Keeping up with this ancient—albeit misguided—tradition, the Biden administration has sought to demonize pharmacy benefit managers (PBMs), which are middlemen in the prescription drug market. A recent example of this effort is a July 2024 Federal Trade Commission (FTC) interim report.

PBMs are intermediaries in the healthcare pharmaceutical supply chain that manage prescription drug benefits on behalf of health insurers, Medicare Part D drug plans, large employers, and other payers. Their primary role involves negotiating with drug manufacturers to secure discounts and rebates, creating and maintaining drug formularies (that is, what drugs or similar drugs an insurer covers), and processing prescription drug claims. By leveraging their scale, PBMs aim to control drug spending, improve access to medications, and enhance overall patient outcomes.

Modern economic theory recognizes that intermediaries play a crucial role in enhancing market efficiency, reducing transaction costs, and facilitating the flow of goods and services. PBMs demonstrate the indispensable role of intermediaries in healthcare, balancing cost containment with access to essential medications. That is overlooked in the FTC’s report, as noted in Commissioner Melissa Holyoak’s dissenting statement.

Benefits / PBMs have several beneficial effects on the healthcare system, including:

• Cost containment: PBMs play a critical role in cost containment within the healthcare system by negotiating drug prices with manufacturers and leveraging their purchasing power. This allows them to secure substantial discounts and rebates that lower the overall cost of prescription medications. Nearly all these savings are passed on to insurers and consumers, resulting in reduced insurance premiums and out-of-pocket expenses. Additionally, PBMs implement cost-saving measures by encouraging the use of generic drugs and promoting cost-effective therapeutic alternatives. These strategies curb the rapid growth of pharmaceutical expenditures, making healthcare more affordable for a broader population.
  
  Previous research I conducted with Ike Brannon elucidated one of the mechanisms by which PBMs can achieve savings (Brannon and Lo Sasso 2021). State Medicaid programs have two broad options for purchasing drugs for enrollees: direct management or employing managed care organizations and their PBMs. While states may appear to have significant bargaining power because of the size of their Medicaid programs, the ever-changing pharmaceutical market demands continuous attention, which PBMs are well-equipped to provide.
  
  For instance, in recent years, Michigan centralized the purchasing of specialty pharmacy products while Illinois used PBMs. The introduction of curative hepatitis C therapies in the early 2010s illustrates the effects of this difference. Comparing data from the Centers for Medicare and Medicaid Services (CMS), we found that Illinois PBMs transitioned to cheaper generic alternatives by 2019, but Michigan did not. This nimble response by PBMs could have saved Michigan taxpayers up to $50 million annually, demonstrating the significant cost-saving potential of PBMs in adapting to market changes.
• Market efficiency and transparency: PBMs improve market efficiency by streamlining the pharmaceutical supply chain, reducing administrative burdens, and managing complex processes such as formulary development, drug utilization review, and claims processing. This centralization of tasks minimizes redundancies and errors, ensuring that medications are delivered promptly and accurately to patients. Also, PBMs provide valuable market information and analytics to insurers and healthcare providers, aiding in better decision making and resource allocation. By acting as intermediaries, PBMs enhance coordination among manufacturers, pharmacies, and payers, leading to a more efficient and responsive healthcare system.
• Innovation and competition: The presence of PBMs fosters innovation and competition within the pharmaceutical industry. By negotiating favorable terms and promoting the use of cost-effective medications, PBMs encourage drug manufacturers to develop innovative treatments that offer better value. This dynamic stimulates competition among manufacturers to produce high-quality, affordable drugs and adopt new, patient-centric payment and care models. The competitive environment nurtured by PBMs ultimately benefits consumers by expanding access to cutting-edge therapies and improving health outcomes.
• Mail-order pharmacy programs: PBMs support the provision of mail-order pharmacy services. They negotiate bulk purchasing agreements by leveraging their extensive networks and secure lower prices for medications. These benefits are then passed onto consumers through mail-order programs. These services allow patients to receive their prescriptions directly at their homes, reducing the need for frequent trips to retail pharmacies and ensuring a steady supply of necessary medications.
  
  Also, PBMs often implement automated refill programs and provide comprehensive medication management services through mail order, enhancing adherence to prescribed therapies and improving overall health outcomes, saving billions of dollars a year for both insurers and Medicare.

Criticism of PBMs / It should be noted that some research has shown a positive correlation between drug list price, rebate amounts, and patient out-of-pocket costs in recent years—that is, insureds are not receiving the full rebates on their drugs’ prices (see e.g., Mallatt et al. 2024). However, PBM critics attributing increased patient costs to PBMs “pocketing” rebates make a mistaken inference that overlooks key factors. First, drug companies, not PBMs, control drug list price. Second, a Government Accountability Office report found that 99 percent of rebates are returned to payers in the form of lower premiums (GAO 2019). Most importantly, it is the payer—not the PBM—that determines patient copayments and out-of-pocket costs. Given the long-term trend of rising healthcare costs, it is not surprising that payers may increase patient cost-sharing as a cost-control measure. Attributing this trend to PBMs, especially in light of experiences like Michigan and Illinois discussed above, is a questionable narrative.

Conclusion / Despite the skepticism from politicians and independent pharmacists and pharmaceutical companies who resent having their prices pushed down, the role of PBMs in the healthcare system is essential. They have demonstrated their ability to contain costs, enhance market efficiency, and foster innovation and competition within the pharmaceutical industry. PBMs help manage an exceedingly complex prescription drug market to ensure better access to medications and significant savings for consumers and payers.

Readings

• Brannon, Ike, and Anthony T. Lo Sasso, 2021, “The Myth that the State Can Do Better: Medicaid Drug Prices and Managed Care Organizations,” working paper, May 26.
• Federal Trade Commission, 2024, “Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies,” Interim Staff Report, Office of Policy Planning, July.
• GAO (Government Accountability Office), 2019, “Medicare Part D: Use of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures and Utilization,” Report to Congressional Requesters, GAO-19–498, July.
• Holyoak, Melissa, 2024, “Dissenting Statement of Commissioner Melissa Holyoak,” Federal Trade Commission, July 9.
• Mallatt, Justine, Abe Dunn, and Lasanthi Fernando, 2024, “Consumer Out-Of-Pocket Drug Prices Grew Faster Than Prices Faced By Insurers After Accounting For Rebates, 2007–20,” Health Affairs 43(9): 1284–1289.