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PBM 101

What is a PBM? How do PBMs affect me? Here's what you need to know.

PBMs are the Single Biggest Influence on the Price of Prescription Medication.

PBMs would have consumers, employers and taxpayers believe that transparency is bad for the market – that it will drive prescription up drug costs if transparency is required.

PBMs claim to save their clients money at the prescription counter, but in fact, they are one of the biggest reasons why prescription medication prices are escalating.

PUTT is calling out PBMs, and asking American consumers, taxpayers, and lawmakers to stand with us to demand stronger laws and regulatory oversight over these invisible, unregulated middlemen and to stop PBM abuse and manipulation of the prescription drug system for their own profiteering.

PBMs: the basics

What is a PBM?

PBMs are third-party administrators contracted by health plans, large employers, unions, and government entities to manage prescription drug benefits programs. Originally intended to process claims on behalf of clients, PBMs now profit at every stage of the supply chain from drug maker to patient.  They are often called “invisible middlemen” or "medical middlemen" because they are hidden between the patient’s insurance company, whom the PBM works for, and the pharmacy, whom the PBM reimburses for dispensing the prescription.


Currently, the three largest PBMs - CVS Caremark, Express Scripts, and OptumRx (a division of United Healthcare) control over 80% of the prescription benefits market in the U.S. 

What's the PBM/Pharmacy Relationship?

PBMs are responsible for reimbursing the pharmacy for dispensing a patient’s medication. The pharmacy, who has already purchased the medication, has no control over any aspect of the medication’s sale. It is the PBM who determines the patient’s copay, and the PBM who determines how much it will reimburse the pharmacy for each medication covered under a drug plan.


Under a PBM-developed system called the “Maximum Allowable Cost” (MAC) list, the PBM pre-determines how much each drug covered under the plan should cost. This is the amount it reimburses all pharmacies the PBM does not own. Often the reimbursement rates are well below the pharmacy's purchase cost of the drug. This puts pharmacies in the position of having to fill the prescription at a loss.


No one knows how the maximum allowable cost (MAC price) for each covered drug is determined because PBMs are not regulated and not required to disclose their formulas for determining that cost. PBMs consider this information a “trade secret”, leaving pharmacies with no choice but to dispense a patient's medication at a loss, or lose that patient to a PBM-owned pharmacy.

Why are PBMs a Problem?

It starts with the nature of the PBM business model, which masquerades as a “cost saver” but is actually a cost multiplier. PBMs profit at nearly every stage of the supply chain. They:

  • Negotiate and keep manufacturer rebates in exchange for covering some drugs over others;

  • Determine how much to bill the insurance plan per prescription and what they will reimburse the pharmacy for dispensing that prescription;

  • Manage Medicaid and Medicare prescription plans and overbill the government the same way they overbill their private insurance clients;

  • Own their own pharmacies - both retail stores and mail-order - and make money when patients are forced to use mail order or only purchase from a PBM-owned pharmacy, such as CVS;

  • Reimburse their own pharmacies more than they reimburse non-PBM-owned pharmacies, especially small community and independent pharmacies.

How are PBMs Allowed to Own Pharmacies?

Currently there is no law preventing PBMs from owning retail, mail order, specialty or any other type of pharmacy - a clear conflict of interest because PBMs not only negotiate which drugs will be covered and at what cost, they have direct and proprietary access to their prescription drug benefit plan enrollees and can use their access as a platform to guide, steer, direct or require which pharmacies plan enrollees are allowed to use.


PBMs use their role as drug plan administrators to entice plan enrollees to use PBM pharmacies by offering incentives to patients that they directly forbid other pharmacies to use. For example, a PBM can offer a 90-day medication supply for the price of 60-days at its mail order pharmacy, but prohibits the local community pharmacy from being able to do the same thing, even though that community pharmacy may be part of the plan's pharmacy network.


CVS and Express Scripts have already been caught - and fined - for engaging in misleading scare tactics that pull patients away from their local pharmacies to a CVS or Express Scripts “preferred status” (large retail) pharmacy, claiming if patients don’t leave their local pharmacy, the price of their medication will greatly increase. These fines are cost of doing business for billion dollar corporations - they continue to engage in the practice.

More Frequently Asked Questions

Why Do Pharmacies Contract with PBMs?

Pharmacies are dependent on having patients. Most patients depend on having a prescription drug plan to help offset the cost of expensive medications. Because of this, pharmacies are left in a “take it or leave it” situation, business-wise. Pharmacies contract with PBMs because they are in the business of providing care and the PBMs have the patients.

What is Spread Pricing?

Spread pricing is the PBM practice of charging the health plan payer several times more than the actual cost of the drug.


While adding a mark-up to a good or service is standard business practice and not illegal, what makes spread pricing alarming is how PBMs have been shown to reimburse pharmacies at or often below (sometimes far below) the cost of the drug, then charge the health plan several times more than the drug cost. The health plan administrators think they are paying the true cost of the drug while the local pharmacy hasn’t been paid enough to cover the cost of goods sold. The result is a fomenting crisis among smaller independent and community pharmacies that can no longer afford to keep their doors open or employ staff and are forced to close.


The closure of small business pharmacies mostly affects underprivileged communities and rural areas with populations of less than 50,000. It creates pharmacy deserts that leave patients with less access to medication, while health plan sponsors and taxpayers are left to foot the much-higher bill.

How Are Taxpayers Affected by PBMs?

Investigations in multiple states have uncovered serious questions about the level of profiteering PBMs that manage Medicaid are engaged in. As with private health plans, PBMs provide prescription drug benefit plans to Medicaid and Medicare enrollees and bill the government for their services. State government pays for services with money raised by local taxes and receives matching federal funding (also taxes) to cover costs.


For Example: In Ohio, an independent investigation by the Columbus Dispatch has shown CVS Caremark charged the state as much as 9 times the cost of a prescription drug while reimbursing local pharmacies below cost - meaning taxpayers are grossly overpaying CVS for common medications - while CVS Caremark pockets the difference in a practice known as "spread pricing".

What Do You Mean, PBMs Keep Drug Manufacturer Rebates?

PBMs work with drug makers to determine the list of medications to be covered by health plans they represent. In the process PBMs negotiate, and are incentivized by, manufacturer rebates - which they keep in part or whole. The  more expensive the medication, the higher the rebate.


While the term “rebate” usually means the buyer receives money back post-purchase, this is not the case for prescriptions. The patient buys the product but the PBM receives the rebate. PBMs will often structure their contracts to allow them to collect and keep rebates as part of an “administrative fee” or “rebate sharing” arrangement with the health plan instead of passing the rebate to its rightful owner - the purchaser of the prescription.

Take a deeper dive into PBMs' and their parent health corporations' business practices.


Support PUTT in the Fight Against PBM Abuse of Our Healthcare System

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