How 3 companies came to dominate the PBM market

When you think of industries dominated by a few powerful players (*cough* tech *cough*), the pharmacy benefit manager (PBM) industry probably isn’t the first that comes to mind. But since the creation of PBMs in the 1960s, three companies have come to dominate almost 89% of the market, which is valued at $518.6 billion this year.

A PBM is a company that works on behalf of insurers to negotiate with drug manufacturers and create lists of drugs that insurers cover. Prescription drugs accounted for about 8.8% of the total US annual healthcare spend, or $378 billion, in 2021, and PBMs play a crucial role in setting those drug prices.

To understand how three PBMs (Express Scripts, CVS Caremark, and Optum Rx) came to command such a massive chunk of a huge market, we need to look back at the origin of the industry.

A brief history of time PBMs

The first PBMs are very different from how they look today. They were formed when insurers began covering prescription drugs in the 1960s, with the purpose of deciding which drugs to cover, according to the National Association of Insurance Commissioners, the US regulatory support and standard-setting organization.

Roughly a decade later, PBMs began processing claims to streamline the process for pharmacies, Ronna Hauser, SVP of policy and pharmacy affairs at the National Community Pharmacists Association, told Healthcare Brew.

In the 1990s, drug manufacturers started buying up PBMs, but the FTC put an end to that, Hauser said, over fears of conflicts of interest. Instead, the PBM industry began consolidating.

Today, there are 66 PBMs in the US, and the top three are “all vertically integrated with some of the largest health insurers in the country,” said Hauser. Cigna owns Express Scripts; CVS, which merged with insurer Aetna in 2018, owns Caremark; and UnitedHealth Group owns Optum Rx.

The top three’s rise to power

For any type of product sold, the price correlates with the interests of the “end payer” (i.e., whoever is paying for that item). Before insurance covered prescription drugs, the end payer used to be the person going to the pharmacy to pick up a prescription, according to Antonio Ciaccia, CEO of drug pricing nonprofit 46brooklyn Research.

As insurers began covering drugs, they (and in turn, the PBMs they contracted with) became the end payer, so drug pricing became responsive to PBM interests, Ciaccia said. Drug prices then started to inflate, as what became important was the rebates negotiated by PBMs rather than the sticker prices of the drugs.

As drug prices inflated, the PBMs that could negotiate the biggest discounts would “essentially have a magnetic pole in their direction,” meaning they got the most business, Ciaccia said. The ones that can negotiate the lowest prices are the ones with the most leverage, and a big way PBMs get more leverage is through consolidation. The top three PBMs have all consolidated with larger healthcare companies.

The top three maintain control because it’s “very, very difficult” for a new PBM to break into the market today, according to Ciaccia. The main reason being that newer PBMs don’t have the same leverage as their larger counterparts when it comes to negotiating discounts.

Drug pricing has become so complicated that convincing a payer a new PBM could save it money is not easy, Ciaccia added. PBMs keep the prices they negotiate a secret, so it’s hard for payers to get much visibility into how much they’re actually saving.

“You’re essentially asking somebody to navigate through a through fog in order to find what a better experience might look like,” Ciaccia said. 

One of the most recent launches of a PBM was in late 2021 from The Purchaser Business Group on Health, a coalition of 40 employers that created the PBM EmsanaRx. The company brands itself as being a PBM “built by employers, for employers.”

Smaller PBMs are more likely to be acquired by their larger counterparts rather than fold if they struggle to compete, according to Ciaccia.

“Every covered patient life is a value to a PBM, and if size and leverage is the name of the game, large PBMs can squeeze good returns and value out of acquiring those patients from smaller PBMs,” he said. 

New pharmacy players putting ‘substantial pressure’ on PBMs

The PBM trend Ciaccia will track this year is the “substantial pressure” new pharmacy players like Mark Cuban Cost Plus Drugs, a mail-order pharmacy, are putting on the top three PBMs. Cuban’s pharmacy, as well as a few others that have popped up in the last couple years like Blueberry Pharmacy in Pittsburgh, already have “more competitive prices” than the legacy PBMs, Ciaccia said.

“If the largest PBMs are now Fortune 15 companies, it should go without saying that they have the lowest costs in the marketplace,” said Ciaccia. “But here you have [Cuban] who rolled out of bed a year ago and decided to start a mail-order pharmacy with very little investment and almost no sophistication in the industry, and his prices are beating the crap out of the old PBMs. And starting some really hard conversations for PBMs to justify what it is they’ve been building for all these years.”