Pharmacy Benefit Managers (PBMs) are pivotal players in today’s prescription drug landscape, managing the prescription benefits for diverse clients, including health insurance companies, large employers, governments, and Medicare Part D plans. While their role in negotiating discounts and streamlining drug plans was initially beneficial, a lack of transparency and accountability has allowed PBMs to evolve into highly profitable, powerful middlemen who grab more and more of our healthcare dollars for themselves. PBM reform is essential if we are going see the benefit of free market principles, emphasizing competition and consumer choice, driving down costs for patients and taxpayers.
As conservatives, we believe in the power of the free market to deliver better outcomes at lower costs. This conviction extends to health care, where competition, price negotiation, and consumer choice should drive innovation and affordability. The Medicare Part D Prescription Drug Benefit is a testament to this belief. Since its inception, seniors have been able to choose the Medicare plan that best meets their needs, fostering competition among private insurance companies. This competition has proven effective in holding down prices and improving innovation and new drug discovery..
The Medicare Advantage Plans, which allow seniors to receive all their Medicare benefits—including prescription drugs—through private insurance companies, further demonstrate the benefits of free-market-driven health care. Unlike a one-size-fits-all government approach, this model empowers consumers with choice, allowing them to select plans that suit their individual health needs.
However, as PBMs have grown into powerful, vertically integrated conglomerates, their influence on the market has strayed. PBMs were initially created to manage claims and negotiate drug prices on behalf of insurance plans. But they have consolidated their power and now exert enormous control over drug prices, formularies, and pharmacy contracts. Unfortunately, PBMs increasingly prioritized their own profits over the interests of patients, taxpayers, and even their clients.
To understand why reform is necessary, it is important to grasp the basic functions of PBMs. PBMs serve four critical roles:
1. **Negotiating Rebates**: On behalf of their clients—whether insurance companies, employers, or government entities—PBMs negotiate discounts with drug manufacturers. These discounts, or rebates, are based on the volume of prescriptions expected to be filled. While the idea of negotiating lower prices is beneficial, the current system often ties PBM compensation to the size of the rebates they secure, creating perverse incentives for PBMs to favor higher-priced drugs that come with larger rebates, thereby feathering their bottom line
2. **Formulary Design**: PBMs create and manage the drug formularies for health plans. This involves deciding which drugs will be covered and how they will be tiered. Drugs with higher rebates are often placed on lower tiers, ensuring they are prescribed more frequently. This practice once again prioritizes PBM profits over patient care.
3. **Determining Plan Policies**: PBMs have significant influence over plan design, including deductible levels, co-pay structures, and step therapy protocols (where patients must try less expensive drugs before being approved for costlier ones). These decisions have a profound impact on patients ’access to medications and out-of-pocket costs.
4. **Negotiating with Pharmacies**: PBMs often control which pharmacies can dispense prescriptions under a plan they are paid to design. Because PBMs hold such sway over which pharmacies are “in-network,” these negotiations are often skewed heavily in favor of the PBM, leaving independent pharmacies with little leverage and limiting access for patients.
PBMs sit at the center of the prescription drug supply chain, controlling much of what patients pay and which drugs they can access. Yet, despite their power, PBMs remain one of the least regulated and least transparent sectors in health care.
Over time, the PBM industry has become highly consolidated, with just three PBMs controlling 80% of the market. This level of consolidation has drastically reduced competition, allowing these few PBMs to wield disproportionate control over drug prices and pharmacy access. Compounding the issue is the fact that these three dominant PBMs are now vertically integrated with insurance companies and pharmacy chains. This creates a significant conflict of interest, as the PBM is often negotiating with entities owned by the same parent company, undermining the free market forces of competition.
Such vertical integration stifles true competition and distorts the market, enabling PBMs to inflate costs rather than drive them down. Instead of acting as independent negotiators working to lower prices for health plans and patients, PBMs are now positioned to maximize profits across the entire supply chain—from negotiating rebates with drug manufacturers to controlling pharmacy reimbursements. This consolidation has pushed PBMs further away from the original free-market ideals that once underpinned their existence.
Reforming PBMs to realign them with free-market principles is critical to creating a prescription drug system that benefits consumers. Two primary reforms—**delinking** and **pass-through pricing**—are essential to restoring fairness and transparency.
– **Delinking**: One of the most critical reforms is to change how PBMs are compensated. Currently, PBMs earn a percentage of the rebates they negotiate, incentivizing them to favor high-priced drugs with larger rebates. Delinking would shift PBMs to a flat-fee model, paying them based on the services they provide rather than a percentage of savings. This would remove the incentive for PBMs to prioritize higher rebates over lower costs for consumers.
– **Pass-Through Pricing**: This reform would require PBMs to pass the full value of rebates and discounts on to the health plans they represent, ensuring that the savings are realized by consumers and not captured by PBM for their profit. Transparency would also increase, allowing health plans and policymakers to better understand how drug pricing decisions are made.
PBMs have strayed far from their original purpose.. Instead of fostering competition and lowering prices, the PBM industry has become a profit center unto itself, driven by a lack of transparency, consolidation, and conflicts of interest. Reforms like delinking and pass-through pricing are necessary to restore free-market principles to the prescription drug system and ensure that patients, not middlemen, are the ultimate beneficiaries. Conservatives must lead the charge in holding PBMs accountable and ensuring that the free market, not corporate interests, guides the future of health care.
Conservatives must lead the charge in holding PBMs accountable. A good place to start is with the “delinking” reform. Conservatives need to press for inclusion of this critical PBM reform in legislation Congress must pass before it adjourns this year. This reform cannot wait. By doing so, we can ensure that the free market, not corporate interests, shapes the future of healthcare.
About the Author
Pam McAloon is a retired Registered Nurse, specializing in critical care and oncology. Currently serving as State Committee Woman for Pinellas County and as Pinellas Chair of the FRW.
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