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The biggest PBMs are handling more and more of the country’s drug price negotiations

STAT+


Alex Schmelzer didn’t think he’d be the most-hated person in drug pricing negotiations, but he was.


Schmelzer founded a consulting firm in 2016 to help companies battle their pharmacy benefit managers, the behemoth intermediaries that negotiate drug prices, process claims, and create networks of pharmacies. Schmelzer and his colleagues pored through data and discovered many employers were paying too much for their workers’ drugs.


But after three years, in 2019, Schmelzer had to shut down his shop. It turns out his clients didn’t want him to battle as hard as he did — even if they were getting overcharged.


“Everyone hated me, even the people who I was helping because it threatened their jobs,” Schmelzer said. “Employers did not re-up because I caused too much friction. I’d sit at a meeting with the PBM or insurance executive and say, ‘Why are you ripping off my client?’ And then everybody would get upset.”


While firms like Schmelzer’s push for change, the PBM industry has only grown despite its motto of lowering drug costs. The five largest PBMs — CVS Health’s Caremark, Cigna’s Express Scripts, UnitedHealth Group’s OptumRx, Humana, and Anthem’s IngenioRx — handled more than $422 billion of gross drug revenues in 2021, according to a STAT review of the companies’ financial filings. That’s 9% higher than 2020 and 56% higher than in 2015. Almost 90% of those gross revenues from last year flowed through CVS, Express Scripts and OptumRx, colloquially known as the “Big Three” in the industry.


Gross revenues, on their own, don’t tell the entire story. PBMs sit at the center of a complicated web for how Americans pay for drugs, and rising gross revenues reflect a number of broader trends: Manufacturers’ list prices are going up, new drugs have ever-higher price tags, and more people with insurance are filling more prescriptions. Those numbers also include pharmacies’ fees and the drug rebates that PBMs receive before they are paid out to insurers and employers.


“We are simply seeing more activity in the pharmacy space, which is leading to more business,” JC Scott, the head of the Pharmaceutical Care Management Association, the primary lobbying group for PBMs, told STAT. “There’s more demand for PBM services as a result of that.”


However, PBMs’ profit margins now hover around 4-5% of gross revenues, according to the filings, which equates to tens of billions of dollars in profit annually.

“They’re making a lot of money off the backs of their clients and employers,” said Gary Becker, a longtime drug benefits consultant who works with smaller employers as the CEO of ScriptSourcing. “These large PBMs have contracts with many, many pages, written by teams of attorneys, with many that are hard to understand and have lots of hidden cash flows.”


Little has fundamentally changed with PBMs in the past several years, experts say. Health insurance companies now own the largest PBMs, which hold more leverage than ever in drug-pricing negotiations; employers rarely switch vendors, fearing a messy change and blowback from workers who don’t want their prescriptions altered; large consulting firms direct most companies to the biggest PBMs; and drug rebates and contracting terms remain hazy for the employers that are ultimately paying the lion’s share of the tab.


Clandestine PBM contracts continue to be the main source of ire among industry detractors. A primary function of PBMs is negotiating lower drug prices, in the form of rebates. Drugmakers that offer bigger discounts get lower copays for their drugs, and therefore better placement on the lists of approved drugs.


PBMs usually pass all or most of those rebate dollars back to employers, but sometimes they don’t — or rebates are disguised as other types of fees, which people in the industry acknowledge is a “shell game.” Pricey brand-name drugs are occasionally favored over generics if big rebates are attached, which forces patients to pay more out of pocket. Ultimately, everything depends on the contract terms, and whether PBMs force companies to accept them.


“Most plans simply renew their PBM contracts, year after year, with one of the Big Three,” said Linda Cahn, an independent drug benefit consultant and PBM critic. “The plans ignore the fact that virtually all existing contracts are stuffed with loopholes that make the contracts essentially worthless.”


PCMA’s Scott said the PBM landscape is competitive with 70 different companies, including six new ones that have started since 2019. And some consultants say other players that promise simpler terms are generating more interest.


“Among the smaller and mid-sized employers that are self-funding, I see an openness in moving away from the big PBMs,” Becker said. He directs his self-funded companies, which pay for their own drug claims, to smaller benefit managers like Southern Scripts and US-Rx Care.


But Schmelzer said ultimately there’s a mentality among employers to stay with the biggest PBMs, which have scale and are believed to be safer options despite their labyrinthian contracts. The drug cost savings associated with switching may not always be worth the disruption, he said, and human resources specialists often believe in the saying, “Nobody got fired for buying IBM.”


“I wish it had worked,” Schmelzer said of his firm. “I know there’s still a huge problem.”