The U.S. biopharmaceutical industry is essential for maintaining the public health, national security, and continued economic success of the nation. To help reduce the cost of often life-sustaining biopharmaceuticals, private employers, insurance companies, and state and federal governments utilize pharmacy benefit managers (PBMs) as third-party administrators of prescription drug programs.
Of 298 million Americans enrolled in a health insurance plan in 2020, 266 million are served by PBMs through commercial health insurance, Medicare Part D or Managed Medicaid plans, self-insured employer plans, the federal Employees Health Program, and state government health insurance plans. PBMs argue that they utilize complex business models to efficiently manage prescription drug program services; negotiate rebates from biopharmaceutical manufacturers and discounts from retail pharmacy chains; offer more affordable pharmacy channels and more effective delivery channels; encourage the use of cost-saving generics and affordable brand drugs; reduce waste by efficient processing of insurance claims; and manage high-cost, specialty medications.
Yet, the inner workings of how these PBMs use their power to negotiate lower prescription prices – and how much of these savings remain with the PBMs themselves – is a mystery that has come under recent state lawmakers’ scrutiny. According to the National Academy for State Health Policy, as of October 14, 2021, 42 states have introduced 111 separate bills this year regulating PBMs – with 15 states having enacted proposed legislation into law. This deluge of legislation comes after a unanimous U.S. Supreme Court ruling in December 2020 that supported the State of Arkansas’ right to enforce administrative rules on PBMs.
Who are these PBMs? Drug Channels reports the following PBMs and their respective market share (by total equivalent prescription claims managed) for 2020: CVS Health (Caremark) (32 percent); Cigna (Express Scripts + Ascent Health Services) (24 percent); United Health (OptumRX) (21 percent); Humana Pharmacy Solutions (8 percent); Medimpact HealthCare Systems 6 percent; Prime Therapeutics (4 percent); and All Other PBMs + Cash Pay (4 percent). Interestingly, the top three firms hold 77 percent of market share. Using the Herfindahl-Hirschman Index (HHI), a formula utilized by the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) to calculate horizontal industry market concentration, the HHI for the PBM sector is 2,173, which is considered a “Moderately Concentrated Market” (i.e., an HHI number situated between 1500 and 2500), which translates to a less competitive marketplace.
In addition, vertical integration has also transformed the PBM industry. Drug Channels reports that the five largest PBMs are incorporated into large, vertically integrated organizations that combine health care insurers, PBMs, specialty pharmacies, and healthcare providers. However, whether this vertical integration strategy will improve efficiency by reducing supply chain transaction costs (and subsequently reduce costs to consumers and health care insurers) in the biopharmaceutical supply chain is yet to be determined.
Other new PBM entrants, however, recognize business opportunities in the biopharmaceutical marketplace. In October 2021, The Wall Street Journal reported that two new PBMs were being launched: the Mark Cuban Cost Plus Drug Company PBC and the Purchaser Business Group on Health (PBGH).
The Mark Cuban Cost Plus Drug Company PBC is a vertically integrated enterprise that will incorporate manufacturing, wholesale distribution, and pharmacy services. Cuban’s PBM pledges to utilize a transparent business model, firstly, by keeping its operating costs transparent to clients and providing them with 100 percent of the rebates it negotiates with biopharmaceutical manufacturers, and secondly, by launching its own online pharmacy to retail 100 of the most commonly prescribed generic medications, charging customers a 15 percent markup and a $3 fee above what it negotiates directly with generic manufacturers.
The Purchaser Business Group on Health (PBGH) is a nonprofit coalition consisting of nearly 40 large public and private employers. The PBGH PBM proposes to negotiate rebates directly with biopharmaceutical manufacturers and will allow its clients to review invoices revealing the dollar amounts it negotiate in rebates. Further, it intends to share 98.5 to 99 percent of its rebates with its clients, with the remainder applied to cover administrative expenses.
Why should these new PBM initiatives be successful when others have not, including “Haven” launched in 2018 by Amazon, JP Morgan, and Berkshire Hathaway, and disbanded in January 2021? One important reason may be the recent U.S. Supreme Court decision favoring the State of Arkansas, which has been an impetus for changing the PBM regulatory environment in 15 states this year – with other states likely to follow in 2022. This emerging “pricing transparency” environment offers new PBMs opportunities to launch innovative business models generating profitability while offering lower biopharmaceutical prices to health care insurers and patients.
