Pharmacy Benefit Managers Negotiate Lower Drug Prices for Millions of Americans

As rural populations have declined across America, falling by nearly 300,000 in the decade since 2010, many independent pharmacies that serve these communities have been forced to shut their doors. This has created what some dub “pharmacy deserts,” places where residents can’t readily access a brick-and-mortar drugstore.

Some pharmacists, lawmakers and a controversial Federal Trade Commission (FTC) report have laid the blame for these deserts at the feet of pharmacy benefit managers (PBMs), the entities that manage prescription plans and negotiate drug prices with pharmacies and drugmakers on behalf of Medicare, Medicaid and private insurance plans. PBMs use the bulk buying power of pooling insurance plans that cover millions of patients to negotiate lower prices.

PBM critics argue this ability to negotiate lower prices is driving independent pharmacies out of business as they’re paid less and less for drugs that they dispense. And when they close, their loyal customers (who often live in remote areas) lose access to medicine. Critics also blame PBMs for steering patients to their own affiliated pharmacy retail chains and mail-order dispensaries, unfairly benefiting themselves and making it even harder for independent pharmacies to survive.

To counter these perceived ills, some states have proposed increased regulation of PBMs to benefit pharmacies, including through mandated dispensing fees and bans on incentives that encourage patients to obtain medications through mail delivery. Given the high drug prices and increasing market concentration in U.S. healthcare, PBMs and their often opaque contractual arrangements are also facing scrutiny from senior government officials such as Vice President Harris, as well as an FTC lawsuit.

However, industry-wide analysis reveals that PBMs boost competition in the costly and heavily regulated U.S. healthcare system by lowering prices for insurers and thus reducing premiums for their customers. Undermining this function to keep pharmacies afloat won’t help most Americans. Instead, it will make medicine more expensive and less accessible for everyone.

Independent Pharmacies

Independent pharmacies aren’t a monolith. Although the number of independent pharmacies has declined in rural locations, it still increased by 9% nationwide between 2011 and 2021 due to significant growth in metropolitan regions. By contrast, pharmacy chains, which are often integrated with PBMs, have witnessed a decline in the number of locations of more than 5% over that time. Profit margins at independent pharmacies have also remained stable, and they typically receive higher reimbursement rates for drugs than pharmacy chains outside PBM networks.

Furthermore, nearly 9 in 10 independent pharmacies enlist Pharmacy Services Administrative Organizations (PSAOs) to negotiate with PBMs on their behalf. PSAOs pool pharmacies, thereby benefiting from scale economies and bulk negotiating power to secure favorable rates of return in a similar manner to PBMs.

Costs and Convenience

Various anti-PBM reforms proposed to help struggling pharmacies will likely drive cost increases for patients and insurance plans, while reducing choice and access to medicine for countless Americans. For instance, Wisconsin state bill AB-773 aims to prevent PBMs from providing exclusive discounts or incentives to pharmacies that they prefer. This practice steers a large volume of patients to the “preferred” pharmacies and enables the PBMs to get bulk discounts from them. But the Wisconsin bill would force PBMs to contract with any pharmacy willing to meet plan terms, which is good news for independent drugstores that are not “preferred”—but bad news for customers, who will have to pay higher prices overall.

In the name of helping brick-and-mortar stores, the Wisconsin bill would also prohibit PBMs from incentivizing mail-order pharmacies (such as by giving patients discounts). But mail-order pharmacies often cost less than regular pharmacies, especially for medications that treat chronic illness. They are generally preferred by many Americans, including those in remote locations, chronic illness sufferers and those simply seeking convenience.

Even in rural areas serviced by a brick-and-mortar pharmacy, senior citizens often rely on mail delivery to maintain their drug regimens, as it can be inconvenient or impossible to regularly pick up drugs in person. Indeed, surveys indicate that brick-and-mortar pharmacies are losing clients to mail delivery, not because of perks or incentives offered by PBMs but because of declining customer satisfaction, longer wait times, less convenience and greater difficulty in ordering prescriptions. This is in line with the wider trend of e-commerce’s growing popularity, which has hurt brick-and-mortar retail businesses of all stripes.

A similar Illinois bill HB4548 would also restrict PBMs’ ability to incentivize mail delivery and negotiate volume-based discounts. Additionally, it would set a price floor for PBMs contracting with pharmacies and mandate a $10.49 per-prescription dispensing fee. This would cost PBMs and health plans hundreds of millions of dollars per year, and these costs would most likely be passed on to customers in the form of higher insurance premiums.

Likewise legislation has passed the North Carolina state House that would affect private single-employer health plans, state and local government and school district plans, Affordable Care Act plans, ERISA plans, and multiemployer and union plans.

These bills would additionally create a grim patchwork of inconsistent regulations, leaving employees of the same firm in similar roles with different coverage and benefits depending on the state in which they’re based. This could expose multistate employers to the risk of anti-discrimination lawsuits under Title VII of the Civil Rights Act if, for instance, employees of a particular religion, race or national origin are disproportionately based in a particular state and receive different benefits from those doing the same job at the firm who are based in other states. This risk would increase costs for businesses and discourage the expansion of employee recruitment, especially across state lines.

Who Bears the Burden?

Trying to benefit the pharmacy industry by undermining the freedom of PBMs to negotiate on behalf of their clients will inevitably result in the costs being passed on to health plans and the patients they cover. There are certainly individual cases where PBMs have rightly been prosecuted for failing to pass benefits on to their clients. For instance, the PBM CVS Caremark recently paid the Illinois government $45 million to settle allegations that it failed to pass on rebates negotiated on behalf of state health plans under their contract. (CVS Caremark, for its part, denies any wrongdoing.) However, it’s unlikely that PBMs are using negotiation to enrich themselves rather than to lower costs on a wide scale; otherwise, health plans wouldn’t contract with them.

Some might argue that insurance companies should perform PBM functions in-house, but research finds that if insurers had in-house PBM services, the spike in management costs would likely be passed on to consumers through higher premiums or drug prices. This would sacrifice 40% of PBM services’ net value, which is about $50 billion annually in the U.S. economy. Responding to a similar anti-PBM argument in 2019, the Congressional Budget Office found that forcing PBMs to pass on discounts they negotiate on drugs to consumers directly at the point of sale would raise costs of U.S. Medicare by $170 billion and Medicaid by $7 billion over a decade, drastically inflating one of the biggest items behind the federal budget deficit.

More recent research finds that nearly 100% of rebates negotiated by PBMs were passed on to insurance plans in 2020 and 2021, and that average annual PBM profit margins hover around 5%, meaning that even if PBMs hypothetically negotiated the terms that they currently do without any profit incentive, it would only lower a $100 drug’s price by $5. A nationwide survey of over 700 employers in late 2023 found that 9 in 10 used discounts negotiated by PBMs to reduce costs and increase healthcare coverage for workers.

A Better Solution

Many independent pharmacies, especially in rural areas, continue to struggle for a variety of reasons. Significant population decline in the communities they serve means that they have less buying power to negotiate favorable rates with health plans and their PBMs. Rising labor costs and high burnout rates also hurt them.

For Americans in these communities, the risk or reality of losing access to affordable medication should be addressed through targeted financial aid rather than singling out pharmacies or interfering with the ability of public and private health plans to negotiate prices through PBMs. This would ensure that patients have the freedom to access relatively more competitive and cost-effective health plans while upholding their right to use mail-order pharmacies if they so choose. Those pharmacies may be the best or most suitable for them, and they may be the most cost-effective means of ensuring these patients can access care. PBM practices such as negotiating bulk discounts by steering patients to in-network options generally benefit consumers and help lower plan costs.

The plight of struggling businesses in struggling communities warrants sympathy. But that doesn’t justify hurting the very people the healthcare system is meant to serve by imposing higher costs to keep those businesses going or to artificially boost the profits of their industry.

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