California's Drug Transparency Law: Navigating The Boundaries Of State Authority On Drug Pricing

Pharmacy Benefit Managers: History, Business Practices, Economics, and Policy

Importance

Pharmacy benefit managers (PBMs) play a major role in the provision of pharmacy services by acting as intermediaries between pharmacies, plan sponsors (insurance companies and employers), pharmaceutical manufacturers, and drug wholesalers. As their role and visibility have increased, PBMs have come under increased scrutiny from policymakers. However, no prior literature has systematically described the history, business practices, and policymaking of PBMs.

Objective

To provide an overview of the PBM industry, including its history, the evolution of services provided by PBMs, an assessment of the current policy landscape, and analysis of how proposed policies could affect PBM practices and patient care.

Evidence

This work reviews historical events; previous and current industry practices and publications; prior academic literature, existing statutes, regulations, and court cases; and recent legislative reforms and agency actions regarding PBMs.

Findings

Pharmacy benefit managers evolved in parallel with the pharmaceutical manufacturing and health insurance industries. The evolution of the PBM industry has been characterized by horizontal and vertical integration and market concentration. The PBM provides 5 key functions: formulary design, utilization management, price negotiation, pharmacy network formation, and mail order pharmacy services. Criticism of the PBM industry centers around the lack of competition, pricing, agency problems, and lack of transparency. Legislation to address these concerns has been introduced at the state and federal levels, but the potential for these policies to address concerns about PBMs is unknown and may be eclipsed by private sector responses.

Conclusions and Relevance

Pharmacy benefit managers are intermediaries in the pharmaceutical supply chain and perform multiple roles in the management and distribution of pharmaceuticals to patients. When regulating PBMs, it is important to adopt policies that address market failure problems by improving PBM competition as opposed to policies designed to serve the narrow financial interests of other market participants (eg, pharmacies, pharmaceutical manufacturers) without meeting the needs of consumers.