulin manufacturers set the initial or “list price” of the medication. Then the PBMs negotiate with the drug-makers and help determine what their clients (the health plans’ sponsors), pharmacies, other middlemen and — eventually — you and I actually pay.

How Do PBMs Make Money?

Desai of Avalere Health helpfully puts PBMs’ profit-centers into three “buckets:”

* Imagine with me the sound of coins falling into the buckets (“cha-ching”) as I describe each one *

Cha-ching #1: Rebates

Drugmakers want their products to be given preferred status in the PBMs’ formularies. To get an edge, the manufacturers offer “rebates”—i.e., lots of money—to the PBMs for placing individual drugs. The winners in the race for formulary inclusion pay the rebates to PBMs up front.

Sometimes PBMs keep a percentage of the rebates, and sometimes they return 100% to their clients, the health plan sponsors.

What do we get out of it?

Health plan sponsors generally use rebates to help lower premiums, and that helps you and me at the bottom of the Pharma food chain. Then again, drug makers hike their list prices because they’re anticipating the rebates and discounts. So it’s not clear if consumers win or lose in the rebate game.

The PBMs definitely win, even if they give all of the rebate money back to their clients. That’s because, Desai tells us, PBMs generally hang on to the rebate payments long enough to benefit from interest payments (aka “float”). Pretty clever, huh?

Cha-ching #2: Discounts

Because PBMs purchase large quantities of medications and supplies from drug makers, they’re also in a position to bargain for up-front purchase discounts. Desai says discounts typically range from 5-10% of the list price of a drug.

What do we get out of it?

Although the PBM’s parent company keeps the discounts, Desai says, “The customer gets an indirect benefit when the PBM pharmacy dispenses at a lower cost than a non-PBM pharmacy.”

Cha-ching #3: Services

PBMs charge a wide range of fees for different aspects of health plan administration. “Generally speaking they tend to be in the single or low double digits, but you won’t find source material on that because of confidentiality clauses in contracts,” Desai says.

What do we get out of it?

According to a report commissioned by the PCMA trade association itself, PBMs save payers and patients an average of $941 a year because of the price concessions they negotiate and other activities. See below for an assessment of whether they do more good than harm on drug costs.

More PBM Pricing Shenanigans

And here are three more “buckets,” which will give you an idea of why many independent pharmacists and consumer advocates hate PBMs:

Cha-ching #4: Spread Pricing

Sometimes PBMs reimburse pharmacies at one rate for dispensing a medication, but charge a higher rate to the health plan sponsor, and then pocket the difference – or “the spread.”

Cha-ching #5: Rebate Pumping

PBMs have occasionally been caught favoring expensive drugs on formularies, in return for extra-large payments from drug manufacturers. Business Insider reported on how AstraZeneca and Medco Health — now part of Express Scripts — tried to pull this off for an acid reflux drug.

Cha-ching #6:Clawbacks

At the pharmacy counter, a patient pays a copay set by the PBM and an insurance plan. Sometimes the PBM “claws back” a portion of that payment and keeps it. For example: a PBM tells a pharmacist to ask for a $35 copay on a nasal spray, even though the PBM would later keep $28 of that patient’s payment and the pharmacy would get just $7.

Some pharmacists view this practice as highway robbery, but the PBMs defend it as part of the system they use to “monitor their pharmacy networks,“ according to Desai. The clawback is the penalty pharmacies pay their PBM masters for not measuring up to certain performance standards – e.g., when their customers don’t refill medications regularly.

Are PBMs Doing More Good Than Harm?

I have yet to find anyone who can give a convincing answer to that question, because the process of pricing drugs is both hidden and complicated. There is no doubt that PBMs reduce the initial, list prices of drugs charged by manufacturers. And that’s a good thing.

Adding it all up though, Desai says it’s “difficult to judge” whether the value they provide measures up to the fees they charge. If an expert like him can’t make the judgment, how are the rest of us supposed to sort it out?

I, for one, am convinced that the system gives PBMs too much power and profit, evidenced by all the different ways they make money without actually producing anything.

There are ways to repair at least some of what is broken, and we must find ways to reform the system to ensure PBMs don’t add to drug costs and do more harm than good. The diabetes advocacy community (and beyond) can play a part in this, and we’ll explore those calls to action soon.

Stay tuned for our continuing #PBMsExposed coverage.