Pharmacy benefit managers (PBMs) have garnered significant attention from Congress, the media, and the public. The original 1,547-page Continuing Resolution bill contained numerous provisions to regulate them; The New York Times has been running a series titled “The Middlemen” to criticize them; and Elon Musk asked, “What is a PBM?” to his 210 million followers on X on Tuesday.
PBMs, hired by insurance plan sponsors to manage prescription drug benefits, compete by lowering premiums to gain business. For instance, the average annual growth rate of Medicare Part D premiums was only 0.7% from 2010 to 2023, far below inflation. This remarkable stability is attributable to PBMs.
The PBM business model dictates that they are adversaries to drug manufacturers and pharmacies. PBMs affect the revenues of branded drug manufacturers by controlling the placement of their drugs on formularies—favorably placed drugs enjoy high sales volumes. PBMs also influence the revenues of pharmacies by determining the reimbursement amounts they receive.
For branded drugs, PBMs make money through rebate retention. Congress established safe harbor protections that exempt drug rebates from the federal anti-kickback statute. Holding the net price equal, PBMs would favor high-list-price-high-rebate drugs over low-list-price-low-rebate drugs because PBMs can retain larger rebates. The safe harbor is the root cause of rising list prices and high patient cost sharing (when it’s tied to the list price).
For generic drugs, PBMs profit from spread pricing—charging plan sponsors a high price while paying pharmacies a low price. This is like intermediaries in other industries that charge upstream players more than they pay downstream players. However, due to the administrative complexity inherent in insurance transactions, generic drugs, with their low costs and predictable nature, are not insurable and should be transacted directly between patients and pharmacies, much like how oil changes are paid for.
Insurance regulations mandate the coverage of generic drugs, including some over-the-counter drugs, and limit the use of Health Savings Accounts. These regulations invite PBMs to profit from spread pricing, leading to higher spending, premiums and cost sharing, as well as lower reimbursements to pharmacies. Not surprisingly, cash-pay prices at direct-pay platforms are often lower than prices involving insurance and PBMs.
PBM-related provisions in the original Continuing Resolution bill, including delinking PBM revenue from drug prices and banning spread pricing, aim to support pharmacies and align incentives between PBMs and plan sponsors. However, they fail to address the root causes of rebate retention and spread pricing: the safe harbor protections and insurance regulations, respectively.
Moreover, some provisions would weaken PBMs’ ability to contain premiums, leading to higher spending for both plan sponsors and patients. As Professors Joey Mattingly, David Hyman, and I discussed in JAMA Health Forum, every player in the drug supply chain seeks to make money, and there is no concrete evidence that weakening PBMs would benefit patients, except in cases where insurance and PBMs are bypassed entirely for certain drug transactions.
Questionable behaviors of healthcare players are often driven by bad rules of the game—unintended consequences from well-intentioned laws. Our new Congress, which will assume office on Friday, should focus on removing bad rules to improve the PBM game rather than applying Band-Aid solutions to the players.
