Rising Drug Prices and Shortages Are Fueled in Part by the Very Reform Mechanism Intended to Curtail Them

It's a familiar complaint: The American health system is failing to deliver in part because of ever-rising drug prices. According to a Department of Health and Human Services survey, Americans pay two to three times more for drugs than people in many other countries.

President Biden announced a prescription price rollback plan with great fanfare in 2021, but except for a few isolated cases, it has been a failure. Expensive and rising drug prices and limited availability remain perennial concerns for the public and politicians. Pharmaceutical pricing is opaque, even to most healthcare providers. The National Academy of Sciences, Engineering, and Medicine discussed some of the reasons in its report, Making Medicine Affordable: A National Imperative:

The biopharmaceutical sector of the United States has a market structure that is more complex than any other sector in health care — and perhaps more complex than any other sector in the entire economy... This complexity is compounded by the structure of the health insurance market, which is more complicated for prescription drugs than for other aspects of health care...

The resulting complexity of the system makes it difficult to understand the contributions of the various factors that affect drug costs, a difficulty only magnified by the fact that there is very little publicly available information concerning the financial transactions among the various participants in the biopharmaceutical supply chain. The sort of meaningful data required for developing a clear understanding of even the most basic issues... simply do not exist or are not accessible. This lack of transparency frequently makes it impossible to pinpoint the root causes of increasing drug prices.

The New York Times' shocking investigation

A 2024 New York Times investigation highlighted a key but rarely reported reason for stubbornly high drug prices: pharmacy benefit managers, or PBMs.

According to the Times' investigative report team, Rebecca Robbins and Reed Abelson:

It is a common, longstanding complaint. And the culprits seem obvious: Drug companies. Insurers. A dysfunctional federal government.

But there is another collection of powerful forces that often escape attention because they operate in the bowels of the healthcare system and cloak themselves in such opacity and complexity that many people don't even realize they exist.

They are called pharmacy benefit managers. And they are driving up drug costs for millions of people, employers and the government.

The three largest pharmacy benefit managers, or PBMs, act as middlemen overseeing prescriptions for more than 200 million Americans. They are owned by huge healthcare conglomerates — CVS Health, Cigna and UnitedHealth Group — and are hired by employers and governments.

What are PBMs?

As depicted in the figure below, PBMs are at the center of the distribution chain for prescription drugs, a kind of coordinator of the enormously complex system of getting drugs from manufacturers to patients and facilitating payment for them. They are supposed to:

• develop and maintain lists, or formularies, of covered medications on behalf of health insurers. These formularies determine which drugs patients have access to and their out-of-pocket costs
• use their massive purchasing power to negotiate rebates and discounts from drug manufacturers
• contract directly with individual pharmacies to reimburse them for drugs dispensed to beneficiaries

That all sounds good, but among the Times investigation's many startling findings was that efforts specifically intended to curb pharmaceutical prices may be increasing costs for employers and the insured. Other key findings:

• PBMs are supposed to control drug costs by serving as intermediaries, or middlemen, between manufacturers and retailers of prescription drugs. The three largest PBMs — Caremark, Express Scripts, and Optum Rx — owned by healthcare behemoths CVS Health, Cigna, and UnitedHealth Group — manage prescriptions for over 200 million Americans, negotiating with drug companies and paying pharmacies, often deciding which drugs patients can access and at what price.
• The PBM industry is hugely profitable and rapidly expanding. If the three largest PBMs were independent companies, each would rank among the top 40 U.S. companies by revenue. Following a series of mergers and acquisitions, their collective market share has grown from less than 50% in 2012 to around 80% today.
• PBMs profit from the difference between the wholesale cost of a drug and what they charge employers and prescription drug insurers. This markup can far exceed typical retail markups. PBMs also may receive rebates from manufacturers and, in addition, PBMs have subsidiaries that collect fees from drug manufacturers, funneling this money into their profits rather than reducing costs to patients. Independent pharmacies may receive payments from PBMs that are insufficient to cover their costs, a possible cause of some going out of business, especially in poorer communities.

Here's why the PBM system is not working

According to the Times' investigation, to manipulate the cost and availability of prescription drugs, PBMs can steer patients toward more expensive medications that have higher out-of-pocket costs, impose hefty markups on cheaper drugs, and extract still more in hidden fees. These practices can lead to higher insurance premiums, increased taxes, and exorbitant out-of-pocket expenses for patients.

For example, in Oklahoma, Caremark overcharged the state employee health plan by over $120,000 annually for a cancer drug; and in Illinois, a cancer patient paid hundreds more for her medication due to Caremark's insistence on a higher-priced version. Express Scripts charged a New Jersey retiree $211 for a drug he could have bought for $22 at Costco.

PBM practices can thus inflate drug costs and complicate access to medications. When trying to fill prescriptions, patients may encounter delays and restrictions that lead to severe health consequences. Patients are likely to be unaware of PBMs unless they are forced to navigate a convoluted system of approvals and restrictions to get their medications.

PBMs' demands for greater discounts can lead drug companies to increase list prices so they can maintain their profit margins. For example, the price of Eliquis, a blood thinner, has more than doubled over the past decade, even though the manufacturer is now paying much more in discounts. Why is that? PBMs often keep the rebates, refunding only a portion to the employer benefit plan that hired them and even less to patients. 

How PBM's avoid scrutiny and oversight

To grow and obscure their revenue sources even further, PBMs have established group purchasing organizations (GPOs). These subsidiaries, often based in tax-friendly countries like Ireland and Switzerland, negotiate additional fees with drug manufacturers. These fees are not shared with employers, which allows PBMs to claim they are passing on most of the negotiated savings to employers while pocketing the other substantial sums from these subsidiaries' fees. In 2022, PBMs and their GPOs collected $7.6 billion in fees, double the amount from four years earlier.

The impact of PBM practices on individuals can be significant. The Times cites the example of a patient in rural Middleport, New York, who was forced to pay over $300 out-of-pocket for a brand-name inhaler when the generic version, costing $60 less, was no longer covered. Such scenarios illustrate the everyday struggles patients face due to PBMs' practices.

In July last year, the Federal Trade Commission released a scathing Interim Staff Report on PBMs that echoed many of the revelations of the Times' investigation:

The interim staff report, which is part of an ongoing inquiry launched in 2022 by the FTC, details how increasing vertical integration and concentration has enabled the six largest PBMs to manage nearly 95 percent of all prescriptions filled in the United States.

This vertically integrated and concentrated market structure has allowed PBMs to profit at the expense of patients and independent pharmacists, the report details...

The report finds that PBMs wield enormous power over patients’ ability to access and afford their prescription drugs, allowing PBMs to significantly influence what drugs are available and at what price. This can have dire consequences, with nearly 30 percent of Americans surveyed reporting rationing or even skipping doses of their prescribed medicines due to high costs, the report states.

The interim report also finds that PBMs hold substantial influence over independent pharmacies by imposing unfair, arbitrary, and harmful contractual terms that can impact independent pharmacies’ ability to stay in business and serve their communities. 

On September 20, 2024, the Federal Trade Commission struck a significant blow against PBMs:

The Federal Trade Commission brought action against the three largest prescription drug benefit managers (PBMs)—Caremark Rx, Express Scripts (ESI), and OptumRx—and their affiliated group purchasing organizations (GPOs) for engaging in anticompetitive and unfair rebating practices that have artificially inflated the list price of insulin drugs, impaired patients’ access to lower list price products, and shifted the cost of high insulin list prices to vulnerable patients.

The FTC’s administrative complaint alleges that CVS Health’s Caremark, Cigna’s ESI, and United Health Group’s Optum, and their respective GPOs—Zinc Health Services, Ascent Health Services, and Emisar Pharma Services—have abused their economic power by rigging pharmaceutical supply chain competition in their favor, forcing patients to pay more for life-saving medication. According to the complaint, these PBMs, known as the Big Three, together administer about 80% of all prescriptions in the United States.

The three PBMs asked a Missouri federal district court to block the agency’s suit, calling it unconstitutional, but only last week, the judge rejected the PBMs’ request as lacking sufficient merit. Therefore, the lawsuit can move forward. 

PBMs have evolved from relatively obscure cost-saving entities into powerful industry behemoths with significant influence over drug pricing and access. Their business practices and profit-driven models appear to have led to inflated drug costs, restricted access to medications, and increased financial burdens for patients and employers.

Congressional legislation introduced in 2023 and 2024 sought to lower costs, add transparency, reform PBMs, increase accountability, and even "delink revenue from unfair gouging," but they've gone nowhere as industry lobbying has soared and politicians remain divided on reforms. States have begun to enact legislation addressing PBMs, with all 50 states having enacted at least one PBM-related law between 2017 and 2023, according to the Government Accountability Office. But the only real solution is at the national level.

It remains to be seen whether the federal government will be able to stem the tide of rising prices of drugs and limited access to them by reining in the power of the PBMs.  

A previous version of this article was published by the Genetic Literacy Project.