Pharmacy Benefit Managers (PBMs) play a central role in the pharmaceutical supply chain.

Within the supply chain, they serve three main roles, all of which are related.

First, PBMs serve as an intermediary between drug manufacturers and health plan sponsors such as insurers and businesses.

Health plan sponsors hire PBMs to negotiate lower costs from drug manufacturers on their behalf.

One PBM will often represent multiple health plans. By representing multiple consumers from different employers and insurers, they have greater negotiating power with drug manufacturers. PBMs control a high-level of demand and can therefore drive lower costs.

Second, PBMs work with health plans to develop utilization criteria and formularies.

A formulary is just a fancy word for a list of drugs that your insurance plan covers. Drugs are “tiered.” These tiers determine your costs. Tier 1 drugs are typically generic medications, which will have low out-of-pocket costs. Out-of-pocket costs go higher as tiers go up.

Tiers help lower costs because drug manufacturers will compete to get their medications onto lower tiers by offering discounts.

For example, let’s say three different manufacturers produce three different brands of Drug X, all of which do the same thing. A PBM can goto each of the manufacturers and ask for their lowest cost in exchange for abetter tier placement. The manufacturer will want to provide the lowest cost, because they will get the best access to those consumers who are represented by the PBM. The manufacturer who provides the largest discount gets the best spot on the formulary.

Third, PBMs reimburse pharmacies on behalf of consumers.

When you go into a pharmacy, you pay an out-of-pocket cost.What you pay, however, is not the full price of the drug. PBMs collect money from your insurer to reimburse the pharmacy the balance of your prescription cost.

Criticisms of PBMs typically focus on how they make money.

PBMs make money in two main ways, one on the manufacturing side and one on the pharmacy side.

First, PBMs make money through negotiating rebates, or discounts, with manufacturers.

Let’s say a manufacturer sets the cost of a drug at $1,000. But in exchange for favorable placement on the plan’s formulary, a manufacturer may offer a PBM a $300 rebate, bringing the net cost of the drug down to $700.

The rebate in this instance works more like a fee paid from the manufacturer to the PBM. In exchange for covering the drug at a preferred tier, the manufacturer pays the PBM $300 every time one of its consumers purchases the drug.

Then, one of two things then happens to that $300 based on what the PBM’s client prefers.

The client can opt for a “100 percent pass through” where the $300 goes directly back to the client. The PBM makes no money on the negotiated rebate but is instead paid an administrative fee from the insurer for negotiating the rebates and setting up the formulary. 

Or, instead of the administrative fee, the PBM can keep a portion of the rebate, say $30, and pass the remaining $270 back to the client.

Second, on the pharmacy side, is something called spread pricing.

Spread pricing is a contractual arrangement between a PBM and its client. In spread pricing, the PBM and the client will agree to a set price for a drug. Every time that drug is purchased by someone on the health plan at a pharmacy, the plan pays the PBM a fixed amount, with which they reimburse the pharmacy.

For example, let’s say a PBM and their client agree to guaranteed rate of $700 on the drug. If the PBM can negotiate a reimbursement rate of $650 with a pharmacy, it makes $50. If the PBM can only negotiate a$750 reimbursement with a pharmacy, it loses $50.   

Or the health plan may decide to forego spread pricing and simply pay the PBM whatever the pharmacy charges, and an administrative fee for the PBM’s services.

Some critics argue that a PBM’s use of spread pricing drives up drug costs because they pay the pharmacy less than what the health plan gives them for the drug.

Criticism of spread pricing, however, ignores the important fact that it is a choice, not a requirement.

No one is forced into a spread pricing contract. PBMs and health plans must agree to a spread pricing model together. Many businesses and health plans choose spread pricing because it offers cost predictability.

Critics also argue that PBMs do not pass back rebates to consumers, and instead pocket the money as profit.

Again, how much of a rebate a PBM retains is a contractual matter. Plans may choose to allow the PBM to retain some rebate in exchange for lower administrative fees. Others maybe choose to have 100 percent of the rebate passed back.

Rebates are passed back in full a vast majority of the time.

PBMs are middlemen. And middlemen make a good scapegoat.

But the truth is, PBMs do far more to lower drug costs than increase them.

Research suggests that PBMs will help save health plans sponsors and consumers more than $1 trillion between 2020-2029.

PBMs help generate savings of nearly $1,000 per person per year and reduce costs by $6 for every $1 spent on their services.

Laws targeting PBMs have also been shown to increase drug costs.

The Affordable Health Coalition of North Carolina is committed to advocating for policies that will help lower drug costs for consumers.