Pharmacy Benefit Managers, Rebates, and Drug Prices: Conflicts of Interest in the Market for Prescription Drugs

Abstract

Pharmacy benefit managers (PBMs) manage the drug benefits for over ninety percent of Americans with prescription drug coverage. However, conflicts of interest inherent in the PBM business model create perverse incentives for drug price increases. The most significant conflict of interest arises from manufacturer rebates paid to PBMs. PBMs negotiate rebates from drug manufacturers in exchange for giving the manufacturers’ drugs preferred status on a health plan’s formulary. Because the rebates paid to PBMs are typically a percentage of a drug’s list price, drug makers are pressured to increase list prices in order to satisfy PBMs’ demands for higher rebates. Although a portion of the increasing rebate dollars may eventually find its way to patients in the form of lower co-pays, many patients still suffer from the list prices increases. This Article analyzes various proposals to rein in PBM rebates and asserts that, compared to the other proposals, a partial point-of-sale rebate system maintains many of the benefits of selective contracting while minimizing incentives to increase drug list prices.