US Drug Prices Distorted to Favor Pharmacy Benefit Managers

PBMs use hidden rebates and other strategies to rig drug pricing and sidestep regulatory efforts

It’s easy to ask what a drug costs; patients ask every day. It’s tough, though, to give them an accurate answer.

“There is no ‘price’ for a drug in the United States,” said Antonio Ciaccia, Senior Advisor for Disruptive Innovation and Practice Transformation for the American Pharmacists Association (APhA) and President of industry consultant 3 Axis Advisors. “Price varies by time and your place in the distribution chain. Drug prices are hidden, set by contract, and are being manipulated by pharmacy benefit managers.”

Ciaccia attempted to clear some of the smoke, mirrors, and confusion around drug prices during his presentation at the APhA Annual Meeting and Exposition in San Antonio, Texas.

Pharmacy benefit managers (PBMs) began intermediaries and claims processors between insurers and pharmacies. Today, 3 PBMs—CVSCaremark, Express Scripts, and OptumRx—control about 80% of the United States pharmaceutical market with vertically integrated organizations that include insurers, pharmacies, rebate aggregators, and other industry players.

Every organization and level in the distribution chain, from manufacturers to patients, has its own private contracts and rebates, both acknowledged and disguised. The rebates that grease the wheels of the drug distribution chain would be called kickbacks in any other business, Ciaccia continued, but are legal in this particular industry.

“PBMs advertise that they are the only entity working to control prescription drug costs,” he said, “but data show that PBM profits generated off prescription drug transactions heavily distorts their incentives to control drug spending for their clients.” The reality, he continued, is that formulary placement fees and other rebates give PBMs positive incentives to distort prices and increase their own profits. Each PBM promotes utilization of different mixes of drug products for different health plans. Different utilization mixes trigger different mixes of rebates and fees, making it more difficult to compare real costs.

Another problem? The entire drug distribution system is based on fake prices. List prices are artificial, Ciccia explained. So is average wholesale price. The AWP for 20 mg of omeprazole magnesium (Prilosec) in 2021 ranged from $0.30 per unit to nearly $9.

“We need a benchmark that isn’t set by somebody who makes money off those drugs,” he said.

Today’s rigged prices leave cash-pay patients and small employers paying list price or close to it. Large employers pay a bit less, followed by Part D Plan sponsors, Big 4 federal buyers—like Veterans Affairs, the Department of Defense, Public Health Service, and Coast Guard, with Federal Ceiling Price protection—and then Medicaid.

One result: An analysis concluded by 3 Axis Advisors found that a group of small, self-insured employers with combined drug spend of over $110 million in 2018 received about $5 million in rebates. Based on the Federal Supply Schedule, a proxy for the best commercial price, they should have received about $30 million in rebates. PBMs pocketed the difference.

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