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"PBMs” — Protect Against Unfair Drug Industry Practices: Key Facts, Polling, Best Practices

Policy Overview:  Regulate Pharmacy Benefits Managers (PBMs), who act as middlemen between drug manufacturers and public and private health plans, negotiating prices for prescription drugs. The PBM industry is highly corruptible and lax oversight of PBM practices has resulted in ethical lapses and instances of PBMs pocketing discounts they negotiated for health plans, rather than forwarding discounts through to clients.  Require transparency, a fiduciary relationship, and annual audits of all PBMs to ensure that the full value of negotiated discounts, rebates, or other financial considerations are passed through. 

Link: Model Legislation to Lower Prescription Drug Costs and Protect Against Unfair Prescription Drug Practices

Key Facts on PBMs: To get a drug on a health plan's benefit list or formulary, drug companies make payments to PBMs that are proportionate to how often the drug is prescribed.  PBMs boost their profits by pocketing some or all of these payments instead of passing them along as savings to their customers. 

  • Three PBM companies administer 80% of all private prescription coverage and each pocket annual revenues exceeding $15 billion.
  • The three largest PBM companies manage the drug benefits for 95% of Americans with prescription drug coverage.
  • From 1997 to 1999, Medco Managed Care, then a subsidiary of Merck, was paid $3.5 billion in rebates it negotiated from manufacturers, the majority of which were not passed through to health plans and consumers.
  • Illinois has estimated it could save $10 million annually by directly negotiating prescription drug prices for the state employee health plan instead of using a PBM.
  • The University of Michigan saved $8.6 million in 2003 by downsizing from 5 to 1 PBMs and better regulating the single remaining manager.

Key Facts on Drug Prices: The pharmaceutical industry is raising its prices at the fastest rate since 1992.  Critics identify this as an attempt to wedge in higher prices before Congress passes health reform that may clamp down on exorbitant drug prices and begins expanding coverage to millions of Americans.  Leading up to the creation of the Medicare Part D drug benefit, which notably lacked authority for Medicare to flex taxpayers’ purchasing power to negotiate lower prices, drug manufacturers raised their prices at the widest margin in 6 years.  The industry has so far protected its profits by spending more than almost all other lobbies in Washington, DC.

Polling Data:

  •  70% of Americans say the industry puts profits before people, according to a 2005 Kaiser Family Foundation poll.
  • 74% of Americans believe the drug industry makes too much profit, according to a November 2009 Associated Press poll.
  • 9 in 10 Americans support the government using its buying power to negotiate lower prices from drug companies, which many states are already doing, according to a recent Kaiser Family Foundation/Harvard poll.

For more, see Pew and Community Catalyst's public opinion survey on American's concerns about drug industry gifts and other ties to physicians and a recent Kaiser Family Foundation/Harvard/NPR survey on the public's opinion of the role of health care interest groups in health reform.

Best Practices: As outlined in our model legislation, public and private health plans will benefit by requiring transparency, a fiduciary relationship, and annual audits of all PBMs to insure that the full value of negotiated discounts, rebates, or other financial considerations are passed through. 

  • Several states have enacted PBM transparency laws, but Texas, Maine, Maryland, and the District of Columbia have the strongest.
  • As noted, Illinois has estimated it could save $10 million annually by directly negotiating prescription drug prices for the state employee health plan instead of using a PBM. And, the University of Michigan saved $8.6 million in 2003 by downsizing from 5 to 1 PBMs and better regulating the single remaining manager.

Possible Federal Action Creates Potential for States to Go Further:  Federal reform may set the stage for states to greatly expand their Rx reform initiatives, most notably those included in PSN’s 2010 Rx Agenda.  While the House reform bill authorizes Medicare to negotiate with the drug industry for reduced prices, a key and necessary reform, the Senate bill simply calls for a study of Medicare Part D drug prices.  And, the Senate bill and House bill, which has stronger language, both require greater PBM transparency and reporting, including instances where a PBM switches a covered individual from a less expensive to a higher cost drug.  This would help shine a light on PBM practices and ensure that these decisions are clinically-based, rather than an unethical agreement between the PBM and a drug manufacturer.  If federal reform passes this year or early next, and includes these provisions, it will be incumbent upon states to act quickly to maximize participation in these programs and regulations and to build on them.