I accompanied my friend as he picked up a prescription from a pharmacy.
“$42, please”
“Could you check how much it is without insurance?”
The pharmacist typed something into the keyboard, “that’ll be $8.”
Well, that didn’t make any sense. How could insurance make medication more expensive? Later, I learned this was due to a part of our healthcare system called the pharmacy benefit manager (PBM), which most of us (including medical students like myself) know nothing about.
Many Americans don’t understand the utterly convoluted system that dictates how much money we spend on our medications. But we ought to. After all, the first step of solving an issue is awareness. Most media attention frames pharmaceutical companies as the villain, as exemplified by the heartbreaking stories of people unable to afford lifesaving medications like insulin or epinephrine. PBMs are an even greater culprit. But before looking at why, we need to understand what a PBM is.
They were originally created to curb prices. Drug manufacturers often hold patent monopolies over certain drugs, and individual employers, insurance companies and patients don’t have the power to negotiate with them. PBMs are the counterweight to that. They pool millions of covered people across employers and insurance plans and can tell a drug manufacturer “give us a better price or we won’t cover this drug, and you won’t be able to sell to these millions of patients.” Manufacturers must compete to be placed on a PBM’s list of allowed medications, called a formulary, and thus must reduce prices to stay competitive. At least … in theory.
What ends up happening is PBMs take advantage of a perverse set of incentives, and drug prices shoot into the stratosphere. Take the idea of spread-based pricing, where PBMs get a percentage of the money they win back from the manufacturer. The bigger the gap between a drug’s sticker price (the official price set by the manufacturer without any discounts) and its real price (what it actually accepts after the PBM negotiates), the bigger the PBM’s paycheck. That quietly flips its incentive into wanting list prices as high as possible.
Take insulin. A manufacturer might only need to make $50 on a vial, but the list price balloons to $300. The manufacturer still pockets its $50, while the PBM skims its cut of the $250 “discount” it claims to have won for you. If the list price had only been $60, the PBM’s cut of the $10 they saved you would’ve been a lot smaller, disincentivizing them from covering the medication in their formulary. Thus, PBMs encourage manufacturers to increase prices, and it’s the patients who pay the price.
This is further complicated by multiple other shortcomings in the way PBMs are structured, not to mention the caveat that many PBMs, pharmacies and insurance companies are owned by the same organization. But ultimately, irrespective of the details, the takeaway is that my opinion is that the current system doesn’t work — not for the people it’s supposed to help. And, while change won’t come overnight, it’s important for us to know the drivers of the issue. Reform begins by asking why.
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