Improving Value

Drugs - Regulating Pharmacy Benefit Managers

Pharmacy benefit managers (PBMs) contract with health insurers to administer pharmacy benefits. PBMs often design prescription drug formularies—lists of drugs covered by a health plan—and determine which cost-sharing tier each covered drug falls into. PBMs also negotiate rebates with drug makers, but these negotiations are confidential. Drug companies also give PBMs volume-based rebates in order to keep generics off the formulary. This has caused some stakeholders to worry that PBMs may not be passing on savings to consumers and are contributing to rising drug prices. Furthermore, the industry is becoming more consolidated, increasing PBMs’ bargaining power by stifling competition.

PBMs typically do not have a fiduciary obligation to prioritize a plan sponsor client’s best interest. A fiduciary duty is the legal obligation of one party to act in the best interest of another, for example, the best interest of the consumer. Health plans and PBMs are regulated either by state insurance regulators or the U.S. Department of Labor (DOL). Courts have uniformly ruled that the Employee Retirement Income Security Act (ERISA), a law overseen by the DOL to set minimum standards for most voluntarily established pension and health plans to provide protections for enrollees, does not apply to PBMs. 

A study commissioned by the Ohio Department of Medicaid1 found that that PBMs were engaging in "spread pricing" a practice where PBMs pocket the difference between what they bill to the payer for medications and what they pay the pharmacy to dispense drugs. The report2 showed that the spread represented an 8.8 percent difference between what was billed to managed care plans and paid to pharmacies in the state.

Conversely, an Altarum study found that rebates negotiated by PBMs benefitted both consumers and payers—lowering government costs and contributing to lower premiums. Medicare Part D plans achieved larger rebates than private plans. However, authors noted that PBMs have gained financially from the rebate system, earing approximately $11 billion in profits in 2016.

State legislation regulating PBMs aims to shed light on their opaque business practices in several ways. These include: banning gag clauses that prevent pharmacists from revealing lower-cost options to consumers; requiring PBMs to be licensed by the state; mandating that PBMs disclose whether a generic is available; limiting cost-sharing; preventing PBMs from charging plans more than what a pharmacy paid; and requiring PBMs to report pricing and rebate information to promote transparency.



1.  Royce, Travor J.,Cheetal Kircher and Rena Conti, "Pharmacy Benefit Manager Reform: Lessons From Ohio," JAMA Vo. 322, No. 4 (June 20, 2019). 

2. "Ohio's Medicaid Managed Care Pharmacy Services: Auditor of State Report," Auditor of State of Ohio (August 16, 2018). 

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