Pharmacy Benefits Managers (PBMs)
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A Discovery Plan for Pharmacy Benefit Managers Auctioneer's Collusion - forthcoming, December 2024
The FTC has recently filed a lawsuit against the Big 3 PBMs claiming they engaged is "unfair" conduct that violates Section 5 of the FTC Act, 15 U.S.C. § 45. They never used the word "collusion" in this lawsuit and chose not to sue under The Sherman Act, Section 1.
Yet, we find it unfathomable that the gross-to-net price bubble could have occurred without both explicit and tacit horizontal collusion among the Big 3 PBMs. As an academic exercise, we apply our model of an auction market design for favored formulary positions to focus discovery of evidence in support of case for collusion.. This includes what we think is the "smoking gun" of this auctioneers' collusion -- the so-called "winners' determination equation".
Pharmacy Benefit Managers and their Market Design for Formulary Positions: forthcoming paper November 2024
A key function of pharmacy benefit managers (PBMs) is to manage a list of prescription drugs (Rx) covered by healthcare insurance. That list is known as a formulary. In select therapeutic classes where there are 2+ drugs with equivalents, PBMs have created a market design where off-invoice rebates are exchanged for favored formulary positions. This purpose of this paper is:
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Apply taxonomies of market design to support our classification of this as a multi-round combinatorial auction;
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Apply auction theory to evaluate its strengths and weaknesses;
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Provide a list of specific changes to the current Big 3 PBM auction design we think could produce better outcomes than the current vague proposals for business model transparency and piece-meal 100% pass-throughs.
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
