The Path to Fair PBM Competition

Across industries, competition between a few dominant players is not unusual, but in healthcare, its effects extend well beyond standard business rivalry. When control over prescription drug access rests with only a few players, the result is not just market imbalance — it is higher plan costs, increased financial pressures, and ultimately reduced affordability for patients.

The pharmacy benefit management (PBM) space has a competition problem. The American Medical Association details the situation in a recent report. It finds that the PBM space is highly concentrated and that the lack of competition could lead to higher drug prices, ultimately paid for by patients. The PBM space is dominated by three companies, which account for over 80% of the market. This statistic points to a more complex reality. While these three giants make up the majority of the market, over 75 PBMs are operating in the U.S. 

To improve competition, increase price transparency, and lower healthcare costs for patients, more insurers and health plan managers must find ways to work with those lesser-known PBMs. 

The competition problem

At first glance, all PBMs may look alike. But in practice, the incentives and operating models within a highly concentrated PBM market have significant consequences for costs, transparency, and patient access.

A handful of PBMs, closely linked with health insurers, dominate the market mainly due to the amount of additional revenue available through the pharmacy delivery chain. Vertical integration, a lucrative industry-wide trend that merges these entities and streamlines revenue generation for the largest health insurers in this country. For plan managers, this integration makes it very difficult to distinguish between PBMs and insurers. The result leaves employers feeling trapped with a lack of alternatives, burdened by excessive switching fees, and unable to pursue better deals or innovative approaches with any of the other 70 PBMs.

Managed PBMs and other innovative models, focused on clinical outcomes and cost management, hold the potential to be a cost-effective, long-term partner for employers and employees alike. With an increase in competition across the industry, plan managers can unlock greater affordability and transparency at a time when it’s needed most: employers are predicting a 10% surge in healthcare costs next year.

So, why can’t plan managers simply work with more PBMs to create better, more affordable solutions for patients? Vertically integrated PBMs create a problematic structure and exert unbalanced control, and the following roadblocks only further complicate the situation.

• Request for Proposal (RFP) process: Typically, RFPs focus primarily on the discounts and rebates that PBMs can offer when deciding which companies to partner with. PBMs that focus on rebate generation encourage the usage of higher-cost drugs. Therefore, measuring PBMs based on the amount of rebates they can garner ignores the PBM’s ability to manage overall costs.  

• Carveout fees and health insurer credits: Health Insurers often charge excessive fees when a plan sponsor moves pharmacy benefits outside their ownership structure. At the same time, they offer rebate credits and other financial incentives that help offset monthly plan expenses. These credits support cash flow management for sponsors, but they make it financially challenging to walk away from the insurer. 

• Misaligned incentives: The consultants who manage the RFP processes are often specialized advisors hired by plan sponsors, such as employers or health plans, to evaluate and recommend PBM vendors. However, these consultants can have financial incentives tied to certain PBMs, which may influence their recommendations.. 

• Name recognition: In highly concentrated markets, the largest companies are often seen as the only credible choices. Similarly, in the PBM market, there is a prevalent perception that lesser-known PBMs are inferior to the dominant, well-established companies, even when they offer innovative approaches or more flexible solutions. This perception often causes plan sponsors to hesitate in selecting PBMs with limited name recognition due to concerns about potential negative reactions from their members.

• Rebates: One of the pharmacy benefit managers’ responsibilities is to negotiate rebates from drug manufacturers to lower the cost of drugs for health plan members. These rebates are typically negotiated through Group Purchasing Organizations (GPOs) that are owned by the three largest PBMs. The GPOs retain a portion of the rebate and pass the remaining amount to the PBM. Rebates average between 30% and 50% in cost reduction. But these savings don’t go directly to plan members. The cost savings go to the plan sponsor 3-6 months after a claim occurs. To benefit from these significant rebates, PBMs incentivize more expensive drugs. Often, rebates are not available on less expensive, generic prescriptions or biosimilar drugs. PBMs are often encouraged to use more costly treatments, whether through prior authorization criteria or formulary placement, which, despite the rebates, can lead to higher premiums

Moving forward

What strategies can the healthcare industry, particularly plan sponsors, employ to foster greater competition within the pharmacy benefit management (PBM) sector, while ensuring that established market leaders retain the operational flexibility necessary to maintain stability and innovation?

• Carefully vet consultants: A significant number of plans use a consultant to inform their benefits selection decision. Some of those consultants have financial incentives to place business with larger organizations. Plan sponsors must do their due diligence when selecting a consultant to ensure their neutrality.

• Overhaul RFPs: The RFP process must consider both cost management and clinical outcomes, rather than focusing solely on rebates and discounts. Choosing a PBM is a long-term decision that should ultimately prioritize what is best for patients.

• Consider managed PBMs: While immediate rebate savings are appealing, plans should prioritize managed PBMs that focus on clinical value and cost-effectiveness. Those partnering with managed PBMs should actively share their experiences with other plan sponsors to highlight the benefits of clinically driven, outcomes-focused collaborations.

• Increase transparency and address vertical integration: Comprehensive legislation is needed to promote full financial transparency across the PBM market, clarifying the flow of rebates and profits among drug manufacturers, PBMs, and affiliated pharmacies. Additionally, structural reforms should disincentivize vertical integration to prevent conflicts of interest, anti-competitive practices, and ensure equitable access and choice for patients and plan sponsors.

The PBM space has a limited competition problem. With healthcare prices continuing to rise, changes must be made — and soon. There’s no need to wait for plan sponsors; they can already take steps to create a more competitive PBM space by reevaluating their RFP process, using non-conflicted consultants, and considering partnering with managed PBMs. These steps, partnered with effective legislation, can ultimately lead to more affordable healthcare.

Photo: Jordan Lye, Getty Images

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