The healthcare and health insurance industry work with pharmacy benefit management (PBM) companies to help manage prescription drug benefits. Let's learn more about the impact PBM's can have on an insurer and what the future holds for their partnership.

What is a PBM in the modern insurance industry?
PBMs are third-party companies that function as intermediaries. They broker deals and manage the go-between insurance providers and pharmaceutical manufacturers. The Center for Insurance Policy and Research defines a PBM as an organization that:

• Creates formularies.
• Negotiates rebates with drug manufacturers.
• Processes claims.
• Creates pharmacy networks.
• Reviews drug utilization.
• Manages mail-order specialty pharmacies.

Historical significance

Many criticize PBM's role in healthcare due to the companies often being touted as a relic of a bygone era. The Center for Insurance Policy and Research reports that insurance companies first started offering prescription drugs as a health plan benefit in the 1960s and at this time PBMs were necessary to prevent drug spending from getting out of hand. More recently, in the 1990s, the Federal Trade Commission (FTC) ordered drug manufacturers to divest from PBMs, which encouraged a flurry of mergers and acquisitions in the sector.

PBMs in the modern marketplace

While there are 66 PBMs nationally, 6 companies account for 96% of the market share, with the top three holding 79%:

• CVS Health/Caremark: 33%
• Cigna/Evernorth/Express Scripts: 24%
• United Health/Optum Rx: 22%

This kind of industry control garnered the attention of the FTC because the lack of competition in the sector can negatively impact consumers, insurers and policyholders. However, the 57 other, albeit smaller, PBM companies are working to increase their influence and encourage competition within the industry. In fact, a Fortune Business Insights projection reports that the global PBM market is projected to increase to $740 billion in 2029, while it was at $495 million in 2022.

Beyond industry control, PBMs flagged additional scrutiny from the government and the public as a whole as healthcare costs continue to rise. This pressure increased as consumers struggled with the cost of prescription drugs like insulin and EpiPens. PBMs are known to heavily influence the drug benefit of policyholders and patient accessibility under their managed care plan. Let's look into the true prescription drug spending in the U.S. and what it means for PBMs and insurers.

Prescription drug spending in the U.S

Prescription drug spending is a topic that both the insurance industry and the greater consumer and policyholder base is interested in because of the drastic impact it has on them. Let's break down the most recent statistics report and what it means for the healthcare insurance marketplace.

A September 2022 brief for the Office of the Assistant Secretary for Planning and Evaluation found that "in 2021, the U.S. health care system spent $603 billion on prescription drugs, before accounting for rebates, of which $421 billion was on retail drugs." When comparing this spending to the rest of the world, Americans end up paying higher drug prices for prescriptions than any other country in the world. Consumers pay more than 2.5 times as high as those in comparable nations, according to a RAND research report.

For as many factors as there are that influence prescription drug spending, there are just as many potential outcomes and future spending trends. Actuaries are able to project possible expenditure amounts and create models that can assist insurers in anticipating what the future holds.

How insurance companies should prepare

An insurance company needs to prepare for the future of prescription drug spending and the impact of PBMs in order to protect itself from risk and loss. This is where actuaries can provide valuable information and insight into potential future outcomes. Actuaries help to provide data and analysis regarding prescription drug costs while taking into account medication trends and manufacturer scrutiny.

The U.S. government and PBMs

Government regulations and attention in recent years will impact the future of the healthcare industry. It's important to stay up to date on matters pertaining to PBMs, as they are likely to have a long-term influence on the insurance industry. Here are some examples:

Pharmacy Benefit Manager Transparency Act of 2022

Introduced in the Senate in 2022, the goal of the act is to prohibit PBMs from engaging in spread pricing. Spread pricing is when a PBM charges health plans more for prescription drugs than the PBMs pay to pharmacies. Note that the payment to the pharmacies is often below the actual cost for the pharmacy to acquire the drugs they are dispensing to patients.

While the Pharmacy Benefit Manager Transparency Act of 2022 has different components, one noteworthy one is that PBMs must report annually to the Federal Trade Commission (FTC) the payments received from health plans and fees charged to pharmacies, according to Congress.

Drug Price Transparency in Medicaid Act of 2021

First introduced at the end of 2021 in the House, the act's main purpose is to ban the use of spread pricing by PBMs for specifically Medicaid services. The bill requires pass-through pricing models for payment arrangements with PBMs under Medicaid.

The bill also extends funding for retail pharmacies surveys and requires additional information with respect to price concessions, dispensing fees, and survey participation to be made publicly available.

PBM reform in 2023

In general, the PBM industry is feeling pressure to change its practices, which is manifesting in acts and laws as mentioned previously. The regulatory landscape is actively changing and, as of May 2023, The Senate Health, Education, Labor and Pensions Committee is still discussing major pieces of legislation that are focused on reducing the rising costs of prescription drugs. The main piece of legislation that would significantly impact PBMs is the PBM Reform Act. According to the bill, the main goals are the following:

• To limit pharmacy spread pricing.
• To require pass-through of all rebates to plan sponsors.
• Require health issuers and PBMs to submit detailed annual and semi-annual reports.
• Commission a pair of studies intended to analyze PBM's impact on the pharmacy supply chain. In addition, the studies would look at the impact of potential regulatory interventions.

Whether the bill passes or not will certainly affect the PBM industry and tangentially influence the way that healthcare insurance providers are able to operate.

Why finding the right partner can make a difference for health insurers

Given the complexity of the healthcare insurance industry and changing government intervention, it's essential for insurance companies to remain vigilant. Actuaries can assist health insurers in preparing for the future and assess the company's different lines of business to help them meet their goals. Take a look at some of the services that Lewis & Ellis offers:

• Auditor Support.
• Software Solutions.
• Statistical Consulting.
• Health Care Reform & Policy.
• Medicare Advantage.
• Retiree Medical.
• Compliance Support.
• Product Development.
• Market Conduct Examinations.

Are you ready to learn more about what Lewis & Ellis can do for you and your insurance business to work with PBMs better? Reach out to our team today to get started.