Pharmacy Benefit Managers’ Profitability Under Scrutiny

Transparent PBMs vs. For-Profit PBMs—What HR Managers Need to Know

Pharmacy Benefit Managers (PBMs) have become a focal point in recent congressional hearings due to concerns over their profitability and the growing costs of prescription drugs for consumers. As an HR Manager, especially those responsible for control their medical benefit spending, it is probably time to understand the difference between traditional for-profit PBMs and emerging transparent PBMs. You’re understanding and comprehension of these different type of entities can significantly impact both healthcare costs and the quality of pharmacy benefits offered to employees.

The big three PBMs, CVS Health (Caremark), Cigna (Express Scripts), and UnitedHealth Group (OptumRx), dominate the U.S. pharmacy benefits market, collectively controlling about 80% of the industry.

While I can count over 30 additional options that are available, the big three are known to dominate the marketplace despite all the discussions surrounding potentially unfair pricing. In 2022, CVS Health alone reported over $400 billion in revenue, a large portion of which came from PBM operations. These for-profit PBMs generate revenue primarily by negotiating rebates from drug manufacturers and managing pharmacy networks for large and small insurers alike. However, critics argue that these PBMs prioritize profit over consumer savings, which has been the intense focus on congressional inquiries. For instance, it is possible that they can retain up to 30% of negotiated rebates instead of passing these savings directly on to consumers, leading to higher out-of-pocket costs for patients. When you consider that estimates show $378B according to The American Association of Actuaries, is spent on Pharmacy Costs in the US, we are talking significant money here. The Congressional Budget Office (CBO) has found that PBMs contribute to higher drug prices by inflating list prices to secure larger rebates creating an endless cycle of increased prices for employers.

In contrast, transparent PBMs often operate with a business model that emphasizes full disclosure of pricing, rebate arrangements, and administrative fees all reported back to the employers which they are associated with. With transparent PBMs, employers and consumers can clearly see the cost structure and ensure that savings negotiated with drug manufacturers are passed directly to the patient or the employer and even how these rebates can be issued. A number of the transparent PBMs find themselves operating through flat fee per member structures or a cost-plus model, where employers pay for services at a known and agreed-upon rate, rather than a percentage of the rebates or profits generated. This is what is often found in self-funded type arrangements we have discussed previously. But it is always the best policy to ask your benefit advisor how your PBM partner is paid for their services to ensure you have aligned incentives.

For HR managers, it is extremely important to know these differences when it comes to creating your company’s benefit designs. The previously mentioned For-Profit PBMs may offer cost savings when you receive your spreadsheet comparison from your benefit broker, but that may be simply because you are going to pass the increased costs to your employees rather than create actual savings. The alternative option of Transparent PBMs often do not appear as competitive on the plan comparison spreadsheet but may be a better long-term savings for you and your employees when you compare the annual expected spending comparison. The only person that truly can complete this analysis is you and your insurance advisor.

As we wrap up another benefit plan year, ask yourself if you truly understand these models, and make sure you are staying informed. This is another case of the more you know, the better you can serve your company and the employee’s healthcare benefit design.

With decades of experience in the healthcare benefits landscape, Trey Hinson outlines the ongoing fusion of technology and healthcare, providing a wealth of practical solutions for today’s business leaders. While he will not provide actual plan advice, Trey will offer insights that can help your employees navigate today’s complex terrain. 

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