What history tells us about your prescription costs and the new ‘bad boys’ of health care

The new bad boys of healthcare are pharmacy benefit managers (PBMs). The U.S. House and Senate are targeting PBM practices, such as drug manufacturers’ rebates which allegedly hike drug prices. The FTC is preparing a report on PBMs’ impact on drug access and affordability.

The list of allegations leveled against intermediaries like PBMs is lengthy: e.g., anticompetitive behavior, collusion with manufacturers, exclusive contracts, reduced patient access to needed medicine, conflicts of interest, excessive fees, kickbacks, secret rebates, lack of transparency, and higher consumer costs. By contrast, the supporting evidence is scant.

There is little critical analysis of what these intermediaries actually do, who they work for, what their business and revenue models are, and their impact on prices and competition.

A new Wharton School report shines a light of objectivity on these issues. (Full disclosure: Two years ago, two PBMs paid me to research two very specific topics, including the supply and demand factors behind the opioid epidemic. I provided short feedback, as requested — and the work had no impact on the book that serves as basis for this op-ed: The relevant sections had already been written.)

PBMs are intermediaries trying to control healthcare costs while maintaining quality. History suggests that intermediaries are like the late comedian, Rodney Dangerfield: they get no respect – just the blame.

In the early 1990s, employers supported health maintenance organizations (HMOs) to contain rising healthcare costs; by the late 1990s, HMOs were considered heartless villains (e.g., second-opinion surgeries), prompting a managed care backlash and the Patients’ Bill of Rights Act (1998). Group purchasing organizations (GPOs) sought to negotiate lower medical device prices for their hospital sponsors. In the early 2000s they were greeted with four Senate Hearings on antitrust and proposed legislation (The Medical Device Competition) to rein them in.

Critics rarely bother to examine the history of PBMs. The narrative has (until now) never been pulled together from archival sources, which requires a lot of homework. As former President Harry Truman said, “the only thing new in the world is the history you don’t know.” This narrative constitutes one set of inconvenient truths for intermediary critics.

Early PBMs began as local cooperatives providing medical and pharmaceutical services to community members through prepaid groups. They were less healthcare insurance and more healthcare assurance providers. They were typically organized around HMOs that provided both medical and pharmacy benefits to cover all healthcare enrollee needs under an affordable budget. The early PBMs were thus tied to health insurers, just like they are today.

Certain PBM practices have irritated critics. They include drug formularies, contract admin fees paid by manufacturers, discounts and rebates from manufacturers, narrow pharmacy networks, and spread pricing. Critics fail to realize is that many of these contracting tools have long been in place without causing an uproar. That is likely because these tools served the economic interests of their sponsoring organizations downstream (health plans and employers) who developed them to deal with reimbursement pressures, as well as rising list prices charged by manufacturers. Just like many contracts between buyers and sellers in the private sector, PBM contracts are never publicly disclosed to encourage price discounting by manufacturers (and inhibit any collusion among them). This casts the whole transparency issue in a different light.

The historical narrative demonstrates that the business and revenue models of PBMs have changed over time. PBMs are now heavily focused on the dispensing of specialty drugs and operating 340B contract pharmacies, taking advantage of trends in drug discovery and federal legislation. Yet, PBM critics continue to attack them regarding strategies heavily pursued in the past, such as manufacturer rebates and retail pharmacy network management. Although still a sizeable portion of their revenues, such strategies are on the wane.

A core tactic in market competition is bargaining power. The historical narrative shows that PBMs amass purchasing volume to negotiate lower prices from drug manufacturers. HMO-PBMs combined the prescription orders of scores (and then hundreds) of physicians on their medical staffs. Both routed these orders through a centralized negotiating hub to contract as “one” with manufacturers. The game has always been one of “leverage” over product suppliers and exchange of higher buyer volumes for lower unit price.

This game became more important for survival and customer service with intensification of input cost pressures and/or reimbursement pressures. When squeezed downstream, PBMs sought to squeeze manufacturers upstream. PBM consolidation has helped them to negotiate lower input prices and keep annual net sales price growth for drugs in the low single digits (~3 percent) for beneficiaries. If one really wants to start pointing fingers at the biggest culprits in consolidation and rising cost, one does not have to look very far: “Big Med.”

Another core principle in economics — and a key to PBMs and the healthcare ecosystem — is tradeoffs. PBMs (in partnership with health plans) develop formulary tiers that allow plan participants to access the drug(s) they prefer at the cost they can afford. PBMs do not dictate the choice to their health plan enrollees. Product quality is, nevertheless, evident in the decisions made by health plan pharmacy and therapeutics committees. Such committees are heavily comprised of clinicians (physicians, nurses, pharmacists) who focus primarily on product quality, not on product cost. To the extent their product choice set is limited, it usually reflects committee (peer) assessments of what are comparable, therapeutically equivalent drugs with no evidence base to differentiate them. In this manner, PBMs foment competition among drug makers of similar products to grant price concessions to get on PBM formularies.

In sum, PBMs promote competition in healthcare and help to reduce prices.

PBMs get drug makers to compete on price and get pharmacies to reduce their fees. PBMs also compete with one another in terms of claim processing fees and a host of client services to get contracts with insurers and employers. They are, thus, pro-competitive. This is not a blanket defense of PBMs and all their trading practices. However, history suggests they deserve a little more credit (and perhaps our thanks).

Lawton Robert Burns is the James Joo-Jin Kim Professor in The Wharton School at the University of Pennsylvania, and the author of “The Healthcare Value Chain: Demystifying the Role of GPOs and PBMs” (2022) and “The U.S. Healthcare Ecosystem” (2021).