Report Trains Critical Eye on PBMs’ Changing Profit Streams

A new report about PBMs’ “evolving business models and revenue” is making a stir, with the main PBM trade group arguing that the organization behind it is biased and its conclusions are misguided. But industry observers tell AIS Health that the analysis offers illuminating information about how vertical integration and other factors have shaped the PBM sector — and they warn that PBMs must truly change if they are to survive increasing scrutiny.

The report was produced by the PBM Accountability Project, which counts organizations such as the National Community Pharmacists Association, Diabetes Patient Advocacy Coalition and the labor union UFCW among its members. Primary findings from the report include:

  • PBMs’ overall gross profit (revenue minus the cost of goods sold) increased by 12% between 2017 and 2019, from $25 billion to $28 billion.
  • During that studied time period, gross profit from retained rebates paid by manufacturers decreased from $4 billion to $1.6 billion, while gross profit from retained administrative fees paid by manufacturers increased by 51%, from $3.8 billion to $5.7 billion. And gross profit from PBM-owned mail order and specialty pharmacies increased from $8.9 billion in 2017 to $10.1 billion in 2019.
  • Despite gathering all that information, the authors of the report note that “available financial data proved insufficient to fully describe the source of nearly 40% of PBMs’ total gross profit.” The report speculates that potential sources of that unaccounted-for profit may include “spread pricing, pharmacy fees and clawbacks, fees collected from payers, and other non-administrative fees collected from manufacturers.”

Industry experts interviewed by AIS Health, a division of MMIT, were particularly struck that the report authors were unable to account for such a significant percentage of PBM profits.

“That’s a lot to have no idea where it’s coming from,” remarks Lindsay Bealor Greenleaf, vice president at the Washington, D.C.-based consulting firm ADVI Health. “For publicly traded companies that are so highly concentrated, you would want more transparency into how they’re profiting.”

On the one hand, “this large fraction of unaccounted-for gross revenue makes it difficult to come to firm conclusions,” points out Elan Rubinstein, Pharm.D., principal at EB Rubinstein Associates. Still, “overall the report provides a good qualitative overview of evolving PBM pricing and business practices,” he tells AIS Health.

One notable finding, he says, is that while the report points out that PBMs now return a high percentage of rebates to customers, “there has been a huge growth in rebate dollars per member collected, so the absolute dollars retained by PBMs have grown considerably.”

In general, PBMs appear to have been moving away from rebates as their primary source of profit as a rebuttal to criticisms about “distorted incentives in the marketplace where PBMs make higher rebates off of drugs with higher list prices,” Greenleaf says. “PBMs’ response would be, ‘Well don’t worry, we’re moving away from rebates, we’re going to these other fees.’ But this report highlights that these fees are calculated based on the price of the rebated drug, so they’re still profiting off of higher priced drugs. So, OK, it’s not a rebate; it’s a schm-ebate.”

The Pharmaceutical Care Management Association (PCMA) responded to the report by stating that “the group behind the report is founded and operated by special interests that have an agenda to blame others for high prescription drug prices.”

“PBMs have a proven track record of reducing prescription drug cost for clients and patients, which should be the focus for every member of the prescription drug supply and payment chain,” a spokesperson for PCMA added.

Yet Rubinstein argues that “the statement that authors have an agenda is both disingenuous and laughable. PBM Accountability Project’s sponsors are payers and patient advocacy groups — both of which groups demand lower drug prices, lower year-over-year cost increases, and greater PBM transparency and accountability.”

PBMs Need to Explain Themselves

Rather than attack PBM Accountability Project’s credibility, it would be wiser for PBMs and their supporters to help their payer customers and patients understand their evolving role and business models, including profit centers, Rubinstein adds. After all, “pressure is increasing on state and particularly federal government to control drug prices through legislation — especially now through President Biden’s Build Back Better [Act].” Greenleaf, however, points out that it’s drug manufacturers, not PBMs, that stand to take the biggest hit from the drug-pricing provisions in Democrats’ signature social spending bill, which is now being considered by the Senate.

“The fact that PBMs hold all this power, and they operate in a black box, and they profit most from drugs with the highest list prices, and then they make patients pay coinsurance based off those inflated list prices — that’s a dangerous combination — meanwhile, the Build Back Better Act that’s being debated by Congress right now sets government price controls on manufacturers while letting the PBMs completely off the hook,” she says. The legislation does impose some transparency requirements on PBMs, but also repeals a never-implemented Part D rebate reform regulation that the industry strongly opposed.

PBMs Must Innovate to Survive

Brian Anderson, a principal at Milliman Inc. who specializes in pharmacy benefits consulting, suggests that the PBM Accountability Project report makes some salient points about trends in the PBM sector — and the industry’s need to truly innovate.

“As the industry becomes more complex, PBMs are identifying additional areas of revenue to offset lagging areas that are seeing smaller profits. In addition, the technology is moving fast and PBMs are leveraging data to provide insights and to find ways to identify revenue streams,” he tells AIS Health. “As illustrated in the report, rebate revenue is trending down and other revenue streams are trending up. The innovation of PBMs will be a key item to define the long-term sustainability of the PBM model.”

Ultimately, “I expect that if the PBM model does not continue to innovate, the market may shift to focus on ways to increase data velocity and to simplify the processing of claims for benefits. The success of innovation can create a huge opportunity for PBMs or make them less popular in the years to come.”

If PBMs don’t self-impose reforms, and the government doesn’t force the matter, “the biggest hope for change” is likely to come from employers and other clients of PBMs, Greenleaf says. “The hope is that they keep stepping up and saying, ‘What’s going on here, am I getting the best deal, and even if I am getting a good deal, how good of a deal are you getting?’”

Indeed, “payers are deeply frustrated, and becoming more frustrated as the industry-dominant PBMs, now part of large insurers, become more powerful and less responsive,” Rubinstein weighs in. He notes that the Purchaser Business Group on Health, one of the larger and more powerful purchasing coalitions,” recently announced the launch of its own PBM, EmsanaRx. “This development speaks to a loss of trust by self-funded employers and their purchasing coalitions in the PBM industry.”

Already, some smaller PBMs are pushing new business models that are focused on transparency with clients, such as TransparentRx, Greenleaf adds. “They are running a business, they do have clients, but they just really haven’t fully broken through yet, obviously — it’s just hard when you’re going up against three players that have 80% of the market.”

© 2022 MMIT

Leslie Small

Leslie has been reporting and editing in various journalism roles for nearly a decade. Most recently, she was the senior editor of FierceHealthPayer, an e-newsletter covering the health insurance industry. A graduate of Penn State University, she previously served in editing roles at newspapers in Pennsylvania, Virginia and Colorado.

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