Pharmacy Benefits Managers (PBMs)
Home - .pdfs of URLs, Sections - Summaries and .pdfs of URL
A Pharmacy Benefit Managers Insurance Business Model - March 2025
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.
A Discovery Plan for Pharmacy Benefit Managers' Collusion - November 2024
click to download a .pdf
The Federal Trade Commission (FTC) has recently filed an administrative complaint against the Big 3 pharmacy benefit managers (PBMs) claiming they engaged in "unfair" conduct in violation of Section 5 of the FTC Act, 15 U.S.C. § 45. They never used the word "collusion" in the lawsuit and chose not to sue under The Sherman Act, Section 1. We view this as a novel case of market design collusion rather than a case of price collusion. The Big 3 PBMs are conceptualized as auctioneers soliciting rebate bids off list prices in exchange for favored positions on formularies.
We will show how the fairness standard of the FTC Act can be made operational by judging fairness against economic theories of good auction design. Discovery is focused on finding explicit communication among the Big 3 PBMs in 2012 to change the so-called “winner’s determination equation” of this auction, adding high gross rebates as a basis for formulary position assignments. On the other hand, we will argue that a discovery plan based on a bevy of anecdotes comparing only net unit prices will fail due to nuances in the winner’s determination equation
Market Design as a Remedy in
the Google Search Engine Antitrust Case
forthcoming April 2025
On August 5, 2024, U.S. District Court Judge Amit Mehta ruled that Google was in violation of the Sherman Act, Section 2 for monopolizing the search engine market via a multibillion dollar yearly payment in return for exclusive assignment on Apple device operating systems.
The magnitude of the payment -- $20 Billion in 2023 -- surprised most followers of the case. However, the actual basis of Google’s payment was an ad revenue sharing percentage, which we have estimated to be 36%. Compared to the 30% in-app revenue sharing percentage Apple charges developers for a 1 in 380,000 video game shared position in the Apple Store, the Google payment for an exclusive search engine position does not seem excessive.
In searching for a remedy that is not overreaching, case law suggests that a judge start by asking a “but-for” question: But for this $20 Billion payment exclusive deal between Google and Apple, how can a search engine market be structured to be competitive?
The purpose of this paper is to suggest a market design remedy. This is opposed to remedies involving divestiture of the Chrome browser or elimination of all payments to Apple. The market design remedy mandates that Apple conduct an annual combinatorial auction for positions on a search engine choice screen. For the first few years, the remedy should require Google to maintain its 36% revenue share percentage. The one hard structural choice is that the auction never include an exclusive position, given decades for Google to develop its current technical superiority in both search and AdTech without much competition.
In the first year, invite Microsoft, Mozilla, and others to bid the same 30% revenue sharing percent as the Apple Store. Possibly, create new niche positions for AI search buttons. Give Apple discretion to choose among bidders willing to bid 30% revenue sharing for a position on the basis of potential to execute. Mandate Apple give new entrants multi-year terms, but allow Apple to include a liquidated damage clause, approved by an outside arbitrator, to facilitate efficient breach due to poor performance.
Review all contracts after the courts rule on pending antitrust cases involving Google's AdTech
When Are Exclusionary Formulary Rebates Anticompetitive?
Presenting at June 2025 Western Economics Association International
Conference - San Francisco - June 17, 2025
The Wyden-Grassley 2019 Senate Staff Report confirms that rebate contracts between pharmaceutical companies (Pharma) and the Big 3 pharmacy benefit managers (PBMs) feature a combinatorial bid-menu for formulary positions with 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 report confirms that the standard basis for rebate bids is a % off unit list price. In passing, the report provided email evidence of secretive discussions between Pharma and PBMs involving deviations from this standard in the form of lump sum and bundled rebates.
The purpose of this paper is to apply auction design theory to provide a test for when these incremental exclusionary rebates are anticompetitive. The key to our case is the conceptualization of this option as “rent-shifting” liquidated damages, a bargaining theory concept introduced by Aghion and Bolton twenty-seven years ago. We will argue that the rule of reason applies for unit rebate liquidated damages, but secretive lump sum and bundled rebates are presumptive gross overestimates and anti-competitive.
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
