Nevadans pay too much for prescription drugs.
And if there’s one culprit that doctors, pharmacy companies, elected officials and others in the health care world blame for those exorbitant prices, it’s pharmacy benefit managers (PBMs).
The three largest PBMs, sometimes referred to as middlemen in the drug supply chain, oversee prescriptions for more than 200 million Americans and are owned by massive health care conglomerates — CVS Health, Cigna and UnitedHealth Group.
In theory, PBMs are supposed to save everyone money by negotiating with drug companies, paying pharmacies and helping decide which drugs patients can get at what price.
But the level of scrutiny over their role in the health care system and the persistently high cost of prescription drugs has ramped up in recent years. A major investigation from The New York Times found that PBMs “steer patients toward pricier drugs, charge steep markups on what would otherwise be inexpensive medicines and extract billions of dollars in hidden fees.”
It’s a topic that Nevada lawmakers are set to tackle in 2025, after passing related legislation in recent years requiring more transparency on the pricing of asthma and diabetes drugs and creating the Patient Protection Commission. Lawmakers in 2023 also sought to cap the costs for prescription drugs at federal Medicare-negotiated rates, but the bill was vetoed.
“If PBMs will not stop abusing their positions for profit, then policymakers must insist on reforms,” Nevada Attorney General Aaron Ford, a Democrat, wrote in a recent op-ed in the Las Vegas Sun.
In the questions and answers below, The Nevada Independent explains what these so-called middlemen do, how they shape the price of prescription drugs and what is contributing to high prescription drug costs.
What are PBMs?
Even if you’ve never heard of PBMs, you’ve likely dealt with them if you (like most Americans) get your health insurance through a government program such as Medicare or your employer.
Each covered person usually receives two different types of insurance. One covers visits to doctors and hospitals, and is handled by insurance companies. The other type pays for prescriptions, which is overseen by a PBM.
PBMs are responsible for determining the list of prescription drugs health plans offer to enrollees, negotiating discounts with prescription drug manufacturers and establishing preferred pharmacy networks, where enrollees can access drugs at cheaper rates.
Why do PBMs exist?
Unlike other countries, the U.S. does not have drug price controls. PBMs were developed by private industry, in part, to keep pharmaceutical industries’ prices in check.
Juliette Cubanski, the deputy director of KFF’s Medicare policy program, told The Nevada Independent that as the prescription drug industry evolved, the types of pharmaceutical treatments expanded and created a need for insurers to manage drug prices and patient options — leading to the evolution of PBMs between the 1960s and 1990s.
Initially, PBMs began as claims processors within insurance companies, making it possible for patients to directly pay pharmacies for their portion of a drug’s cost instead of paying up front and later getting reimbursed.
Over time, PBMs expanded, taking over insurers’ prescription drug benefits programs and negotiating with pharmaceutical manufacturers to lower drug prices for an insurer. In 2018, health insurer Aetna merged with CVS, and insurer Cigna purchased Express Scripts, two large PBMs, consolidating power and leading to the modern PBM.
Are PBMs middlemen, and how do they operate?
Ultimately, the companies that manufacture drugs are responsible for setting the price of a medication. But Cubanski and other experts told The Nevada Independent that this price is not what people with insurance actually end up paying.
If a person has insurance, they generally pay a portion of the drug’s price based on their formulary — the list of drugs covered by their insurance. That drug list is established by a PBM and determines how much a patient will pay out of pocket for medications.
“[PBMs are] a middleman in the sense that they are negotiating prices with drug manufacturers,” Cubanski said.
Some PBMs also directly reimburse retail pharmacies on behalf of insurers or own a mail-order pharmacy, offering mail delivery options at cheaper rates for patients. Though PBMs, for the most part, do not operate retail pharmacies, CVS Caremark is one exception.
How are the lists of drugs covered by insurance established?
Bill Head, the assistant vice president of state affairs for the Pharmaceutical Care Management Association, which represents PBMs, said formularies are developed by committees made up of doctors, nurses and other health care experts.
The committees examine peer-reviewed articles about drugs and make recommendations for the types of drugs that should fall under preferred or non-preferred medications, all while considering cost-effectiveness and weighing name-brand versus cheaper, generic options. The medications are then placed into categories, or tiers, of drugs that determine how much a patient has to pay.
Cubanski said drug companies will also offer PBMs rebates, or partial refunds, on the list price of a drug in exchange for preferred placement on a prescription drug formulary.
How do PBMs make money?
PBMs usually receive administrative fees from insurers, such as a per-prescription fee. They can also generate additional revenue through spread pricing — a compensation model where a PBM reimburses an in-network pharmacy for less than what the insurer pays to the PBM for a drug, pocketing the difference.
When negotiating drug rebates, PBMs can also increase their profit margins by keeping some of the savings from the rebates.
The New York Times reported that the three largest PBMs — Caremark, Express Scripts and Optum Rx — would each rank among the top 40 U.S. companies by revenue if they were standalone entities.
There’s little to no transparency at the state or federal level surrounding spread pricing or the rebate process. A 2019 report from the U.S. Government Accountability Office indicated that PBMs kept just 1 percent of rebates, but there’s no way for the public to be certain.
Rebates play a critical role in funding the public health care system, including federally qualified health centers and other facilities that serve Medicaid and Medicare patients.
In 2017, Nevada passed a first-in-the-nation insulin pricing transparency law that required manufacturers of so-called essential diabetes drugs and PBMs to report certain data to the state in an attempt to understand the reasons for year-over-year increases in the price of those drugs. Those data points include profits manufacturers have earned from the drug, the cost of research that went into it and the profits PBMs have kept from negotiating rebates on the drugs. Lawmakers expanded the scope of the law to include asthma drugs in 2019.
What’s the controversy surrounding these ways to make money?
The bigger the rebate, Cubanski said, the higher the discount, leading to more dollars for PBMs.
“That’s good for the PBM, it’s good for the plan sponsors in that that helps them lower their costs relative to what they would otherwise be,” Cubanski said. “But it’s not universally good for patients.”
Cubanski said that patients with insurance often pay a percentage of the drug’s list price regardless of the rebate.
For example: If a pharmaceutical company lists the price of a drug at $1,000 a month, a PBM can negotiate a 50 percent discount, bringing that price to $500 for the insurance company. But the patient’s co-pay percentage is based on the drug’s list price. If the co-insurance requirement is 25 percent, the patient is paying 25 percent of $1,000, not $500.
A USC study found that PBMs can capture savings with spread pricing, but that the practice requires patients to pay more in out-of-pocket costs. The research also indicated that, on average, a $1 increase in rebates from pharmaceutical manufacturers is correlated with a $1.17 increase in list price.
“A lot of people have pointed to this practice of rebate negotiations as kind of a flaw in this system,” Cubanski said. “It translates into lower costs overall, but it doesn’t translate directly into lower out-of-pocket costs to the patients who use these specific medications.”
Are there any other criticisms of PBMs?
With little competition, PBMs have been criticized for their ability to shape the prescription drug market and potentially enter contracts that disadvantage smaller, independent pharmacies.
Another criticism surrounds the vertical integration of PBMs and health insurers.
As a Brookings report notes, PBMs have become “increasingly tightly integrated with health insurers.” Some of the country’s largest insurers, including Aetna, United Healthcare and some nonprofit Blue Cross Blue Shield plans, own PBMs or are part of companies with PBMs.
An interim report issued by the Federal Trade Commission in July found that vertical integration appears to create conflicts of interest that disadvantage independent pharmacies and increase prescription drug costs.
Are PBMs to blame for high drug costs?
Though the Pharmaceutical Research and Manufacturers of America (PhRMA) and pharmacies, along with others, have pointed fingers at PBMs as the cause of increasingly expensive drug prices, manufacturers, insurers and retail pharmacies also profit from the drug supply chain.
Cubanski said drug prices should theoretically reflect research and development costs, but there isn’t a direct line between those costs and the price of a drug. She added that competitor products manufactured by different companies have similar prices, which often increase at the same rate over time, suggesting a relationship.
Another potential contributor is coupons offered by the pharmaceutical industry for certain drugs. Though coupons lower costs for individual patients, Cubanski said the practice can encourage using more expensive drugs when a cheaper, just as effective generic drug is available.
“You, the patient, have this coupon, so maybe you’re paying $15 instead of $150 or something like that, but somebody else is paying that higher cost,” she said. “That translates, generally speaking, into higher plan costs, which turns into higher premiums.”
She said the coupons are sometimes a way for a manufacturer to circumvent a PBM’s formulary and generate revenue that the manufacturer might not have if it didn’t subsidize the cost of a drug.
What role do PBMs play in Medicaid?
Within Nevada Medicaid, a joint federal and state program that helps cover medical costs for people on low incomes and those with disabilities, PBMs are primarily responsible for processing pharmacy claims, managing formularies and implementing cost-saving strategies. PBMs also handle the administration of federal and supplemental rebates, which involves negotiating rebate agreements, invoicing and managing rebate collection.
Nevada Medicaid’s Drug Utilization Review Board meets quarterly to review and approve standards surrounding prescription drug use to ensure drugs are used appropriately and improve patient health. Agency officials said a PBM is contracted to facilitate meetings, but Nevada Medicaid manages the board and its functions.
What would happen if PBMs are banned?
Cubanski said she can’t imagine a scenario where a PBM, or an entity performing a similar role, wouldn’t exist.
“There are thousands of FDA-approved medications,” she said. “And there needs to, it seems to me, be a role for an entity to cull through all of those medications to decide the ones that you, insurer A, want to cover because it’s really not feasible to cover all of them.”
Cubanski said that PBMs are the latest target in the attempt to mitigate high drug prices. The pharmaceutical industry has historically had success batting away regulation attempts, she said, though it did face a setback with the Inflation Reduction Act, which includes provisions to lower the prices of certain medications.
“Everybody feels that they have an important role to play in the system. And they may be right about that,” Cubanski said. “At the same time, everybody is also playing a little bit of a role in contributing to higher prices in this country, and maybe making it more difficult at the end of the day for the patients to afford drugs that they need.”
