Documents and industry insiders suggest that PBMs’ pledges to pass the rebates (commissions) they get from drug makers back to their clients are a sleight of hand. In recent years, PBMs have changed what they call some of the money they take from pharma. Instead of rebates (commissions), these payments now go by such names as “administration fees,” “data fees” or “inflation protection.”
Drug Benefit Firms Devise New Fees That Go to Them, Not Clients
Pharmacy benefit managers negotiate cheaper prices for employers and health plans. They also pocket drugmakers’ cash.
By John Tozzi
August 22, 2023 at 4:00 AM CDT
Pharmacy benefit managers (PBMs) arose in the 1960s to help health insurance plans control spending on prescription drugs. They were lauded early on as a counterweight to drug companies, able to bundle the purchasing power of thousands of employers and insurers to negotiate lower prices for medicines. But these days, they’re frequently accused of being one of the causes of higher drug prices rather than a solution to them.
At issue are the side deals that the drug price negotiators have made with pharma companies, allowing PBMs to grab extra cash for themselves from the very parties they’re supposed to be playing hardball against. Facing increasing pressure to pass along all the discounts they get from drugmakers back to their clients, PBMs have recently changed what that money is called in a way that makes it harder to trace.
That’s made an already opaque payment system even murkier—and left PBMs under fire from all directions. Officials as diverse as Federal Trade Commission Chair Lina Khan and Florida Governor Ron DeSantis want more transparency from them. And Congress is advancing bills to force more disclosure about their deals with pharma companies.
US Retail Prescription Drug Spending
Source: Centers for Medicare & Medicaid Services
Most Americans may only have a hazy idea of what PBMs do, if any. But they influence what medications are available to almost everyone with health insurance and how much those drugs cost. The industry says it saves money for clients—employers and health plans—by getting discounts on the prices drugmakers set. Critics say PBMs’ agreements with drug manufacturers warp their incentives, because they also get paid, in the form of often-undisclosed rebates and fees on the value of medicines sold, by the same pharma companies they’re bargaining with on behalf of clients.
“PBMs are taking money from the parties with whom they’re negotiating” that they don’t disclose to their clients, says Lauren Vela, a consultant to the Purchaser Business Group on Health, a coalition of dozens of employers including Amazon, JPMorgan Chase and Walmart. “I don’t know any other industry where that would be OK.”
After years of consolidation, three companies dominate the PBM market: Cigna Group, CVS Health and UnitedHealth Group. Units of those companies process about 80% of prescription claims. Executives from the three say that they pass almost all the rebates they receive from drugmakers back to clients. Cigna’s Express Scripts PBM unveiled a new “fully transparent” option in April that offers clients 100% of the rebates Express Scripts gets.
Still, some clients are losing faith. Blue Shield of California on Aug. 17 announced plans to replace some drug procurement services from CVS Health Corp.’s Caremark PBM with an amalgam of rival offerings, including Amazon.com Inc.’s nascent pharmacy business and an upstart venture from billionaire Mark Cuban. “We just need to start over,” Blue Shield Chief Executive Officer Paul Markovich said.
CVS said in a statement that in the last two years it has held increases in drug spending to single digits as drugmakers hiked list prices an average of four times the rate of inflation, and that it earns trust from clients “by delivering results and being transparent about how their health care dollars are spent.”
Cigna has said its PBM and an affiliated purchasing group “help to lower the cost of prescription drugs for thousands of plan sponsors and millions of Americans.” The leader of UnitedHealth’s Optum Rx PBM said in Senate testimony earlier this year that competition to lower drug costs “squarely aligns the interests of pharmacy benefit companies with our clients and our consumers, not with the manufacturers that set the prices for prescription drugs.” None of the companies directly answered detailed questions for this story.
Pharmacy Benefit Manager Market Share
By total equivalent prescription claims managed, 2022
Source: Drug Channels Institute
Documents and industry insiders suggest that PBMs’ pledges to pass the rebates they get from drugmakers back to their clients are a sleight of hand. In recent years, PBMs have changed what they call some of the money they take from pharma. Instead of rebates, these payments now go by such names as “administration fees,” “data fees” or “inflation protection.”
The shift allows PBMs to retain money from drugmakers while telling clients that they’re fully passing along all the rebates, critics say. “They have all these junk fees,” says Trond Waerness, founding president of Atna Consulting Services, which works with small and midsize pharmaceutical manufacturers. “They can then say that’s not really a rebate.” What’s more, the fees are pegged to a drug’s list price, even though the expense of handling a prescription “does not cost any more if the drug is $2,000 or $200,” Waerness says. “It’s the exact same work, but on one drug you’re charging 10 times more.”
The FTC is probing these arrangements. In 27-page long subpoenas sent to PBMs last year, the antitrust regulator asked for details not just of rebates but about “any other remuneration or consideration from drug manufacturers” and how much of that money they retain. More recently the FTC has subpoenaed affiliates of the PBMs called group purchasing organizations. These entities, formed in the last few years, have taken over some rebate negotiations, adding an extra layer to the convoluted path—and another tranche where fees could be collected—between companies that sell medicines and patients that take them.
Court records shed some light on the payments. Insys Therapeutics, the maker of a fentanyl spray called Subsys, filed for bankruptcy in 2019 after the company’s founder and other executives were convicted in a racketeering case of bribing doctors to prescribe it. Throughout the turmoil, Cigna’s Express Scripts continued to invoice the drugmaker for rebates and other fees connected with the fentanyl prescriptions that Express Scripts members filled.
Express Scripts got an administrative fee of 4.875% of the drug’s list price for each prescription of Insys’ products, according to a contract with the drugmaker that lawyers for Express Scripts filed at a Delaware bankruptcy court in 2021. The contract notes that the fee is “separate from the applicable rebate amount.” Invoices filed in court show that administrative fees and “inflation protection” charges made up a quarter of what Express Scripts billed Insys for. Even if Express Scripts passed along all the rebate money to clients, that was only 75% of what it said Insys agreed to pay.
Investigators from the Senate Finance Committee, in a 2021 report on insulin costs, wrote that “PBMs have been collecting substantially greater revenue from administrative fees” as insulin prices went up. An agreement between UnitedHealth’s Optum Rx PBM and Sanofi provided to the committee says Optum Rx’s administrative fee is 4.75% of the drug’s list price, and “it will not agree to pass through the administrative fee.”
The bipartisan Senate report said the total value of these administrative fees “is not known” because the contracts are confidential. Because PBMs also get separate fees from their health plan clients for managing their pharmacy benefit plans, they’re “essentially profiting from all sides of the transaction,” according to the report.
States and municipalities have filed a series of lawsuits against the three largest PBMs and the three major makers of insulin— Eli Lilly & Co., Novo Nordisk and Sanofi—alleging that both sides worked together to drive up prices. One case filed by the city of Cleveland in the Northern District of Ohio in July alleges that PBMs profit by “retaining a significant, but undisclosed, share” of money from drugmakers. The lawsuit argues that such terms as “administrative fees,” “service fees,” “inflation fees” and “volume discounts” are “industry monikers designed to obfuscate the substantial sums being secretly exchanged” between PBMs and insulin manufacturers.
All three of the major insulin manufacturers say they work to help patients afford the medication. Sanofi says its pricing practices comply with the law. Setting PBM fees as a percentage of list prices “incentivizes higher list prices,” a Sanofi spokesperson said, adding that some companies expect 8.5% in fees before rebates. The company doesn’t know how PBMs or insurers use the rebates and fees it pays, or whether they’re passed on to clients or patients.
In a statement, a Novo Nordisk A/S spokesperson said the insulin lawsuits “are without merit” and that the company has offered patients help affording insulin. Lilly didn’t comment on the litigation and has disputed the allegations in court filings. In response to questions, the company referred to comments CEO David Ricks made to Congress in May in which he advocated “delinking other actors’ revenue streams from a medicine’s list price” and making sure that a drug’s rebate lowers the cost for people who take the medicines. Cigna, CVS and UnitedHealth have also disputed the allegations in insulin lawsuits in court and say they’ve worked to bring down insulin costs.
PBMs give clients “as much information and data as requested, all of which is negotiated in an arm’s length contracting process,” said Greg Lopes, a spokesperson for the Pharmaceutical Care Management Association trade group, in an email. Beyond rebates, “drug companies may choose to contract with PBMs for bona fide services,” such as monitoring side effects.
In the fine print of their contracts with health plans and employers, PBMs make clear that they intend to profit from the drugmakers they’re negotiating with. Express Scripts contracts with manufacturers “for its own account” and “may realize positive margin” from them, according to language from publicly available contracts with such groups as the Kentucky Teachers’ Retirement System and the government of Jersey City. Express Scripts may get other compensation from drugmakers that “is not part of the formulary rebates or associated administrative fees,” and may profit from it, the contract says.
Congress is considering tightening the rules. Committees in both houses are advancing bipartisan bills to regulate PBMs. One passed by the Senate Finance Committee would bar PBMs from charging drugmakers fees as a percentage of a drug’s price. Instead, the fees would have to be flat dollar amounts reflecting fair market value of whatever services they’re performing for pharma companies. It would only affect Medicare drug plans, though a separate bill would apply to private plans.
Severing the link between fees and drug prices “is probably the most significant thing” Congress could do to change how PBMs operate, says Spencer Perlman, a health-care analyst with Veda Partners. But he says there’s no simple fix. “Lawmakers are always playing whack-a-mole,” Perlman says, “and they’re always a little bit behind.”