The Path to Fair PBM Competition

In any industry, competition between a few dominant players is not unusual, but in healthcare its effects extend far beyond standard business rivalry. When control of access to prescription drugs rests with just a few players, the result is not only a market imbalance: it also results in higher plan costs, increased financial pressures, and ultimately reduced affordability for patients.

The pharmacy benefit management (PBM) industry is experiencing a competition problem. The American Medical Association details the situation in a recent report. It reveals that the PBM space is highly concentrated and the lack of competition could lead to higher drug prices, ultimately paid by patients. The PBM space is dominated by three companies, which represent more than 80% of the market. This statistic reveals a more complex reality. While these three giants represent the majority of the market, more than 75 PBMs operate in the United States.

To improve competition, increase price transparency, and reduce healthcare costs for patients, more insurers and health plan managers must find ways to work with these lesser-known PBMs.

The problem of competition

At first glance, all PBMs may look the same. But in practice, the incentives and operating models within a highly concentrated PBM market have significant consequences for costs, transparency and patient access.

A handful of PBMs, closely tied to health insurers, dominate the market, primarily due to the amount of additional revenue available through the pharmacy delivery chain. Vertical integration, a lucrative industry-wide trend that is merging these entities and streamlining revenue generation for this country’s largest health insurers. For plan managers, this integration makes it very difficult to distinguish between PBMs and insurers. The result leaves employers feeling trapped by a lack of alternatives, burdened by excessive switching fees, and unable to seek better deals or innovative approaches with any of the other 70 PBMs.

Managed PBMs and other innovative models, focused on clinical outcomes and cost management, have the potential to be a profitable, long-term partner for employers and employees. With increased competition in the industry, plan managers can benefit from greater accessibility and transparency at a time when it is needed most: employers are projecting a 10% increase in health care costs next year.

So why can’t plan managers just work with more PBMs to create better, more affordable solutions for patients? Vertically integrated PBMs create a problematic structure and exercise unbalanced control, and the following obstacles only further complicate the situation.

• Request for Proposal (RFP) Process: Typically, RFPs focus primarily on discounts and rebates that PBMs can offer when deciding which companies to partner with. PBMs focused on generating rebates encourage the use of more expensive drugs. Therefore, measuring PBMs by the amount of discounts they can earn ignores the PBM’s ability to manage overall costs.

• Exclusion fees and health insurer credits: Health insurers often charge excessive fees when a plan sponsor transfers pharmacy benefits outside of its ownership structure. At the same time, they offer rebate credits and other financial incentives that help offset monthly plan expenses. These credits support sponsors’ cash flow management, but they make it financially difficult to abandon the insurer.

• Misaligned incentives: Consultants who manage RFP processes are often specialized advisors hired by plan sponsors, such as employers or health plans, to evaluate and recommend PBM providers. However, these consultants may benefit from financial incentives linked to certain PBMs, which may influence their recommendations.

• Name recognition: In highly concentrated markets, the largest companies are often seen as the only credible choices. Similarly, in the PBM market, there is a widespread perception that lesser-known PBMs are inferior to dominant, well-established companies, even when they offer innovative approaches or more flexible solutions. This perception often causes plan sponsors to be hesitant to choose PBMs with low name recognition due to fears of potential negative reactions from their participants.

• Discounts: One of the responsibilities of pharmacy benefit managers is to negotiate discounts from drug manufacturers to reduce the cost of medications for health plan members. These discounts are typically negotiated through group purchasing organizations (GPOs) that are owned by the three largest PBMs. GPOs keep a portion of the rebate and forward the remaining amount to the PBM. Average discounts vary between 30% and 50% in cost reduction. But these savings do not go directly to plan participants. Cost savings are returned to the plan sponsor 3-6 months after a claim arises. To benefit from these deep discounts, PBMs incentivize more expensive drugs. Discounts are often not available on generic prescriptions or cheaper biosimilar medications. PBMs are often encouraged to use more expensive treatments, whether through prior authorization criteria or formulary placement, which, despite discounts, can lead to higher premiums.

Moving forward

What strategies can the healthcare industry, particularly plan sponsors, employ to foster greater competition within the pharmacy benefit management (PBM) industry, while ensuring that established market leaders maintain the operational flexibility necessary to maintain stability and innovation?

• Carefully vet consultants: A significant number of plans use a consultant to inform their benefit selection decision. Some of these consultants receive financial incentives to do business with larger organizations. Plan sponsors must exercise due diligence when selecting a consultant to ensure neutrality.

• Review calls for tenders: The RFP process should consider both cost management and clinical outcomes, rather than focusing solely on rebates and rebates. Choosing a PBM is a long-term decision that must ultimately prioritize what is best for patients.

• Consider managed PBMs: While the immediate rebate savings are attractive, plans should prioritize managed PBMs that focus on clinical value and profitability. Individuals who partner with managed PBMs should actively share their experiences with other plan sponsors to highlight the benefits of clinical and outcomes-based collaborations.

• Increase transparency and address vertical integration: Comprehensive legislation is needed to promote full financial transparency in the PBM market, clarifying the flow of rebates and profits between drug manufacturers, PBMs, and affiliated pharmacies. Additionally, structural reforms should discourage vertical integration to prevent conflicts of interest and anticompetitive practices and ensure fair access and choice for patients and plan sponsors.

The PBM space has a limited competition problem. As health care prices continue to rise, changes need to be made – and quickly. There is no need to wait for plan sponsors; they can already take steps to create a more competitive PBM space by re-evaluating their RFP process, using non-confrontational consultants, and considering partnering with managed PBMs. These measures, combined with effective legislation, can ultimately lead to more affordable healthcare.

Photo: Jordan Lye, Getty Images

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