Ohio the latest state to legally challenge the business model of Pharmacy Benefit Mangers (PBMs). Last month, the state’s attorney general filed a landmark lawsuit alleging that Express Scripts and Prime Therapeutics – two of the country’s largest PBMs – illegally colluded to drive up drug prices for pharmacies and patients. This the latest high-profile effort by policymakers and law enforcement agencies at various levels of government to increase scrutiny and curtail the practices of PBMs nationwide. 

According the Ohio Attorney Generals office, the two companies shared pricing and other information to increase their leverage in negotiations with drug manufacturers. Under this alleged scheme, the two PBMs restricted coverage for insulin and other treatments by refusing to pay them or favoring competing medications from drugmakers that agreed to pay higher rebates. 

For years now, PBMs have played a largely unseen role in the U.S. health system. 

In theory, PBMs are third-party administrators established to oversee prescription drug benefits for insurers and negotiate lower prices. In reality, they are middlemen with significant bargaining power that have largely become indistinguishable from other parts of the health system. 

For example, CVS is known primarily for its massive chain of drugstores, and it is also a healthcare provider and an insurer. The company recently completed an $8 billion acquisition of Signify Health, a network of 10,000 clinician practices across the United States. With its ever-increasing market power, this single company controls the practice of medicine for doctors around the country as well as the access many patients have to the latest treatments. However, even with all these overlapping lines of business, CVS’s PBM – CVS Caremark – is by far its largest source of revenue, earning nearly $170 billion in 2022. Two other major PBMs – Express Scripts and OptimumRx – both generate over $100 billion in revenue every year. Between them, these three companies control nearly 80% of the PBM market. 

In recent years, many have started asking what PBMs do to earn those types of revenues. What value do they add to our nations health care system. Sadly, from the perspective of patients, the answer is: Not much. In fact, in many ways, they do far more harm than good. 

For starters, PBMs are arguably the biggest driver of increased drug prices in the United States. After negotiating with manufacturers, PBMs place medications on formularies, or tiered lists where treatments are ordered according to costs for patients. Medications on higher tiers have higher copays, but the increased fees are not directly tied to their list prices. There are no enforceable rules determining where a drug should listed on a formulary, and PBMs typically make these decisions with little or no oversight or explanation. 

In many cases, a PBMs fees are proportional to the savings they produce for an insurance plan during negotiations with manufacturers. As a result, their primary objective is to obtain rebates – or discounts off a medications list price – from drug companies. Higher rebates mean increased revenues for a PBM. As a result, they have a built-in incentive to use placement on their formularies, not to lower costs for patients or payers, but to increase rebates. In return for a larger rebate, a PBM can offer a manufacturer exclusivity or agree to limit coverage to a small number of competing treatments. 

On top of that, PBMs typically calculate rebates based on a medications list price, which encourages drug companies to inflate prices to artificially increase the size of their rebates and make PBMs’ negotiations appear more effective. In other words, the business model employed by major PBMs actually creates a built-in preference for higher manufacturer list prices. 

The impact of PBM’s market manipulation isn’t limited to newer, brand-name medications. While generic drugs are typically placed the lowest tier and tend to be covered with low or no required copays, PBMs can still make an array of agreements to benefit certain generic manufacturers and exclude others. The entire purpose of generics is to lower prices through increased competition and addition options for patients. But, with PBMs acting as intermediaries, patients often do not get the full benefit of generic competition. 

In the eyes of many patient advocates, reform and increased enforcement of PBMs are long overdue. 

The case laid out in the Ohio lawsuit presents additional evidence that PBMs – supposedly created to reduce health system costs – often profit from complex arrangements with manufacturers, insurers, and pharmacists that pass higher prices on to patients and consumers. In addition, the Federal Trade Commission, House Republicans, and several other state agencies have also been investigating what appear to be anti-competitive practices on the part of the major PBMs. 

n addition to increased enforcement of antitrust and consumer protection laws, several state legislators and regulators have recently established new rules governing the operation of PBMs in their jurisdictions. In 2022 alone, 12 states enacted laws imposing new restrictions and requirements on PBMs. Thus far, most of the laws have focused on licensing and preventing PBMs from imposing “gag orders” that prevent pharmacists from telling patients when paying by cash for a less expensive medication would be cheaper than using insurance. 

These results are encouraging, but there is something missing in many of these state-level efforts. So far, only a few states have enacted laws requiring PBMs to be more transparent on pricing and rebate decisions. While increased transparency is the focus of federal legislation currently moving through the Senate, mandating these types of disclosures has thus far been a more difficult lift for legislators and regulators at all levels of government. 

This is unfortunate. 

Some critics argue that stricter transparency requirements will not have a direct impact on drug prices. However, that is putting the cart before the horse. The U.S. health system is so entangled and riddled with perverse incentives that meaningful reform is impossible without first requiring additional transparency. Giving patients, pharmacists, and payers have more information PBMs’ pricing negotiations will empower them to make better decisions and, when necessary, hold negotiators accountable for bad agreements and self-dealing. Establishing these kinds of disclosure requirements should be policymakers’ primary focus in the near term when it comes to PBMs.