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What They Are and Why They Matter

This post is part of a series sponsored by AgentSync.

Yes, PBM is yet another in a long line of insurance acronyms, but where would we be without them? Using a lot more words to say the same thing, for sure! With prescription drug costs ever increasing (and an ever-increasing topic of conversation), it’s more important than ever to know the basics of one of the most significant players in the world of prescription drugs: pharmacy benefit managers, or PBMs.

What are PBMs?

In the complex patchwork of the healthcare landscape, PBMs perform the function of third-party intermediaries that sit in the middle of the prescription drug distribution channel. This means, as prescription medications make their way from a manufacturer to a pharmacy and, finally, to the patient who needs them, PBMs (theoretically) help the process move along.

PBMs are unarguably essential to the way the U.S. healthcare market currently functions, but they aren’t without controversy – particularly as they’ve grown more powerful and essential over the last few decades. Ranging from small, independent entities to organizations owned by, and embedded in, the largest healthcare corporations, PBMs wield a heavy influence on everything from which prescriptions a health insurer covers for its members to how much the insurer and its members pay.

A brief history of PBMs

As recently as the late 1980s, Americans paid for the vast majority (about 70 percent) of their prescription drugs out of pocket, without insurance coverage. By 1994, this dropped to 50 percent. Thirty years later, the U.S. Census showed 91.7 percent of Americans are covered by health insurance for at least part of the year, and most health plans (including all ACA-compliant health plans) cover at least some prescription drugs.

With this major shift in how patients pay for prescriptions, namely, a much larger portion of drug costs falling to health plans and health plan sponsors, PBMs began to form as a way to control expenses. The first PBMs emerged in the 1960s as middlemen that handled payments and reimbursements between health plans and pharmacies. They soon evolved to do even more, including establishing participating networks and processing claims.

PBMs really took off after Congress enacted the 1974 Employee Retirement Income Security Act (ERISA), which governs employer-sponsored health and retirement plans. This new federal law included the ability for large employers to start using cost-containment strategies to keep prescription drug prices down for their members. Outsourcing the development and execution of these cost-saving strategies is how PBMs really rose to their current status.

Some of the earliest cost-containment measures PBMs came up with included retail pharmacy cards and mail-order pharmacies. They also quickly realized that, as representatives of health plans and all their members, they could use their massive purchasing power to negotiate lower prices on drugs and threaten to not do business at all with pharmaceutical companies and pharmacies that didn’t agree to the negotiated rates.

Throughout the 1990s and through the present day, the largest PBMs have continued to consolidate and integrate further into the U.S. healthcare system both vertically and horizontally. In 2024, the three largest PBMs, which are also owned by the largest health insurance carriers, control about 89 percent of the prescription drug management market. The remaining (approximately 65 to 70) PBMs compete for their piece of the remaining market. This level of consolidated power has led to controversy over the years, but more on that later.

The role of PBMs in the U.S. healthcare system

Love it or hate it, PBMs play a vital role in today’s healthcare system. What started as a mechanism for large-scale purchasing power and drug price negotiations has evolved into a complex set of responsibilities including:

  • Creating formularies: lists of preferred drugs that a health plan will cover, or cover more favorably than others.
  • Managing mail-order pharmacies that offer prescriptions at a lower price than local retail pharmacies because of their scale and ability to automate.
  • Managing specialty pharmacies, including determining which patients are eligible for higher-level, more expensive medications under their health plan.
  • Creating and managing utilization management programs that help health plan sponsors and patients save money by working with members on medication education and adherence.
  • Setting prices for prescriptions from both the manufacturer or wholesaler side and the pharmacy/retail/consumer side.

This isn’t an exhaustive list of everything a PBM can do. Needless to say, they’re deeply embedded into the way Americans access and pay for prescription medications.

Who regulates PBMs?

PBMs are regulated by a number of entities on both the state and federal level. At the top of the regulatory pyramid are the Centers for Medicare & Medicaid Services (CMS) and the Federal Trade Commission (FTC). Additionally, each state has the ability to write its own regulations regarding PBMs. As of 2023, all 50 states have done so, with state-by-state PBM legislation on the rise between 2017 and 2021.

To assist the states in this task, the National Association of Insurance Commissioners (NAIC) established the PBM Regulatory Issues (B) Subgroup and has created model legislation on PBMs over the last few years.

The Centers for Medicare & Medicaid Services (CMS)

CMS is the federal agency charged with administering the Medicare and Medicaid programs. As such, it regulates PBMs that contract with Medicare Part D plans and Medicaid managed care plans. CMS’s regulations focus on making sure that PBMs provide adequate access to prescription drugs for Medicare and Medicaid members, and that they don’t engage in unfair or deceptive practices.

Recently, CMS has been vocal about some of the issues its Medicare and Medicaid recipients have been facing in terms of access to and affordability of medications. In a letter published Dec. 14, 2023, CMS urged the PBMs it works with to address concerns, like low pharmacy reimbursement rates, that could cause pharmacies to go out of business. The letter also calls out the growing number of complaints CMS receives about prior authorization requirements, utilization review, and coverage for preventive contraceptives.

The Federal Trade Commission (FTC)

The FTC is the federal agency responsible for enforcing antitrust laws and consumer protection laws. It regulates PBMs, just like it regulates all industries, to ensure compliance with trade practices and laws concerning unfair competition or anticompetitive behavior.

Throughout 2022 and 2023 the FTC made it clear that PBMs were on its radar with press releases announcing the launch of an FTC inquiry into “the impact of vertically Integrated Pharmacy Benefit Managers on the access and affordability of medicine,” its “revocation of its prior PBM advocacy,” and the expansion and deepening of its inquiry.

To date, the FTC hasn’t released any findings from its inquiry, though it has already issued “compulsory orders” to more than eight PBMs requiring them to “provide information and records on [their] business practices.”

Why PBMs are making headlines

The cost of prescription drugs in the news is nothing new. But in November of 2023, the pharmacy industry started making headlines in a different way. Coined “Pharmageddon” by the press and on social media, this three-day pharmacist walkout shined a spotlight on the struggles pharmacists, retail pharmacies, and particularly small or independent pharmacies face. Current pharmacological challenges include long hours, low wages, and massive staffing shortages. One reason for this, pharmacies say, is because their margins are being squeezed ever tighter by the low reimbursement rates they receive from PBMs.

Pharmageddon is just the most recent example of PBMs in the news. PBMs have often come under fire in recent years for their role in the rising cost of prescription drugs. Critics allege that PBMs’ payment structures incentivize them to negotiate higher drug prices, higher rebates (which they often keep portions of), and lower reimbursements. Consumer complaints, as reflected in the CMS and FTC press releases and letters, also include accusations that PBMs are restricting patient access to necessary drugs through their formularies.

All in all, PBMs – whether they deserve it or not – are gaining a reputation for not acting in the health plan sponsors’, beneficiaries’, or pharmacies’ best interests. While it remains to be seen what action, if any, government organizations and states will take to address the issue, the headlines won’t be going away any time soon.

What’s next for PBMs

PBMs, and specifically the largest three that control nearly the entire market, aren’t going anywhere. And that’s a good thing in some ways, since their sudden disappearance would inevitably cause chaos for the over 270 million Americans using health plans to access prescription drugs.

On the other hand, increased pressure from consumers has prompted federal agencies and legislators to start working on a way to ease the rising costs of and decreasing access to medically necessary drugs. PBMs may be here to stay, but the shape they’ll take in the future with potential new regulations coming down the pike isn’t set in stone.

As of this writing, there are at least eight congressional bills in various stages of committee and advancement that attempt to legislate PBMs. The major elements that these bills include, in various mix-and-match configurations are:

  • Reporting requirements: To address a major criticism that PBMs are opaque in their dealings, new transparency reporting requirements would mean PBMs have to disclose information on their negotiations with drug manufacturers, how they create formularies, and other information about pricing and rebates.
  • Eliminating spread pricing: It’s common today for PBMs to negotiate higher reimbursements for themselves from health plans than what they then reimburse to This practice, known as spread pricing, lets PBMs keep the difference (the spread) between what they bring in and pay out and can lead to health plans and their members paying higher drug prices.
  • Rebate passthrough: PBMs use their large purchasing power to negotiate rebates with pharmaceutical companies that are intended to lower a health plan sponsor’s net cost. Often, the PBM passes along only a percentage of these rebates to the plan sponsor and keeps a portion as profit. Proposed legislation would make it so PBMs must pass through the entire rebate to the health plan sponsor, which should benefit employers (health plan sponsors) and employees (health plan members).
  • Reducing consumer costs: Despite the real cost savings that PBMs negotiate for themselves and their customers (health plan sponsors), the insured health plan members may not benefit because the prices they pay are based on a drug’s list price before discounts and rebates. Proposed legislation hopes to change this by tying the consumer’s cost to the net price of the drug.
  • Changing PBM compensation structures: As long as PBMs get paid based on how much prescription drugs cost, it creates an incentive to maintain higher prices and to keep portions of the manufacturer rebates. New laws propose a new fee-for-service model to take away the incentive for PBMs to earn a profit by passing higher costs to health plan sponsors and patients.

While nothing has made it into law yet, PBMs are certainly on lawmakers’ minds as drug costs for consumers on government-sponsored and private healthcare plans just keep going up. With any luck, the future of PBMs will be one that’s both fair and profitable for these vital players in the healthcare distribution channel and to the consumers who rely on life-saving medications.

Need more regulatory updates?

If you’re a regulatory and compliance news junkie, make sure to check out our Regulatory Roundup, an ongoing collection of insurance and financial industry regulations, changes, and updates.

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