Congressional Efforts to Regulate PBMs Risk Higher Drug Costs, Worse Health Outcomes for Patients

Pharmacy Benefit Managers (PBMs) are private businesses that developed in the free market to manage prescription drug benefits for health insurance plan sponsors. Nearly all private and government prescription drug insurance plans voluntarily utilize PBMs’ services.

PBMs have been criticized as predatory middlemen. Multiple legislative proposals are pending that would restrict PBM functioning.

In a new paper, Competitive Enterprise Institute (CEI) senior fellow Dr. Joel Zinberg explains how PBMs use market forces to lower drug costs for patients and taxpayers and improve health outcomes. Zinberg also describes why the pending legislation will be counterproductive, resulting in reduced competition, higher costs, decreased health, and an end to beneficial evolution in the pharmacy benefit services market.

PBMs, acting on behalf of drug insurance plans, negotiate with drug manufacturers on the one hand and with pharmacies on the other. They design drug benefit plans, selecting drugs to include on the plan’s formulary list of covered drugs and allocating those drugs to different copay tiers. Drug manufacturers accept lower prices in exchange for access to those plans and increased sales volume. PBMs also select which pharmacies to include in their plan networks and focus on obtaining better terms for plan sponsors and their beneficiaries.

PBMs function much like buyers’ clubs do, obtaining lower prices for their members and facilitating increased use of beneficial drugs. As Zinberg points out, PBMs generate tens of billions of dollars in benefits over their costs in consumer savings resulting from manufacturer and pharmacy rebates and discounts, the value of encouraging better drug utilization in preventing more serious illness and expensive healthcare use, an increased pace of drug development, and government savings from decreased premium subsidies and premium tax expenditures.

PBMs pass nearly all of the rebates and discounts they obtain back to plan sponsors. And, contrary to critics, PBMs do not earn outsized profits. Studies indicate that PBMs’ net margins were 2 percent, less than other participants in the drug distribution system such as manufacturers (26 percent), pharmacies (4 percent), and insurers (3 percent). 

Legislative proposals to limit or eliminate rebates and discounts that pass through PBMs or to require PBMs to disclose pricing and other confidential contract terms could decrease competition and result in higher costs, sacrificing much of the value PBMs provide. The proposals will limit the ability of smaller PBMs to compete and could lead to anti-competitive collusion.

“Congress should reject proposals to limit or eliminate rebates and discounts that pass through PBMs or force disclosure of pricing and confidential contract terms. The market for prescription drugs should be allowed to continue to evolve and become more efficient through negotiations among the market actors,” said Zinberg.

Read “A Free Market Solution for Drug Distribution: How PBMs Enhance Competition, Lower Costs, and Improve Drug Utilization” on CEI.org.