Rising Drug Costs Lead to PBM Scrutiny


If prices rise more than an agreed upon rate, excess increases may be offset by additional rebates. For some employers this means the PBM is pocketing some or all of the rebate money, driving record profits. In these cases there is absolutely no incentive on the part of the PBM to lower Rx costs. Rather, they earn more kickbacks as drug costs escalate. This revenue sharing between the PBMs and manufacturers at the expense of consumers continues to fuel spiraling Rx costs.

Rising Drug Costs Lead to PBM Scrutiny

Posted on 11/28/2016

By Josh Bindl, CEO, National CooperativeRx

Pharmacy benefit managers (PBMs) have come under increased scrutiny as drug prices have begun to rise. As price spikes were identified, manufacturers originally took the heat, but now are pointing the finger at PBMs who may also profit from higher prices.

According to the Drug Channels Institute, the “Big Three” PBMs of Express Scripts, CVS/caremark and OptumRx made up 73 percent of all PBM prescription claims in 2015. All three of these companies, or their parent company, are Fortune top 30. More than just PBMs, they have expanded their business models and own several non-traditional PBM touchpoints with patients. PBMs have gotten larger to maximize purchasing power, but as publicly traded companies they report to shareholders who demand maximization of profit.

The PBM’s role is to drive down costs for employers using their purchasing power. This purchasing power is turned into higher discounts and rebates from the manufacturer. For many years, PBMs have worked to drive costs lower, not only through purchasing power, but also by making people aware of mail order pricing and generic alternatives to brand name drugs.

PBMs make money in several ways. Profits have risen as PBM consolidation has occurred. They have also become more aggressive with contracting as pharmaceutical companies have found new ways to increase their own profits. When new areas of spend develop, so too can a program from the PBM to manage that trend, but not all programs may actually save money for the employer.

If PBMs are in place to protect employers from paying too much to drug makers, who protects employers from paying too much to PBMs?

In 2003, National CooperativeRx was created as a not-for-profit cooperative to join together purchasers of pharmacy benefits to drive a better contract from a PBM and provide independent advice to members. The prescription drug purchasing world has gotten far more complex over the last 13 years. While a multifaceted approach is needed to control costs, it is built around the pillars of rebates, formulary management and a strong contract.


Rebates make up a significant part of the overall prescription drug pricing equation, although pressure on the pharmaceutical industry could temper levels going forward. Many of the large PBMs have price protection features built into the vast majority of their contracts with manufacturers. If prices rise more than an agreed upon rate, excess increases may be offset by additional rebates. With the National CooperativeRx contract with CVS/caremark, 100 percent of rebates are passed back to members. For employers without this protection in place, the PBM is pocketing some of the rebate money and it’s helping drive the record profits.

Formulary Management

Formulary management is a necessary and effective tool to save money. Enough competition exists within many prescription drug categories to make drug manufacturers compete for a spot on the formulary, otherwise known as the list of covered drugs available to a participant. The manufacturer(s) who are unwilling to provide the best price are left off the formulary and unable to access the market. This increases the efficiency of the market and saves employers significant money.

As PBMs have become large, complex and oftentimes slow moving organizations, PBM formulary management may not go far enough. Additionally, PBMs’ profits from formulary decisions may influence formulary design.

When appropriate, National CooperativeRx recommends programs, plan exclusions and/or plan changes to quickly react to waste occurring in the market. Quick reactions and supplemental plan exclusions close loopholes and opportunities for the PBM to make excessive profit.

Contract Strength and Transparency

A strong contract and contract transparency are key to keeping drug costs low. National CooperativeRx prides itself on having a solid contract with our PBM vendor, built on the contractual ability to determine where each dollar is spent. Annually, the cooperative hires independent auditors to ensure contract terms are met. We audit 100 percent of claims, for all members, with all recoveries going back to employers. Contract terms must be inspected, monitored and enforced to ensure the agreed upon terms are being adhered to.

In addition to our contract value, we provide independent advice to employers so they can determine which programs are best for their plan without the added push from a PBM trying to increase their revenues. Many of these programs are provided to members at no additional cost, whereas, without our purchasing power, there would be an added fee from the PBM. Further, the cooperative supplements PBM programs with communications such as our generic awareness and customized specialty letters to promote a well-educated patient.

The current attention given to the prescription drug industry will likely bring changes. As meaningful reforms from Congress may prove difficult, the industry itself could make changes as it has several times before. Expect these changes to come with new ways for the PBM to increase or shift its revenue. Be ahead of the curve by keeping a close eye on rebates, formulary management and your overall contract — or partner with a trusted organization to do so for you.

Learn more:

  • National CooperativeRx is a not-for-profit, member-owned cooperative made up of employers, government entities, unions and coalitions.
  • Can you benefit from The Alliance preferred partnership with National CooperativeRx?
  • Read “Pharmacy Pricing Q&A” on The Alliance blog from Wayne Salverda, senior director of clinical services for National CooperativeRx and a licensed pharmacist.