Pharmacy benefit managers (PBMs) are third-party administrators that manage prescription drug benefits for health insurers, Medicare Part D drug plans, large employers, and other payers. By negotiating with drug manufacturers and pharmacies PBMs regulate drug spending.

In December 2020, the US Supreme Court ruled that an Arkansas law can be used to regulate PBMs. The state law governs reimbursements rates that pharmacy benefit managers, or PBMs, must pay to pharmacies.¹

In 2021, more than 100 separate bills regulating PBMs have been introduced in 42 states this year. At least 12 of the states have adopted new oversight laws.²

PBMs’ ability to negotiate larger rebates from manufacturers has helped lower drug prices, but PBMs may have an incentive to favor high-priced drugs.

PBMs have a significant impact in determining total drug costs for insurers, shaping patients’ access to medications, and determining how much pharmacies are paid. PBMs operate in the middle of the distribution chain for prescription drugs. They develop and maintain lists, or formularies, of covered medications on behalf of health insurers, which influence which drugs individuals use and determine out-of-pocket costs. PBMs use their purchasing power to negotiate rebates and discounts from drug manufacturers. They also contract directly with individual pharmacies to reimburse for drugs dispensed to beneficiaries.³

Controversy swells around pharmacy benefit manager practices due to a lack of transparency in rebates and payments from health insurers and employers. PBMs are reimbursed by health plans and employers at a higher price for generic drugs than what they pay pharmacies and retain the difference (spread pricing). Also PBMs often receive rebates that are calculated as a percentage of the manufacturer’s list price. PBMs can receive a larger rebate for expensive drugs than they do for ones that may provide better value at lower cost.

There are now three large PBMs (CVS, Express Scripts, and UnitedHealth’s Optum) that account for more than 70 percent of claims volume.⁴

Manufacturer rebates to PBMs increased from $39.7 billion in 2012 to $89.5 billion in 2016, partially offsetting list price increases.³

Policy recommendations to address PBMs controversial business tactics include: requiring greater transparency around rebates, banning spread pricing and requiring PBMs to pass through rebates to payers or to patients.³

1. Kaiser Health News. KHN Morning Briefings.https://khn.org/morning-breakout/supreme-court-rules-against-pbms/. Published 2020.

2. Houghton K. States step up push to regulate pharmacy drug brokers. Kaiser Health News. https://montanafreepress.org/2021/06/30/states-regulate-pharmacy-benefit-managers/. Published 2021.

3. Pharmacy Benefit Managers and Their Role in Drug Spending | Commonwealth Fund. Commonwealthfund.org. https://www.commonwealthfund.org/publications/explainer/2019/apr/pharmacy-benefit-managers-and-their-role-drug-spending. Published 2019.

4. Arnold J. John Arnold: Are pharmacy benefit managers the good guys or bad guys of drug pricing?. STAT. https://www.statnews.com/2018/08/27/pharmacy-benefit-managers-good-or-bad/. Published 2018.