Pharmacy benefit management

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In the United States, a pharmacy benefit manager (PBM) is most often a third party administrator (TPA) of prescription drug programs but sometimes can be a service inside of an integrated healthcare system (e.g.: Kaiser or VA). They are primarily responsible for processing and paying prescription drug claims. They also are responsible for developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers. Fortune 500 employers and public purchasers (Medicare Part D, the Federal Employees Health Benefits Program) provide prescription drug benefits to the vast majority of American workers and retirees. There are fewer than 100 major companies in this category in the US.[citation needed]

Scope of PBMs[edit]

PBMs aggregate the buying clout of millions 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. PBMs also use clinical tools aimed at reducing inappropriate prescribing by physicians, reducing medication errors, and improving consumer compliance and health outcomes.[citation needed]

Competition among PBMs[edit]

PBMs operate in a marketplace where competition has been described as “vigorous” by the Federal Trade Commission (FTC).[1] Currently, in the United States, a majority of the large managed prescription drug benefit expenditures are conducted by about 60 PBMs.[2] 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]

In 2012,the five largest PBMs were:

  1. Express Scripts (acquired Medco Health Solutions);
  2. CVS Health (formerly CVS Caremark);
  3. Prime Therapeutics, a PBM owned by and operated for a collection of state Blue Cross Blue Shield plans;
  4. United Health / OptumRx;.[3]
  5. Catamaran Corporation (SXC + Catalyst).[4][5]

PBM 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 of 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.[6]
The shipment of drugs through the mail and parcel post is sometimes a concern for temperature-sensitive pharmaceuticals. Uncontrolled shipping conditions can include high and low temperatures outside of the listed storage conditions for some drugs. For example, 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).[7] Shipment by express mail and couriers reduces transit time and often involves delivery to the door, rather than a mail box. The use of insulated shipping containers also helps control drug temperatures, reducing risks to drug safety and efficacy but increasing 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.[8] 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.[9] 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).[9]
  • 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 can save users without insurance from between 10% and 75% on prescription medication, however many independent pharmacies offer prescriptions at or below the recommended price by a discount program.

Litigation over PBM practices[edit]

In 2004, litigation added to the uncertainty about PBM practices.

Medco Health Solutions, at the time the nation's largest PBM, reached a $29.3 million settlement agreement for allegations of violating consumer protection and mail fraud laws filed by 20 states and the federal government. Medco also paid Massachusetts $5.5 million to settle allegations that the company pocketed millions of dollars in rebates from drug companies that should have been passed down to the state.[10]

New York's attorney general, Eliot Spitzer, filed suit against the PBM Express Scripts, alleging breaches of its $600,000 contract and violations of civil law resulting in the state being defrauded of up to $100 million over five years.[11]

Caremark Rx, the nation's second-largest PBM, 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.[12]

State responses[edit]

State legislatures are using "transparency", "fiduciary", and "disclosure" provisions to regulate the business practices of PBMs. 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. 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
  • 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 drugs that treat conditions like Alzheimer's, rheumatoid arthritis and multiple sclerosis.[13] So-called biosimilar legislation that does not grant brand name drug manufacturers monopoly pricing power[14] 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.[15]

See also[edit]


  1. ^ US Federal Trade Commission & US Department of Justice Antitrust Division, “Improving Health Care: A Dose of Competition,” July 2004
  2. ^ Shepherd, Joanna (July 2013). "Is More Information Always Better? Mandatory Disclosure Regulations in the Prescription Drug Market" (PDF). Cornell Law Review Online 99. 
  3. ^
  4. ^ Reference: Health Strategies Group, "Profiles of Leading PBMs." September 2012.
  5. ^ SXC to buy Catalyst in $4.4 billion drug benefit deal - Chicago Tribune. (2012-04-18). Retrieved on 2013-09-05.
  6. ^
  7. ^ Black, J. C.; Layoff, T. "Summer of 1995 – Mailbox Temperature Excurions of St Louis" (PDF). US FDA Division of Drug Analysis. Retrieved 12 July 2011. 
  8. ^ Perrone, M., “Electronic Prescribing Push Clicks with Congress,” The Associated Press, June 3, 2008; Mathews, A.W. and Radnofsky, L., “E-Prescribing Gets Support in Congress,” The Wall Street Journal, June 5, 2008.
  9. ^ a b Visante, “American Recovery and Reinvestment Act Will Save Billions and Reduce Medication Errors by Accelerating E-Prescribing,” prepared for the Pharmaceutical Care Management Association, March 2009,
  10. ^ Loyd, Linda (17 April 2004). "Medco settles with U.S., 20 states The pharmacy-benefits manager will pay states, including Pa., $29.3 million for switching patients' drugs.". Philly. Retrieved 17 January 2014. 
  11. ^ "New York Attorney General Files Suit Against Express Scripts, Alleging $100 Million in Fraud". California Healthline. 5 August 2005. Retrieved 17 January 2014. 
  12. ^ Pfeifer, Stuart (16 December 2011). "Money & Company". Los Angeles Times. Retrieved 17 January 2014. 
  13. ^ Schouten, F., “Lobbyists battle over drug sales,” USA Today, July 29, 2009.
  14. ^ “Our view on generic medications: Drugmakers seek excessive monopolies on ‘biologics’”, USA Today, August 12, 2009.
  15. ^ Federal Trade Commission, “Follow-on Biologic Drug Competition,” June 2009. 2010


  • A Garrett & R Garis, Leveling the Playing Field in the Pharmacy Benefit Management Industry, 42 Valparaiso University Law Review 33-80 (2007)

Correct citation: 42 Val. U.L. Rev. 33

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