Pharmacy benefit management

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In the United States, a pharmacy benefit manager (PBM) is a third-party administrator (TPA) of prescription drug programs for commercial health plans, self-insured employer plans, Medicare Part D plans, the Federal Employees Health Benefits Program, and state government employee plans.[1][2][3]

According to the American Pharmacists Association (APhA), "PBMs are primarily responsible for developing and maintaining the formulary, contracting with pharmacies, negotiating discounts and rebates with drug manufacturers, and processing and paying prescription drug claims. For the most part, they work with self-insured companies and government programs striving to maintain or reduce the pharmacy expenditures of the plan while concurrently trying to improve health care outcomes."[4][5]

As of 2016, PBMs manage pharmacy benefits for 266 million Americans.[2] They operate inside of integrated healthcare systems (e.g., Kaiser or VA), as part of retail pharmacies (e.g., CVS Pharmacy or Rite-Aid), and as part of insurance companies (e.g., UnitedHealth Group).[1][5] There are fewer than 30 major PBM companies in this category in the US,[1] and three major PBMs comprise 78% of the market and cover 180 million enrollees.[1][6]


PBMs aggregate the buying clout of enrollees through their client health plans, enabling plan sponsors and individuals to obtain lower prices for their prescription drugs through price discounts from retail pharmacies, rebates from pharmaceutical manufacturers, and the efficiencies of mail-service pharmacies.[7] As of 2015, CVS Caremark said that it reduced its plan members' prescription drug spend to 5%, down from 11.8% in 2014.[8] A 2014 ERISA hearing, however, noted that vertically integrated PBMs may pose "conflicts of interest", and that PBMs' health plan sponsors "face considerable obstacles in...determin[ing] compliance with PBM contracts including direct and indirect PBM compensation contract terms".[9]


The first PBM, Pharmaceutical Card System Inc. (PCS, later AdvancePCS) originated in 1968 with the invention of the plastic benefit card.[10] By the "1970s, [they] serve[d] as fiscal intermediaries by adjudicating prescription drug claims by paper and then, in the 1980s, electronically".[11]:34 By the late 1980s PBMs had become a major force "as health care and prescription costs were escalating".[12] Diversified Pharmaceutical Services (DPS) was one of the earliest examples of a PBM that entered the market from within a leading national health maintenance organization (HMO) United HealthCare (now United HealthGroup).[13]:304[14] Diversified pioneered many cost containment strategies that are now core PBM services and became a recognized leader in clinical programs.[citation needed] After its acquisition by SmithKline Beecham in 1994, Diversified played a pivotal role in that company's Healthcare Service division. By 1999 UnitedHealth Group accounted for 44% of DPS's total membership.[14] Express Scripts acquired Diversified April 1, 1999 and consolidated its position as a leading PBM for managed care organizations.[14]

In 2007, when CVS acquired Caremark,[1] the function of PBMs changed "from simply processing prescription transactions to managing the pharmacy benefit for health plans",[11]:34 negotiating "drug discounts with pharmaceutical manufacturers",[11]:34 and providing "drug utilization reviews and disease management".[11]:34 PBMs also created a formulary that encouraged or even required "health plan participants to use preferred formulary products to treat their conditions".[11]:34 In 2012, Express Scripts and CVS Caremark transitioned from using tiered formularies, to ones that began excluding drugs from their formulary.[1][15]

2002 Marketing expensive brand name drugs[edit]

According to an article published in August 2002 in the Wall Street Journal, that while PBMs were "steering doctors to cheaper drugs, especially low-cost generic copies of branded drugs from big pharmaceutical companies" from 1992 through 2002, they had "quietly moved into a new business: helping those same big pharmaceutical companies market their expensive brand-name drugs".[16]

By 1998, PBMs were under investigation by Assistant U.S. Attorney James Sheehan of the federal Justice Department and their effectiveness in reducing prescription costs and saving clients money, were questioned.[12]

Major PBMs[edit]

In 2015, the three largest public PBMs were Express Scripts, CVS Health (formerly CVS Caremark) and United Health/OptumRx/Catamaran.[17][18][19] In 2015, the largest private PBM was Prime Therapeutics, a PBM owned by and operated for a collection of state Blue Cross Blue Shield plans.

Express Scripts[edit]

Express Scripts Holding Company is the largest pharmacy benefit management (PBM) organization in the United States,[20] with 2013 revenues of $104.62 billion.[21] In 2012 Express Scripts' $29.1 billion acquisition of rival Medco Health Solutions (once the nation's largest PBM) created "a powerhouse in managing prescription drug benefits".[22]

In October 2015 Express Scripts began reviewing pharmacy programs run by AbbVie Inc and Teva Pharmaceuticals Industries Ltd regarding the potential use of tactics that "can allow drugmakers to work around reimbursement restrictions" from Express Scripts and other insurers. Insurers like Express Scripts direct "patients to cheaper generic versions of widely-used medicines to save costs". These reviews resulted from investigations into "questionable practices" at Valeant Pharmaceuticals International Inc's partner pharmacy, Philidor Rx Services.[20]

CVS Health[edit]

In 1994, CVS launched PharmaCare, a pharmacy benefit management (PBM) company providing a wide range of services to employers, managed care organizations, insurance companies, unions and government agencies.[23] By 2002 CVS' specialty pharmacy ProCare, the "largest integrated retail/mail provider of specialty pharmacy services" in the United States,[24]:10 was consolidated with their pharmacy benefit management company, PharmaCare.[24][25]:4 Caremark Rx was founded as a unit of Baxter International and was spun off from Baxter in 1992 as a publicly traded company. In March 2007, Caremark merged with CVS Corporation to create CVS Caremark, later re-branded as CVS Health.[26]

In 2011 Caremark Rx was the nation's second-largest PBM. Caremark Rx was subject to a class action lawsuit in Tennessee. The suit alleged that Caremark kept discounts from drug manufacturers instead of sharing them with member benefit plans, secretly negotiated rebates for drugs and kept the money, and provided plan members with more expensive drugs when less expensive alternatives were available. CVS Caremark paid $20 million to three states over fraud allegations.[27]

UnitedHealth Group[edit]

OptumRx, a leading PBM, is one of the Optum businesses of UnitedHealth Group Inc.[28]—the largest single health carrier in the United States.[29] UnitedHealth Group—then-UnitedHealthCare Corporation—was created in 1977. UnitedHealthCare Corporation was renamed in 1998). UnitedHealthCare Corporation acquired Charter Med Incorporated in 1977. Charter Med Incorporated was founded in 1974. UnitedHealthCare Corporation had its origins in the development of the HMO.[30] In March 2015 UnitedHealth Group acquired Catamaran Corporation for about $12.8 billion to extend its PBM business.[31][32]

PBMs operate in a marketplace where competition has been described as "vigorous" by the Federal Trade Commission (FTC).[33] Currently, in the United States, a majority of the large managed prescription drug benefit expenditures are conducted by about 60 PBMs.[34] While many PBMs are independently owned and operated, some are subsidiaries of managed care plans, major chain drug stores, or other retail outlets. PBMs compete to win business by offering their clients administrative and clinically based services which manage drug spending by enhancing price competition and increasing the cost-effectiveness of medications.[citation needed]

Strategies and tools[edit]

All PBMs offer a core set of services to manage the cost and utilization of prescription drugs and improve the value of plan sponsors' drug benefits. Some offer additional tools, such as disease management, that can target specific clinical problems for intervention. It is up to the client of the PBM, however, to determine the extent to which these tools will be employed.[citation needed]

Such tools include:[citation needed]

  • Pharmacy networks – PBMs build networks of retail pharmacies, known as preferred pharmacy network, to provide consumers convenient access to prescriptions at discounted rates. PBMs monitor prescription safety across all the network pharmacies, alerting pharmacists to potential drug interactions even if a consumer uses multiple pharmacies.
  • Mail service pharmacies – PBMs provide mail-service pharmacies that supply home-delivered prescriptions without the face-to-face consultation provided by a pharmacist. A 2013 CMS study found negotiated prices at mail order pharmacy to be up to 83% higher than the negotiated prices at community pharmacies.[35]

In 1995 the US FDA found the temperature in a mail box in the sun could reach 136 °F (58 °C) while the ambient air temperature was 101 °F (38 °C).[36] One of the arguments for specialty pharmacies offered by PBMs included concerns about temperature-sensitive pharmaceuticals through regular mail and parcel post. PBMs use insulated shipping container and ship drugs by express mail and couriers to reduce transit time. This may involve delivery to the door, rather than a mail box. This reduces risks to drug safety and efficacy but increases cost.

  • Formularies – PBMs use panels of independent physicians, pharmacists, and other clinical experts to develop lists of drugs approved for reimbursement in order to encourage clinically appropriate and cost-effective prescribing; PBM clients always have the final say over what drugs are included on the formulary that they offer to their employees or members.
  • Plan design – PBMs advise their clients on ways to structure drug benefits to encourage the use of lower cost drug alternatives—such as generics—when appropriate. This is done by setting plans up with different copay tiers, in this case the client will apply a lower copay for generic drugs than it would for brand drugs. The PBMs' role is advisory only; the client retains all responsibility for establishing the plan design.
  • Electronic prescribing (E-prescribing) – PBMs have devised e-prescribing technology, which provides physicians with clinical and cost information on prescription options that allows them to better counsel consumers on which medications—including various lower cost options—will be the safest and most affordable choices. PBMs led the effort to increase the use of e-prescribing in Medicare.[37] Financial incentives for physicians to adopt health information technology (HIT) included in the recent economic stimulus bill will increase the number of prescribers using e-prescribing to more than 75 percent over the next five years—nearly double the rate of use anticipated after passage of last year's e-prescribing legislation.[38] Research has found that e-prescribing will help prevent 3.5 million harmful medication errors and save the federal government $22 billion in drug and medical costs over the next 10 years, offsetting the projected $19 billion in federal outlays to modernize the nation’s HIT infrastructure under the American Recovery and Reinvestment Act (known as ARRA).[38]
  • Manufacturer discounts – PBMs pool purchasing power to negotiate substantial discounts from pharmaceutical manufacturers in order to lower benefit costs for clients and consumers.
  • Clinical management – PBMs use a variety of tools such as drug utilization review and disease management to encourage the best clinical outcomes for patients.
  • Pharmacy discount cards – PBMs are able to offer the uninsured their prenegotiated drug prices through the use of a pharmacy discount card. These discount cards allow patients to pay these prices in cash similar to the discounted price insurance companies will pay pharmacies,[39] however many independent pharmacies offer prescriptions at or below the recommended price by a discount program.[citation needed]

Litigation and controversies[edit]

In 2004, litigation added to the uncertainty about PBM practices.[27][40] In 2015, there were seven lawsuits against PBMs involving fraud, deception, or antitrust claims.[1][6]

In 2011 a new division of the Pharmacy Benefit Managers (PBMs) was formed, with a mandate to license and regulate PBMs under the Mississippi Board of Pharmacy.[41]

State legislatures are using "transparency", "fiduciary", and "disclosure" provisions to improve the business practices of PBMs.[40] The provisions require PBMs to disclose all rebate, discount, and revenue arrangements made with drug manufacturers, including all utilization information on covered individuals.

Fiduciary duty provisions have stirred the most controversy. They require PBMs to act in the best interest of health plans in a way that conflicts with PBMs' role as the intermediary, which is the foundation of the PBM industry. The Pharmaceutical care management association, the national trade association representing PBMs, starkly opposes legislation of this kind. The PCMA believes public disclosure of confidential contract terms would damage competition and ultimately harm private and public sector consumers. The association also argues that transparency already exists for clients that structure contracts to best suit their needs, including imposing audit rights.

Maine, South Dakota, and the District of Columbia have laws requiring PBM transparency.[citation needed] PCMA filed suit against Maine and the District of Columbia for their financial disclosure laws.

In the Maine lawsuit, PCMA v. Rowe, PCMA alleged the law:

  • Destroys the competitive market and will result in higher drug costs for Maine consumers
  • Deprives PBMs of proprietary information and trade secrets
  • Conflicts with the Employee Retirement Income Security Act and the Federal Employees Health Benefit Act
  • Violates the "taking and due process" clause of the U.S. and state constitutions
  • Allows for broad enforcement of violation under the Maine Unfair Trade Practices Act

PCMA won preliminary injunctions against the Maine law twice but was denied its motion for summary judgment. The judge agreed that financial disclosure was reasonable in relation to controlling the cost of prescription drugs. It was determined that the law was designed to create incentives within the market to curtail practices that are likely to unnecessarily increase costs without providing any corresponding benefit to those filling prescriptions. PCMA won an interim injunction against the D.C. law, with the judge ruling that it would be an "illegal taking" of private property.


PBMs have been strong proponents in the creation of a U.S. Food and Drug Administration (FDA) pathway to approve similar versions of expensive specialty drug that treat conditions like Alzheimer's, rheumatoid arthritis and multiple sclerosis.[42] So-called biosimilar legislation that does not grant brand name drug manufacturers monopoly pricing power[43] is strongly supported by PBMs, AARP, AFL-CIO, the Ford Motor Company, and dozens of other consumer, labor, and employer organizations concerned about runaway health care costs in both the private and public sector. A recent Federal Trade Commission (FTC) found that patents for biologic products already provide enough incentives for innovation and that additional periods of exclusivity would "not spur the creation of a new biologic drug or indication" and "imperils" the benefits of the approval process.[44]

See also[edit]


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