PBMs’ profit swells as sector consolidates, report shows

Pharmacy benefit managers are more profitable as the sector consolidates, new research shows.

PBMs, which negotiate rebates from drug manufacturers on behalf of payers, create networks of pharmacies and determine reimbursements to those pharmacies, have been joining forces with large insurers and pharmacies. That has helped boost PBMs’ gross profit from PBM-owned mail order and specialty pharmacies to $10.1 billion in 2019, up 13% from $8.9 billion in 2017, according PBM Accountability Project’s analysis of financial records, government reports, studies and surveys.

PBMs’ gross profit grew 12% from $25 billion to $28 billion over that span.

“That’s a reflection of these vertically integrated companies’ ability to steer prescriptions on their formularies to be filled by affiliated specialty and mail-order pharmacies,” said Mark Blum, executive director of America’s Agenda, founding member of the PBM Accountability Project, which is supported by pharmacists, patient advocacy groups and unions, among other stakeholders. “Vertical integration makes negotiations between stakeholders across different links in the prescription drug supply chain meaningless—it keeps the revenue and profit flow vertical. At the end of the day, the self-funded health plan is paying for the cost of it all.”

State and federal lawmakers and regulators have pushed for PBMs to pass through concessions negotiated with pharmaceutical companies to the employers and payers they serve to reduce drug spending. But PBMs have been able to offset their dwindling rebate revenue by charging more administrative fees, the report shows.

Gross profit from retained administrative fees paid by manufacturers for services provided by PBMs increased 51%, from $3.8 billion in 2017 to $5.7 billion in 2019.

“PBMs are very facile in moving to different revenue sources,” Blum said. “As the private sector becomes savvier about rebate pass-throughs and the threats of regulation and litigation mount, PBMs have stopped retaining rebates and raised administrative fees. We learned through our surveys that they intend to continue to do that with other fees on payers and self-funded plans.”

The Pharmaceutical Care Management Association, which represents PBMs, criticized the report, claiming that it is operated by “special interests pushing an agenda that will increase costs.” PBMs have a proven track record on reducing prescription drug cost for clients and patients, the association said in a statement.

PBMs claim that one of their most valuable offerings is in negotiating discounts with drug manufacturers. But that role may be diluted if the Build Back Better Act becomes law, industry observers said.

The current version of President Joe Biden’s legislation, recently passed by the House, would give HHS the authority to negotiate prices with drug companies for a small number of high-cost drugs without generic or biosimilar competitors.

“For those drugs, there really is not going to be a role for PBMs to negotiate with drug manufacturers,” said Paul Ginsburg, professor of health policy at the University of Southern California, senior fellow at the USC Schaeffer Center for Health Policy and Economics and nonresident senior fellow at the Brookings Institution. “PBMs will still play a role, but really just on claims processing. It might have some effect on profitability.”

Over the last three years, all three of the largest PBMs formed their own group purchasing organizations to handle rebate negotiations in-house. This increased complexity and reduced visibility may allow these supply chain entities to retain a larger share of rebates, fees and other price concessions, the report concluded.

Gross profit from “other sources,” including spread pricing, pharmacy fees and clawbacks, fees collected from payers and other non-administrative fees collected from manufacturers, grew by nearly 26%, from $8.5 billion in 2017 to $10.7 billion in 2019.

While federal regulators aim to impose stricter guidelines on vertical integration that could limit some of that ancillary revenue, it will be hard to unwind these massive conglomerates, industry observers said.

“The information asymmetry and financial opaqueness of the prescription drug supply chain creates many potential avenues for PBM to squeeze money,” said Ge Bai, an accounting professor at Johns Hopkins University who has studied PBMs. “When the door is closed, PBMs will find a creative way to open a new window.”

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