Pharmacy Benefit Management (PMB) Industry: Definition

What Is the Pharmacy Benefit Management (PBM) Industry?

The pharmacy benefit management (PBM) industry is a group of companies that serve as the middlemen between insurance companies, pharmacies, and drug manufacturers. PBMs are responsible for securing lower drug costs for insurers and insurance companies.

They accomplish this by negotiating with pharmacies and drug manufacturers. The discounts are then passed on to the insurance companies. Profits are generated through a slight up-charging of drugs or by retaining portions of rebates.

Understanding the Pharmacy Benefit Management (PBM) Industry

Insurance is a multilayered business with many players serving a variety of interests and purposes, just like other subsectors of the economy. Insurance companies aren't the only entities that operate in this industry. It also includes reinsurers, underwriters, and pharmacy benefit management companies.

Insurance companies rely on PBMs to manage costs, making them the middleman. PBMs leverage their role by negotiating discounts with drug manufacturers for insurance companies in exchange for putting the manufacturer’s drugs in front of millions of customers. These companies also negotiate contracts with pharmacies to create networks of retail pharmacies for drug distribution. 

PBMs exploit several revenue streams. They charge service fees for:

• Negotiating with pharmacies, insurance companies, and drug manufacturers
• Processing prescriptions
• Operating mail-order pharmacies

Contracts with the largest insurance companies can quickly change the prospects of a PBM, giving it huge power when negotiating with drug manufacturers and pharmacies. It should come as no surprise that competition is fierce, with PBMs working to optimally position themselves for contract negotiation with insurance companies.

Source: The Wall Street Journal

Special Considerations

The cost of drugs has exploded over the years, leading insurance companies to rely heavily on PBMs to control and reduce their liabilities. The industry has seen increased competition among PBMs as well as consolidation. Mergers and acquisitions (M&A) allow PBMs to increase in size and boost their negotiating power.

There has also been consolidation between pharmacies and PBMs due to the inherent synergies between them. Rite Aid bought out EnvisionRX in 2015 and CVS Caremark has long had direct access to CVS’s retail pharmacy network.

Criticism of the PBM Industry

As the sheer nature of the business likely implies, PBMs are common targets of lawsuits and government scrutiny. As third-party negotiators, many of their business practices are opaque so PBMs haven’t always disclosed rebates, discounts, itemized billing statements, or the percentage of savings passed on to insurers.

The Bottom Line

State legislatures have been pushing for greater transparency and disclosure provisions to better regulate these companies. There has also been pressure to force fiduciary duty onto PBMs which would require them to act in the best interest of insurers and insurance plans, similar to financial advisors' legal obligation to act in the best interest of their clients. All of this serves to indicate possible regulation of the PBM industry that could affect future profitability.