PBMs and Prescription Drug Distribution: An Economic Consideration of Criticisms Levied Against Pharmacy Benefit Managers

Professor Dennis Carlton, one of the country’s preeminent economists, and a team of leading economists from Compass Lexecon, released a comprehensive analysis of the Pharmacy Benefit Managers (PBMs) industry. Through the examination of approximately 20 billion 30-day equivalent prescriptions representing more than a trillion dollars in drug expenditures, this study sheds light on the true role PBMs play in prescription drug pricing, challenging many of the criticisms leveled against them.

The research—which was funded by CVS Caremark, Express Scripts Inc., and Optum Rx—analyzed data initially provided by the three largest PBMs to the FTC for their 6(b) investigation, along with supplemental data requested by the researchers from these PBMs and existing third-party and publicly available data. Among other findings, the PBMs distribute the vast majority of rebates to plan sponsors, are not restricting access to drugs by preventing generics from being added to formularies, and have not driven independent pharmacies out of business.

KEY HIGHLIGHTS

According to the data, PBMs' operating margins are not responsible for high drug prices.

  • PBMs’ operating margins are less than 5%, decreasing from 5.6% in 2017 to 4.5% in 2022. This includes income earned from PBM services, as well as from dispensing at affiliated mail-order and specialty pharmacies.
  • If PBMs earned zero profit while keeping their operations unchanged (an extreme hypothetical), the price of a $100 drug would only decrease to $95.

According to the data, PBMs pass through the vast majority of manufacturer rebates and fees to plan sponsors, and rebates and fees are not associated with higher growth in list or net prices relative to non-rebated drugs.

  • PBMs are passing through the majority of manufacturer rebates and fees, with the pass-through rate nearing 100% in 2020 and 2021.
  • The net price growth for rebated drugs was lower than for non-rebated drugs between 2018 and 2021, with the real net price of rebated branded drugs decreasing by 5%, while the net price for non-rebated branded drugs increased by 4%. 
  • The growth in list prices for rebated drugs is not significantly higher than for non-rebated drugs. From 2018 to 2022, the average wholesale price for rebated branded drugs increased by 2%, compared to 3% for non-rebated branded drugs.

The research does not support the claim that PBMs are restricting patient access to generic drugs.

  • 91% of prescriptions are for generics, and this figure has increased significantly over time. Approximately 20% of drug expenditures are on generics.
  • Following generic entry, formularies rapidly shift generics to preferred tiers and branded drugs to non-preferred tiers, incentivizing generic drug use. PBMs are not restricting the addition of generics to formularies to favor brand-name drugs.

According to the data, PBMs are not driving independent pharmacies out of business or disfavoring independent pharmacies relative to chain pharmacies.

  • The number of independent pharmacies has grown by 9% between 2011 and 2021, exceeding 20,000 locations, while the number of chain pharmacy locations has declined by more than 5%.
  • Independent pharmacies’ average gross margins have remained stable at around 23% since 2011, while gross margins for major chain pharmacies have declined to around 20% in 2023.
  • PBMs reimburse independent pharmacies at higher rates than chain pharmacies, with independent pharmacies receiving 24% more for generic drugs and 4% more for branded drugs compared to chain pharmacies.

ABOUT PROFESSOR DENNIS CARLTON

Dr. Carlton is one of the country’s preeminent economists. He is the David McDaniel Keller Professor of Economics Emeritus at the University of Chicago, Booth School of Business and a Research Associate of the National Bureau of Economic Research. He is the co-editor of the Journal of Law and Economics.

Dr. Carlton focuses his research on microeconomics, industrial organization, and antitrust. He has published more than 150 articles and two books. From 2006 to 2008, he served as the Deputy Assistant Attorney General for Economic Analysis at Antitrust Division of the U.S. Department of Justice.

He is the recipient of a number of awards. In 2014 he was designated the Distinguished Fellow of the Industrial Organization Society. He has served as an advisor on antitrust matters to the Department of Justice, the Federal Trade Commission, and to private clients. He has served as a commissioner on the Antitrust Modernization Commission, a congressional committee investigating antitrust laws.

About Compass Lexecon

Compass Lexecon is a leading economic consulting firm with expertise across various industries and markets, offering global insights into complex economic challenges. Visit www.compasslexecon.com for more information.