Pharmacy benefit managers are additional players in the middleman structure contributing to cost escalation. Health care plans contract with separate companies, middlemen entities known as pharmacy benefit managers (PBM’s), to get members their prescription drug medication. The largest PBM’s are Express Scripts, CVS Caremark, and Optum RX . PBM’s are for profit companies which make their money by pocketing a percentage of the discounts off prescription drug prices  that they negotiate with drug manufacturers. Hired by many  employers and insurers as middlemen to negotiate discounts , PBM’s have a unique advantage in making deals.

While insurance companies due to antitrust laws and contractual “gag” clauses cannot compare prices they pay for drugs among themselves , PBM’s , who represent large swaths of the healthcare industry, know all the pricing deals in the industry  and have huge negotiating power. The items than end up  on  formularies, an insurer’s list of covered drugs and devices , are not always the ones that patients need  most or work best , but rather the ones on which the PBM has gotten the best profit margin for itself.  The PBM’s may  for example drop a popular drug from coverage as a negotiating tactic in order to get a  drug manufacturer to make a more advantageous offer for the PBM the next  year.

 PBMs often make undisclosed  side deals with insurers and drug manufacturers  that boost the PBM’s  profits from  employers, who are paying for group coverage plans for their employees. One of their profit making    tactics  is a common practice known in the industry as the spread.  A PBM will, for example, tell an employer it costs $100 to fill a prescription that actually costs $60, allowing the PBM to pocket  $40. The fine print in the standard contracts between PBM’s and the third party administrators whom employers hire (usually insurance companies) to manage their   group employee benefits funds often allows the PBM’s to withhold what is considered “proprietary” pricing information from the employers who hire them to provide group drug benefits for their employees.

The PBM spread has been extensive. A recent report by the Ohio state auditor noted that the spread on generic drugs  had cost their state’s Medicaid plan $208 million in a single year, which represented over 30% of total state expenditures for all prescription drugs. Kentucky state auditors found PBM’s making $123 million annually from spread pricing in that state’s Medicaid drug program.  Michigan’s Medicaid program was overcharged by an estimated $64 million in a two year period due to spread pricing. The Pharmacists Society of the State of New York reported a $300 million spread pricing overcharge for one recent year.