Pharmacy Benefits Managers (PBMs)
Lawrence W. Abrams, Ph.D. Economist, 50+ papers on PBMs since 2003
Contact: labrams9@gmail.com
The Wyden-Grassley 2019 Senate Staff Report confirms that rebate contracts between pharmaceutical companies (Pharma) and the Big 3 pharmacy benefit managers (PBMs) contain a combinatorial bid-menu for formulary positions featuring both exclusive and shared positions. Pharma bid-menus often include a separate bid option for “an incremental base rate” if the PBM outright excludes a named competing drug. The standard bid basis is a percentage off a publicly available list price.
The purpose of this paper is to apply the economics field of market design to develop a simple algebraic and graphic model of a combinatorial auction for formulary position assignments.
This paper is evidence of economist Ran Spiegler’s observation in his book The Curious Culture of Economic Theory that market design economics blurs the lines between an economist and the market designer. In places, this economist becomes a market designer suggesting the following ways PBMs can improve their auction design:
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a test for anticompetitive incremental exclusionary rebate bids.
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a more incentive-compatible auction by limiting shared position bid-downs.
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banning lump sum, bundled, market share, and all other non-linear rebate bid bases.
A Pharmacy Benefit Managers Insurance Business Model
click to download a .pdf
It is time to move on from attempts to make the pharmacy benefit manager (PBM) reseller business model more transparent. Time and time again the Big 3 PBMs have developed opaque alternatives to piecemeal 100% pass-through mandates. Time and time again PBMs have demonstrated expertise in finding loopholes in state government disclosure laws.
The purpose of this paper is to provide quantitative estimates of two transparent insurance business models as a solution to the PBM agency issue. The key parameter used is an 8% gross profit margin figure disclosed by the Big 3 PBMs themselves. Based on reported drug trend delivered to plans, we use a $1,200 to $1,500 per member per year (PMPY) as the range for this key performance indicator (KPI).
We propose that discussions of PBM insurance business models start with the following figures: (1) a fixed premium model with medical loss ratio ranging from 92% to 85%; (2) a fee-for-service model ranging from $96 to $180 PMPY with risk sharing of deviations from a contracted PMPY delivered drug spend.
Table of Contents: List of Paper URLs
Section 1: The PBM Business Model (click on titles to download .pdf)
Section 2: PBM Rebates and Formularies (click on titles to download .pdf)
Pharmacy Benefit Managers as Bargaining Agents --Paper presented at the Western Economic Association
International, 8th Annual Conference, July 2005
The Effect of Corporate Structure on Formulary Design: The Case of Large Insurance Companies Poster Presentation, ISPOR 10th Annual Meeting, Washington DC, May 2005
Section 3: PBM Policy and Law (click on titles to download .pdf)
Practical Issues With PBM Full Disclosure Laws Originally Published in FDLI Update Magazine, Issue 4, 2004.
About the author:
I have a B.A. in Economics from Amherst College and a Ph.D in Economics
from Washington University in St. Louis.
I post often on twitter @larrywabrams on issues relating to PBMs, biosimilars
investing in biotech stocks in my portfolio and issues relating to Monterey
County, California where I reside.
My writings are at the intersection of economics, accounting, financial
analysis, and high tech. I have received no remuneration for these articles
and have no financial relation with any company discussed in these articles.
In 2002, I started looking at the 10-Qs and 10-Ks of the drug store chains and pharmacy benefit managers
after an "aha moment" in a Mountain View CA. Longs Drug store (later bought out by CVS).
I had gone there to to pick-up my renewal Rx of Type 2 diabetes drug Glucophage.
Several things happened that night piqued my interest in PBMs and big drug store chains.
First, I found out my Rx for Glucophage was now an Rx for Metformin without my prior knowledge.
I asked the pharmacist what was going on. He mentioned that my Rx now had a cheaper generic available
and my drug benefit plan manager made the switch automatically.
That night I was also struck by the fact that here was a 12,000 square foot store and all the customers were lined up
at the pharmacy counter in the back. I asked myself, "Could it be that hole in the wall in the back generated
all the profits while the front store was just a relic of the bygone days of lunch counters and shopping on Main Street?
The question of relative source of pre-tax profits -- pharmacy vs front store -- piqued my interest all the more
as I compared the pathetic merchandising I saw in this big drug store chain versus the amazing health product
merchandising I saw a week earlier at the first Whole Foods store on the West Coast in downtown Palo Alto, CA.
Based on that "aha moment", I created an early Wordpress website https://nu-retail.com
to host the following 3 papers that embody that moment:
Nu-Retail: A Counter to the Web 2002
The Next Tom's of Maine - 2002
Walgreen's Transparency Issue - November 2003
In addition, I was an early adopter of PBM as acronym for pharmacy benefit managers and
I published the first publicly available papers that quantified the PBM business model and retained rebates.
Quantifying Medco's Business Model - April 2005
Estimating the Rebate Retention Rate of Pharmacy Benefit Managers - April 2003
