PBMs Are at a Crossroads. Which Way Will They Go?

Author(s)Troy Trygstad, PharmD, PhD, MBA, Pharmacy Times Editor in Chief

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Key Takeaways

PBMs have shifted from administrative roles to profit-driven entities, focusing on in-house dispensing and rebate schemes.
The FTC has launched investigations into PBM practices, highlighting potential market misalignments and economic rents.
Transparency and value-based contracting are essential for PBMs to align with purchaser demands and ensure market functionality.
Community pharmacies face closures due to unfavorable PBM contracts, necessitating urgent industry changes to maintain access and sustainability.

Criticism and inquiry are coming from all directions. Will investors earn more by holding on to the past or transitioning toward the future?

PBMS ARE BUSINESSES, DESIGNED TO MAKE A RETURN ON EQUITY AND INVESTMENTS

Nearly every working or retired American owns a piece of a company with a pharmacy benefit manager (PBM). I frequently ask a room of pharmacy owners how many of them log into their brokerage or retirement accounts each morning and evaluate performance on anything besides return on investment and the most recent price of the holdings. I usually get a few grumbles and smirks, with silent acknowledgment that PBMs act rationally to bring returns and profits to their stockholders like every other corporation traded on the exchanges. PBMs are good at making money and making lots of it. How they make money is what has generated much attention over the past year, and whether their earnings are the result of advancing marketplace competition or manipulating it. Within pharmacy circles, PBMs have been the subject of extended levels of discourse, angst, and ire over the past decade. Nearly 50 years ago, PBMs started as an administrative business focused on making transactions between pharmacies and insurers more efficient and effective. As the number of brand-only drugs increased, as well as the list prices associated with them, PBMs took on a more prominent role in containing drug spending in the 1990s. As more and more branded drugs came off patent, the calling card of PBMs through the turn of the century was brand-to-generic switching and an interclass focus on preferring generic products over brands.

During the 2010s, overall generic dispensing rates rose well into the 80%-plus range (up from 50%-plus roughly a decade prior), relegating drug cost control to intensive harvesting of savings from a small number of products or intensive reduction in dispensing rates for generics from pharmacies. With generic dispensing rates now well into the 90%-plus range and little margin left to negotiate with pharmacies, PBMs have shifted their profit strategy almost entirely toward in-house dispensing of those branded drugs and rebate schemes. This has resulted in a potential misalignment with purchasers of health care services and drug products.

About the Author

Troy Trygstad, PharmD, PhD, MBA, is the executive director of CPESN USA, a clinically integrated network of more than 3500 participating pharmacies. He received his PharmD and MBA degrees from Drake University and a PhD in pharmaceutical outcomes and policy from the University of North Carolina. He has recently served on the board of directors for the Pharmacy Quality Alliance and the American Pharmacists Association Foundation. He also proudly practiced in community pharmacies across the state of North Carolina for 17 years.

SCRUTINY INTENSIFIES ON PBMS’ BUSINESS PRACTICES AND BENEFIT TO THE MARKETPLACE

In the summer of 2022, the Federal Trade Commission (FTC) launched an investigation into PBM practices,¹ largely owing to these potential misalignments with purchasers and functional and efficient markets (thus the FTC on the inquiry’s lead). This past summer, an interim staff report on that inquiry was released with some fanfare, but with fierce pushback by PBMs that claimed the findings were unfounded.² In August, Express Scripts filed suit against the FTC to retract the report, again citing poor methods and data.³ Subsequently, the FTC filed suit with the PBMs over insulin pricing schemes⁴ of the type described earlier, in which the rebates create potential misalignment with purchasers.

Recently, these purchasers have taken an acute interest in the role and effectiveness of PBMs in the pharmaceutical marketplace. Notably, payers, as PBMs and insurers are known among health care providers, are not actually health care purchasers. Nearly all health care products and services delivered in the US are purchased by employers, taxpayers, and patient households (through direct payments, co-payments, or coinsurance). Currently, all 3 groups believe they are being robbed. The key question among them is, if the original purpose of PBMs was to increase administrative efficiencies and keep drug costs down, where is the evidence that these 2 pillars are effectively functioning in 2024 and will be beyond? Ultimately, purchasers will decide what they want to purchase, given a transparent view of products and multiple products to choose from (ie, a functional marketplace).

WHICH STRATEGY IS MORE PROFITABLE?

Economic rents are a fancy academic way of saying profits without value. Administrative efficiencies and brand-to-generic switching are nothing more than a commodity play, with little opportunity to generate profits. Concern is growing that the rebate game and spreadsheet wars increase economic rents, working against the marketplace instead of advancing it. PBMs have become so adept at generating profits that they are the main driver of earnings for most, if not all, national insurers.

Transparency will win in the end. Purchasers and their subsequent politics will demand it, and PBMs will be absorbed into the standard operations of multipronged administrative insurers. Direct-pay opportunities like the Mark Cuban Cost Plus Drug Company will become increasingly popular among employers and commercially insured employees alike, as high-deductible plans with health savings accounts eventually dominate the benefits landscape. The other half of the population entitled to government sponsored insurance will find local and national legislators and administrators demanding access to data to ensure their constituency doesn’t wake up to see articles exposing gross excesses in economic rents from taxpayers.⁵

COMMUNITY PHARMACY SUSTAINABILITY AND SURVIVAL HANGS IN THE BALANCE

Meanwhile, nearly 2500 pharmacies have closed in 2024 alone, with thousands more on the brink of closure due to paltry reimbursement and contract terms with PBMs. PBMs and their conglomerate corporations will eventually move toward transparency and value-based contracting. However, this evolution must occur within months, not years. Otherwise, access to community pharmacies will be even more limited, more walkouts will take place, and the caustic politics of PBMs and pharmacy providers will worsen.