Pharmacy Benefit Managers (PBMs), intermediaries between pharmaceutical companies supplying drugs and customers, have been eyed as drug prices skyrocketed and their profits rose. According to one view, they have battened on excess profits in recent decades due to their dominant control of drug supply chains. Increasingly, they have met with bipartisan criticism for hindering competition in the drugs market. Amazon’s Pharmacy’s mail order business and Mark Cuban’s Cost Plus Drug Company have emerged as competitors to PBMs in some drug market segments.     

PBM Stock prices crash

Early signs of the risk to PBM’s monopoly surfaced with the decision of Blue Shield of California to shift a small part of its drug supply to cheaper alternatives from Amazon Pharmacy and Mark Cuban’s Cost Plus Drug Company beginning in 2024. Stock prices of the leading PBMs dropped sharply on 17th August 2023. CVS Health (NYSE: CVS) sank from $72.72 to a bottom of $65.01, The Cigna Group (NYSE: CI) from $289 to $266, and UnitedHealthcare from $504 to $493—the three control 80 percent of retail prescriptions in the USA.

Blue Shield is shifting only a tiny part of its drug needs for now, but it appears to has shaken the  Pharmacy Benefit Managers (PBMs) house of cards. Amazon Pharmacy will replace only the mail order business and the Cost Plus Company generics. Even though the profitable specialty drugs will remain with the PBMs, and generics account for only 15% of the spend, the market fears that other insurers will follow Blue Shield’s path.  

How generics became expensive

After the rise of PBMs, customers lost much of the cost benefits from the expiry of patent protection of blockbuster branded drugs between 2006 and 2016. Following the availability of generic drugs, the direct out-of-pocket payments by insured consumers dropped 50% and 80% of the total by insurance companies and patients between 2006 and 2016.

After that, the prices rose as PBMs inserted themselves into the drug supply chain. A study by the Schaeffer Center found that Medicare Part D paid $2.6 billion more in 2018 for 184 common generic medications compared with prices for the same drugs available to cash-paying Costco members.

Opaque pricing helps PBMs disguise unearned excess margins. Typically, the prices they pay to pharmacies are lower than the amount they charge the insurance companies, who are unaware of the difference. An audit by Ohio found that the difference was 31.4% for the state’s Medicaid managed care beneficiaries. In other markets, PBMs require drug companies to offer larger discounts, some flowing into their margins, as a condition for inclusion in a formulary. The drug companies return the favor by raising prices.

The business environment for PBMs shifts

PBMs have become a term of opprobrium as rapidly rising prices of drugs, especially critical life-saving medications like insulin, have riled the masses and elicited political fury. Insulin’s price, for example, has increased by 600 percent over twenty years. Detailed data analysis has turned public opinion against PBMs, shifting the blame away from drug companies. Between 2012 and 2021, for example, the list price of Sanofi’s insulin drug, Lantus,  rose 143%, even as the net price received by drug companies—after all rebates and discounts— decreased 54%!

PBMs have invited increasing scrutiny from lawmakers. New laws, Modernizing and Ensuring PBM Accountability Act is one, have been passed to ensure transparency in pricing information. PBMs must reveal the prices paid to pharmacies, the amounts charged to insurance companies, and the administrative costs. Insurance companies will pay for only the cost incurred to procure drugs from pharmacies or directly from drug manufacturing companies (net of the discounts received)

Transparency has attracted competition. Amazon Pharmacy, for example, now offers insulin drugs from an array of drug companies for thirty-five dollars a month (net of manufacturers’ discounts). Additionally, it is launching a five-dollar-a-month plan for subscribers to pick and pay for a roster of 50 generic drugs.

A new world of affordable healthcare

Healthcare costs should never have been unreasonably expensive as they have been in recent years. A lack of transparency and competition and complex regulations has inflated prices. Relatively minor changes in business practices are opening the door to lower costs with competition and entrepreneurial innovation. Lower drug pricing is a start. Much more is possible.