This article is a co-publication with HEALTH CARE un-covered, a website about the health insurance industry. It is available at wendellpotter.substack.com.
Pharmacy benefit managers (PBMs) are the shadowy middlemen who decide what drugs you can buy, where you can buy them, and at what cost—without disclosing how much they charge to your employer, to your doctor, or your pharmacist. And as HEALTH CARE un-covered has reported, the biggest PBMs are now owned by Big Insurance.
PBMs are a poorly understood component of America’s permanent and escalating health care snafu, but they are a growing presence in our lives. Their business practices have created administrative and financial barriers to the prescription drugs patients need, even as PBMs’ Big Insurance owners rake in record profits.
A new Biden administration rule may rein in some of the worst practices of PBMs. But in response—and to protect profit margins—the PBM/Insurance industry, led by UnitedHealth’s Optum, Cigna’s Express Scripts, and CVS’s Caremark, has launched a full-on onslaught against independent pharmacies by dropping reimbursement rates. Many independents are being forced out of business. With them out of the picture, the PBMs will be better able to steer patients to their own pharmacies, mail-order operations, and, at least in Cigna’s case, big investor-owned corporations like Walgreens that they’ve struck deals with.
Last year, Republican Ohio Attorney General Dave Yost said that “PBMs are modern gangsters,” and that “they were designed to protect and negotiate on behalf of employers and consumers after Big Pharma was criticized for overpricing medications, but instead they have absolutely destroyed transparency, scheming in the shadows to control drug prices on all sides of the market.”
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By pursuing practices that drive independent pharmacies out of business, the big insurers can make drug prices even more opaque, resulting in higher costs to ordinary Americans—and monopolizing the pharmacy market in the same way that they have already monopolized pharmacy benefits.
In just the past year, more than 300 independent pharmacies have closed. (The last independent pharmacy in my town of Brattleboro, Vermont, closed in January 2023, blaming “chaos and quirkiness of the pharmaceutical world.”) Meanwhile, PBMs are contributing more and more to revenue and profits at UnitedHealth, Cigna, and CVS, which collectively control 80% of the PBM market. The total pharmacy spending controlled by UnitedHealth’s OptumRx, for example, grew by nearly 30% in a single year to $159 billion, the company recently reported. Cigna’s Evernorth saw a 9% growth. CVS does not report its Caremark revenues separately, but CVS enjoyed a 73% overall growth in operating income in 2023. Among the three, they spent $12 billion buying back their stock in 2023.
Denise Conway owns an independent pharmacy in Ohio. She points out one of the key benefits of independent pharmacies: the human touch that they have with patients, as opposed to a faceless corporate overlord. “Independent pharmacies have an ability to answer the phone,” said Conway. “Our phone rings nonstop because we physically answer the phone. We have someone to talk to face-to-face and person-to-person. Independent pharmacies have charge accounts, people don’t have to pay right away if they don’t have the cash on hand.”
At mail-order and chain pharmacies, Conway pointed out, “People have to wait hours, days, and weeks to get medication filled. If you’re waiting days or weeks you are in a life and death situation. If we can’t fill a prescription quickly, we are on the phone with that patient to ask them if we should transfer it somewhere else, knowing that everything we touch is a person’s life,” she said.
With independent pharmacies out of the picture, the PBMs will be better able to steer patients to their own pharmacies, mail-order operations, and corporations like Walgreens that they’ve struck deals with.
The crux of the crisis facing independent pharmacies is a problem known as Direct and Indirect Remuneration fees, which are charged to pharmacies by PBMs. Tied to the complex system of rebates that makes it very difficult to ascertain the true cost of a prescription drug, DIR fees have until this year been assessed by PBMs after the sale and assessed on highly subjective performance metrics for pharmacies that PBMs exclusively determine. This year, DIR fees were mandated to be assessed at the point of sale, generating some predictability, but they were not banned outright, meaning that reimbursement rates for pharmacies still fluctuate wildly, hence the ongoing financial cataclysm facing independent pharmacies.
From 2010 to 2020, DIR fees increased by 107,000%. From 2020 to 2021, they increased by another 33%, to $12.6 billion in total DIR fees. That year, UnitedHealth’s operating income alone was $23 billion. Together, the three PBMs’ parent companies had an operating income of more than $40 billion. DIR fees are not necessary to the PBMs’ continued existence, but they contribute substantially to profits.
In recent months, an independent pharmacy, Osterhaus Pharmacy, in Iowa, sued the major PBMs over DIR fees. In its lawsuit against UnitedHealth, it stated, “This vertical consolidation has served OptumRx well. It now controls not just the pricing of drugs, not just the selection of the drugs covered by Part D Plans, and not just the selection of pharmacy services providers in each Part D network; OptumRx also controls access to almost a quarter of the Medicare beneficiaries enrolled in PBM‐affiliated Plans.”
Matthew Seiler, the general counsel of the National Community Pharmacists Association, explained to HEALTH CARE un-covered that “The DIR fees created this huge black box. Nobody really knew except for the PBM and their parent company what happened to that money. Who benefits from that? Clearly, none of us insured people have seen insurance rates go down. It’s not like medication prices have gone down because of PBM behavior—insulin is skyrocketing, for example. The PBMs are collecting a ton of money.”
With the new rule, DIR fees have been transferred to the point of sale—the Biden administration declined to ban DIR fees altogether—and there is now more transparency about price. The result? “PBMs are now dropping reimbursement rates considerably,” Seiler said. “What they’re trying to do now is drive independent pharmacies out of the market, steering patients to their own pharmacies so that the black box can return.”
The drop in reimbursement rates and consequent financial distress wrought on the remaining independent pharmacies underscores why it’s so critical for Congress to rein in PBMs before independent pharmacies are no longer an option for patients. The Senate Finance Committee in July 2023 passed legislation that would bar spread pricing for PBMs in Medicaid. Under spread pricing, PBMs provide lower reimbursements to pharmacies than the amount charged to Medicaid. (This was a practice that was found in a 2018 audit to cost Ohio’s Medicaid program more than $220 million in the prior year.) The legislation also included provisions that subject PBMs to additional drug pricing transparency.
But instead of including this legislation in omnibus must-pass federal funding bills, it was recently dropped in the latest round after $50 million of PBM lobbying, as The Lever reported. Pharmacists said that the inaction would lead to more closures.
Senate Finance Committee Chairman Ron Wyden (D-Ore.) and Ranking Member Mike Crapo (R-Idaho) tried to get the legislation included in a new funding bill that must be passed this week to avoid a partial government shutdown this coming weekend. Last Thursday, they held a press conference to call for immediate passage of their reforms.
“The time for PBM reform was yesterday,” Wyden said. “It’s past time to crack down on the shady practices of these pharma middlemen that result in higher drug prices for consumers and threaten pharmacies across Oregon and nationwide. I’ll be working around the clock to get this done as soon as possible.”
However, bipartisan efforts in both the House and Senate to include PBM reform provisions in the funding bill failed yesterday when Congressional leaders couldn’t agree on the scope of the reforms. The next push will come later this year, likely during the lame duck session of Congress after the November 5 elections.
Chapman, the independent pharmacist, said the actions of PBMs demonstrate that they need to be reformed. “We need to bring back transparency and fair play and get rid of these money-hungry incentives that are truly compromising our health care system.”
