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June 20, 2017

Uncloaking Pharmacy Benefit Managers to Promote Market Competition

Pharmacy benefit managers (PBMs) are the intermediary between payers and everyone else in the healthcare industry.  After years of gaining and consolidating power, their actions have captured the ire of the public, leading to government scrutiny. A recent article in Forbes found that PBMs have a “near-monopoly” position, which incentivizing higher list prices for medication, enabling them to create large rebates and discounts at the expense of pharmacies and drug manufactures’, extract direct and indirect remuneration fees (DIR) and other burdensome requirements on non-PBM owned/affiliated pharmacies.[1]  The obvious result is that “PBMs are the most profitable operators in the health-care supply chain,” according to Bloomberg.[2] In fact, Morgan Stanley reported that the true operating margins for Express Scripts and CVS were 15% and 10% respectively in 2015.[3]

The profits will keep increasing as PBMs are further consolidating their networks forcing consumers to use pharmacies owned or affiliated with the PBM.  As Wharton professor, Patricia Danzon, recently stated, “Caremark as a PBM can give preference to CVS and tie its products to some degree.”[4] Such tactics have contributed to closures of hundreds pharmacies, according to the RUPRI Center for Rural Policy Analysis, which conducts independent research on healthcare issues.[5]

PBMs have long hid behind a cloak of secrecy in employing anticompetitive tactics to expand their economic stronghold on the healthcare industry.  Alliance Bernstein, an investment firm, believes the “press/political investigation has potential to reduce [retail] spread . . .  .” Linette Lopez. “These companies you’ve never heard of are about to incite another massive drug price outrage.”[6]Reducing spread can only be done through fair competition, which requires transparency and network access.  As a result of the public outcry on these issues, federal and state governments are now in the beginning stages of introducing legislation to promote transparency, fair competition and patient access.

Federal legislation was recently introduced to promote greater access in underserved areas that mandates that any pharmacy will have the option to be an in-network pharmacy with respect to a prescription drug plan as long as it agrees to the same terms and conditions as other in-network pharmacies.[7]  Likewise, another bill prohibits PBMs from requiring or incentivizing a Medicare beneficiary to use a PBM owned/affiliated pharmacy.[8]  As Congressman Doug Collins (R-Ga), the bill’s sponsor, explained:

PBMs engage in predatory practices designed to boost their own profit margins at the expense of insurers, contracting pharmacies, patients, and – in their relationships with federal programs – taxpayers.  The lack of transparency in their operations has allowed them to control the market unjustly, with the result that these companies without savings that they have promised to pass on.[9]

The goal of the bill is to protect competitive pricing and preserve pharmacy access and choice for patients.[10]

With regard to DIR fees, CMS has found a “notable” growth in the fees over the past few years.  Between 2010 and 2015, DIR fees increased almost 6% or almost $16 billion.[11]  In response to this finding, the “Creating Transparency to Have Drug Rebates Unlocked (C-THRU) Act” was introduced, which would require PBMs to disclose the amount of rebates they negotiate with drug manufacturers for Medicare plans.[12]  Like the other bills, the C-THRU Act is aimed at promoting competition and “lift[ing] the veil of secrecy about prescription drugs,” according to Senator Ron Wyden (D-Ore), who introduced the bill.[13]  Wyden is also concerned about the “increasingly concentrated market with three companies dominating the market share.”[14] Another bill was also introduced to require PBMs to publish generic drug pricing for certain federal programs, including Medicare and to prohibit DIR fees.[15]

Like the federal government, many states have followed suit with legislation to promote competitiveness.  In 2017, a bill was introduced in California that requires PBMs to disclose data on drug costs, rebates and fees.[16]  North Dakota also recently enacted laws that protects pharmacies from charges not apparent at the time a PBM processes the claim or clawing back portions of co-payments paid by patients, as well as, transparency for employers if the PBM engages in spread pricing and creating a “firewall” between a PBM and its affiliated mail-order pharmacy.[17]  Likewise, states like New York have focused on pricing methodologies employed by PBMs through agency action.  The New York Office of the Medicaid Inspector General’s (OMIG) 2017-2018 Work Plan explicitly states that OMIG will “request and review pricing methodologies” of PBMs and compare the pharmacy encounter data to ensure accuracy in billing and payment of claims.[18]

While PBM legislation is still in its infancy, if passed (and that is a big if considering the lobbying, advertising and campaign contributions being made, including that of the Pharmaceutical Care Management Association, a trade group for PBMs), it will aid in meeting these goals.[19] The legislation should provide for greater and more fair competition between PBMs and the pharmacies that are not owned or affiliated with them.

[1] See Winegarden, Wayne. “It’s Time to Switch Our Pharmacy Benefit Manager.” Forbes (May 9, 2017), available at:

[2] See Metcalf, Tom and Weinberg, Neil. “Drug Middlemen Have Slim Profit Margins – Just Ask Them” Bloomberg. (Mar. 31, 2017), available at:

[3] Id.

[4] See Feldman, Brian S., Big pharmacies are dismantling the industry that keeps US drug costs even sort of under control.” Quartz (Mar. 17, 2016), available at:

[5] See Rural Policy Brief, Brief No. 2017-3, RUPRI Center for Rural Health Policy Analysis (April 2017), available at:

[6] Business Insider. (Sept. 12, 2016), available at: (quoting AllianceBernstein analyst report).

[7] See S. 1044/H.R. 1939 (Ensuring Seniors Access to Local Pharmacies Act of 2017, available at:

[8] See H.R.1316 (Prescription Drug Price Transparency Act, available at:

[9] See “Collins Introduces Legislation to Increase Drug Pricing Transparency” (Mar. 2, 2017), available at:

[10] Id.

[11] See “Medicare Part D – Direct and Indirect Remuneration (DIR) (Jan. 19, 2017), available at:

[12] See S. 637 (Creating Transparency to Have Drug Rebates Unlocked (C-THRU) Act, available at:

[13] See “Wyden Calls for Increased Drug Pricing Transparency to Lower Costs” (Mar. 15, 2017), available at:

[14] Id.

[15] See H.R.1316; S. 413/H.R.1038 (Improving Transparency and Accuracy in Medicare Part D Drug Spending Act, available at:{“search”:[“hr+1038”]}&r=1).

[16] See A.B. 315, available at:

[17] See S.B. 2258 and S.B. 2301, enacted April 5, 2017, available at: and, respectively.

[18] See New York State Office of the Medicaid Inspector General (OMIG), Work Plan for State Fiscal Year 2018, (April 1, 2017 to March 31, 2018), p. 11, available at

[19] See Lipton, Eric and Thomas, Katie. “Drug Lobbyists’ Battle Cry Over Prices: Blame the Others” The New York Times. (May 29, 2017); Merritt, Mark. “PCMA’s 6-Point Strategy to Engage the Trump Administration” (Feb. 6, 2017), available at:


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