Pharmacy Benefit Managers: Kind of a Mystery to Me

Let’s see if I can make sense of pharmacy benefit managers (PBMs), the companies that seem to have a reputation as shady price-increasing middlemen in prescription drugs. This is part of my effort to better understand prescription drug prices and what’s wrong with that market.

First, consider the flow of a medicine from start to end.

The obvious start is that drug manufacturers make the medicine. And then that medicine has to get to pharmacies. Pharmacies do not want to contract with every single drug manufacturer directly, so instead they use wholesalers, who do that contracting for them and buy the drugs from the manufacturers and store them, and then those wholesalers are able to quickly supply all the drugs a pharmacy could want for a small markup. I don’t know the details on whether pharmacies can shop around for the best deal on a drug from different wholesalers or if they just contract with a single one, but, regardless, now the pharmacy has its drugs, and this part of the supply chain seems to work properly.

Next, the patient. They buy the drugs from the pharmacy. If they’re going through insurance, the pharmacy inputs into their computer the medication details and the patient’s insurance information and then out of the black box comes an out-of-pocket price for the patient to pay to obtain the medication and a price for the insurer to pay (and that bill gets sent directly to the insurer). That’s the end of the line for the medicine.

But the tricky part is that final transaction, how the prices are determined in that black box. This is where the mystery and intrigue and confusion come in.

Let’s talk about PBMs.

Originally, the precursors of today’s PBMs were simply companies that helped insurers process medication claims after patients would buy them. I’m not sure exactly how they morphed into today’s version of a PBM, but based on what I’ve been reading, my guess is that it went something like this . . .

Insurers (especially smaller self-insured employers) wanted someone with expertise in all things medications to create a formulary for them–surely a very complicated process–and since these precursor PBMs were already processing all the drug claims anyway, they were an obvious choice to ask to take on the new role of creating and managing formularies.

Next, since these precursor PBMs were now making formularies for several different insurers, they inadvertently had amassed significant power over many patients’ out-of-pocket prescription prices (and, therefore, patients’ prescription choices). So when drug prices started to climb higher, these precursor PBMs wanted to stay competitive and offer formularies with all the best medicines for the cheapest, so they got into the game of negotiating directly with drug manufacturers. And that is probably the point where they became modern-day PBMs. The three PBMs with the largest market share today are Express Scripts, CVS CareMark, and UnitedHealth’s OptumRx

But if the drug manufacturer is selling their drugs to pharmacies via wholesalers, what are PBMs and drug manufacturer negotiating over?

Kickbacks for PBMs to get more patients to buy their medications. That’s really what it boils down to. Although the payments from drug manufacturers to PBMs can take various forms, the simplest one is that the drug manufacturer pays a PBM a nice sum for the PBM to include their drugs on the PBM’s formulary. The PBM then passes some of this money on to the patients by lowering their copay for those drugs.

There are a lot of hidden details in these PBM-drug manufacturer negotiations. It’s an area rife with hidden numbers. The main question is, How much do PBMs actually get paid (including all the different forms of kickbacks) from the drug manufacturers? Nobody knows. There have been government attempts to force them to disclose this, but the laws only require them to report on certain kickbacks, and it’s probably not too difficult for them to look really good by shifting the majority of their kickbacks to different categories that are not reported.

My other question is, How do insurers choose a PBM? This should be a fairly answerable question with the right contacts. Is this a fairly transparent market, where insurers can go to each PBM and ask how much the total cost will be of the drugs their patients will get, plus the fees paid to the PBM? Based on the sheer complexity and number of variables involved, I doubt the PBM selection is easy and transparent. This means PBMs can get away with not only hiding how much they are getting paid by drug manufacturers, but also not passing much of that money on to the patients and insurers. And nobody will ever know truly how much these middlemen are adding to our skyrocketing drug prices.

Why Does GoodRx Exist, and How Does It Work

Stacks of GoodRx cards sent to me at my place of employment

Last week, I wrote about pharmacy benefit managers (PBMs), which are the companies that insurers contract with to help them create and manage their drug formularies. These PBMs also have significant power in the market as the ones who, to a fair extent, influence which prescriptions patients get because they control the patient’s copay for each medicine, so they take advantage of that by getting kickbacks from manufacturers to make those manufacturers’ drugs cheaper for patients.

And now PBMs come into play again this week as we look at GoodRx. The most useful source I found when reading about GoodRx is right on the company’s website, an FAQ for pharmacy staff. Also, this review of their public filings was very helpful.

First, what is GoodRx? It’s a company that offers a free prescription card that patients can use to get discounts on their medications, and you can check what the discounted price will be at pharmacies in your area. (They’ve since branched out now into subscription programs and telehealth, but I’ll focus on their original line of business here.) GoodRx prescription discount cards don’t work in addition to insurance; rather, you either buy the medication through your insurance plan or you pay without insurance and use a GoodRx card to get a better price.

I have no financial interest in GoodRx, but it seems like a no-brainer for anyone who is about to buy a medication through insurance to ask how much their copay will be and then pull up the GoodRx app right then and there to see if any local pharmacies can offer the med cheaper through GoodRx (and, according to a couple journalists who tried that, they got a cheaper price through GoodRx about 40% of the time for the most commonly prescribed medications). Just remember though that the money spent on medications when using GoodRx does not count toward your deductible.

It makes sense that there would be a website/app that lists the prices of medications at multiple pharmacies so patients can price shop, but what’s with these discount card prices being lower than the cash prices?

Pharmacies, in their contracts with PBMs, will not get paid more than their list price. So, to avoid missing out on money that PBMs would be perfectly willing to pay them, they make sure to set their list price (i.e., cash price) higher than what any contracted price with a PBM will be. So you should expect cash prices to always be higher than the price you’ll get by going through your insurer, although I’m sure this rule is broken sometimes. Because it’s American healthcare.

On the GoodRx website/app, the prices shown are not cash prices though. They’re the actual prices that pharmacies have contracted with PBMs. These prices vary significantly from pharmacy-PBM contract to pharmacy-PBM contract, mostly because of the complexity and sheer number of different medications that they are negotiating over, which means they cannot possibly negotiate over every individual medication, so instead they negotiate over groups of medications. This means some medications in that group will end up being cheaper than they would otherwise be, and others in that group will end up being more expensive.

This is summed up nicely in a quote by GoodRx co-founder, Doug Hirsch: “We said, let’s see if we can gather all these prices and see if we can exploit the variation in these contracts.”

But this means pharmacies are stuck selling medications to tons of people at prices that they accidentally undervalued in a negotiation with a single PBM. Sure, short of adding a gag clause to their contract, they can’t stop the PBM from sharing that price with GoodRx, but why in the world would pharmacies ever agree to let tons of other patients not even covered by that PBM walk out with a medicine for that same undervalued price?

They actually don’t have a choice. PBMs require in their contracts with pharmacies to accept the GoodRx discount card price. GoodRx does try to make pharmacies feel better about it by saying that “once patients are in the pharmacy, they are also more likely to purchase non-prescription items at the store.” Ok great, so the medication turns into a forced loss leader.

There’s one more big piece to this puzzle. Why would PBMs go along with GoodRx in the first place? Think about it from their perspective. They are angering pharmacies by forcing acceptance of GoodRx as part of their contracts, and they are the ones sharing all their contracted prices with GoodRx and then left looking bad after patients find out their PBM didn’t get the best negotiated price on a large minority of medications. In short, what’s in it for the PBMs?

Money. I suspect the PBM is getting a cut of every transaction that uses GoodRx because the PBM is the one adjudicating the claim. They’re also giving a cut of it to GoodRx as a reward for bringing them the extra claim.

PBMs and GoodRx both seem to win, as do patients if they’re finding lower prices. So if GoodRx is actually decreasing prescription spending, where is the money coming from? There’s only one party left. Pharmacies must be the ones taking the loss. I wonder if that loss-leader argument actually makes pharmacies more than they are losing on this whole venture. My suspicion is that it’s hard to prove one way or the other, but I doubt it.