By Grace Vitaglione
Jennifer Burch is a second-generation pharmacist who’s been working at Central Pharmacy in Durham since she was a teen. Some of her current customers have been coming to the store since the days when she still worked with her father. In those days, when they worked with pharmacy benefits managers, they paid a transmission fee — a simple financial transaction.
Now, pharmacy benefit managers “control the entire pharmacy benefit very tightly,” she said. They’re part of the reason it’s now hard to keep Central Pharmacy in business, Burch said.
Pharmaceutical benefit managers — or PBMs — are often referred to as “middlemen” in the pharmacy supply chain. Initially, they were created as a way to use bulk buying power to get better deals for customers of insurance companies, who hired the PBMs to manage prescription drug benefits.
But in recent years, PBMs have come under increased scrutiny from advocates, pharmacists and government officials at the state and federal level over concerns of opaque business practices. Instead of driving down prices for consumers, critics say the biggest PBMs contribute to high drug prices in part by taking increasingly larger cuts from the deals they make between insurers and drug manufacturers, and higher prices mean bigger profits for the PBMs.
The North Carolina Senate and House of Representatives each passed separate legislation to regulate the companies in late April and early May. But the two chambers differ in how to go about reforming PBMs’ practices in North Carolina.
The House’s version would go further to outlaw certain business practices, while the Senate bill would also regulate other actors in the supply chain. Both would increase reporting requirements with the goal of making the industry more transparent.
Penny Shelton, executive director of the North Carolina Association of Pharmacists, said either bill becoming law would improve the current situation and reduce costs for independent pharmacists, in particular.
What is a PBM and what does it do?
Pharmacy benefit managers first emerged in the 1960s when health insurance plans started including prescription drugs, but they have become increasingly complex since, according to the nonprofit research institute The Commonwealth Fund.
A PBM’s main job is to manage prescription drug benefits for insurance companies. Here’s how that’s supposed to work:
- The PBM decides which drugs an insurance plan should cover and the plan’s members can access. That list is called a formulary.
- The PBM, using its power as a bulk purchaser, negotiates lower costs on drugs for the insurance company.
- The PBM saves the insurance company money, and the company passes on the savings to its members.
- A customer buys a drug from the pharmacy that’s covered by their insurance, and the PBM reimburses the pharmacy for the rest of the agreed upon fee.
- The PBM contracts with certain pharmacies to participate in their networks, and customers who go to those in-network pharmacies save money.
Here’s how critics say PBMs are actually working:
- The PBM negotiates lower prices with pharmaceutical companies, but doesn’t pass along all those savings to insurers.
- The PBM creates hoops for doctors and patients to jump through to access medications through the process of prior authorization — that saves the PBM and the insurance company money.
- The PBM tells employers and insurers that they negotiate discounts on drugs, but the discounts are based on prices inflated by the PBMs themselves, argued Joe Moose, who runs Salisbury-based Moose Pharmacy with his brother.
- The PBM is disincentivized to negotiate lower prices because the company receives a rebate based on a drug’s list price — so the higher the list price, the more money the PBM could receive.
- The PBM sometimes agrees to exclude lower-cost alternatives from the formulary in exchange for higher rebates from manufacturers.
- A customer buys a drug from the pharmacy that’s covered by their insurance and the PBM reimburses the pharmacy less than what the pharmacy bought the drug for, so the pharmacy ends up losing money, said Gina Upchurch, executive director of Durham-based Senior PharmAssist.
- The PBM sometimes charges insurers more than what they paid the pharmacy for the drug and pockets the difference, called spread pricing.
- The PBM reimburses pharmacies affiliated with their parent company more than what the PBM reimburses unaffiliated pharmacies.
Connor Rose, lobbyist for industry group Pharmaceutical Care Management Association, which represents PBMs, pushed back on some of the criticisms.
He argued PBMs are the only ones in the supply chain whose job is to push down drug prices. He also said in an email to NC Health News that PBMs save patients over $1,000 per person annually, and the companies pass more than 90 percent of rebates back to their clients.
‘Feather your own nest’
PBMs have also come under fire for increasing consolidation and control over the market. Three giant PBMs processed nearly 80 percent of all prescription claims in the U.S. in 2024: CVS Caremark, Express Scripts and Optum Rx.
These three large PBMs do an astoundingly large amount of business, but they’re all just a part of even larger health care conglomerates.
For example, CVS Health Corporation bought health insurer Aetna in 2018. The company also operates the PBM CVS Caremark and mail-order, specialty and retail pharmacies under the umbrella CVS Pharmacy.
Many might think that insurance companies are the main money makers in these massive conglomerates, but often, it’s the PBM that rakes in the bucks.
These massive bottom lines give the PBMs a lot of negotiating power with drug manufacturers, Upchurch said. They can also steer patients to pharmacies within their parent company that may offer better prices. But that’s not always the case — those pharmacies are often preferred because they have business dealings together, she said, not because they’re a better value.
“Where you can feather your own nest, you often do it,” Upchurch said.
Many independent pharmacists who aren’t affiliated with large companies like CVS or Walgreens say they’re struggling to stay in business because PBMs reimburse them less for drugs than what they obtain it for.
That’s especially true on brand names, Upchurch said. Instead, small pharmacies have been trying to survive on small markups of generic drugs and vaccine services.
Rose of the Pharmaceutical Care Management Association said those claims are also unfounded, citing a report from Compass Lexecon, an economics consulting firm that has argued in favor of business mergers. Compass Lexecon’s report argued that independent pharmacies were paid 4 percent more for branded drugs and 24 percent more for generic drugs compared to chain pharmacies.
Pharmacies closing
But those on the ground say reality is another matter. PBMs reimbursing independent pharmacies at low rates has contributed to the closure of hundreds of pharmacies in North Carolina over the past several years, said Shelton, from the state pharmacists’ association. In some rural communities, the only health care access for miles is their local pharmacy — but those are disappearing, she said.
Community pharmacists often help patients improve their quality of care by catching conditions earlier on, she argued, preventing a bigger problem down the line like a hospitalization or emergency department visit.
That’s because community pharmacists often talk to patients more and know them as people, said Central Pharmacy’s Burch, while chain stores just fill prescriptions.
“You can call prescriptions a commodity, and you can get them the cheapest route you can get them, but it is much less expensive if the patient has a relationship with the pharmacist,” she argued. That’s because having that relationship allows a local pharmacist to better manage a patient’s prescriptions and prevent unnecessary treatment.
Last year, Central Pharmacy lost almost $88,000 due to low reimbursements for drugs. Burch stopped signing onto certain insurance contracts that led to the pharmacy losing money.
“We can go out of business fast because we keep selling drugs at a loss or we can go out of business slow because we get rid of some of those prescriptions,” she said.
NC lawmakers seek to rein in PBMs
Both chambers of the North Carolina General Assembly have passed bills to regulate PBMs at the state level, but Senate Bill 479 and House Bill 163 differ on how to address them.
Shelton said the House version is viewed as more comprehensive compared with the Senate’s, touching on rebates and eliminating spread pricing — when they charge employers, insurers or the government more than what they reimburse pharmacies. Shelton said the House bill also provides a specific formula to ensure fair reimbursement to pharmacies.
Senate Bill 479’s approach is more about increasing transparency through PBM reporting requirements, which would hopefully mean clearer data on their business practices, Shelton said. That could be the first step in a multi-year approach to reform.
Both bills would require more transparency from PBMs through reports to the N.C. Department of Insurance. House Bill 163 would require PBMs to report quarterly on how much it costs to purchase drugs and how much the companies received in concessions from drug manufacturers or wholesale distributors, among other things.
The Senate would also require PBMs to report on how much they make from spread pricing to the Department of Insurance.
Both bills have good measures, Shelton said. She also said existing PBM laws need to be more strongly enforced.
PBMs currently have to file a licensure with the N.C. Department of Insurance and follow certain other consumer protection rules. If the legislature were to pass new rules, the department may need more resources to enforce them, said Jason Tyson, director of communications at the department.
If either the House or Senate bill were to become law, “self-funded” insurance plans —typically offered by large companies and governed by federal laws — would not be included, given that the state doesn’t have authority to regulate those.
Nearly half of North Carolina’s population is covered by employer-sponsored insurance, according to 2022 data from the Georgetown University Center on Health Insurance Reforms.
Compare and contrast
The Senate bill would also:
- Require PBMs to reimburse their affiliated pharmacies the same as unaffiliated ones.
- Defines “pharmacy deserts” in both urban and rural areas and allows independent pharmacies in those areas to refrain from selling drugs at a loss. Currently, pharmacies “must” dispense a drug, even if it causes a loss of revenue, said Sen. Benton Sawrey (R-Clayton) in a committee meeting on April 10.
- Require PBMs to report annually on things like how much money they receive in manufacturers’ rebates and the difference between what they pay their affiliated retail pharmacies versus unaffiliated ones.
The House bill would also:
- Require PBMs to reimburse pharmacies based on a national average of how much it costs pharmacies to buy a drug, plus the cost of a dispensing fee. This rate is also the one used by the state’s Medicaid program.
‘People are tired of it’
All 50 states have passed some form of regulation around PBMs as of 2024, according to the National Academy for State Health Policy. Many of those state laws include allowing pharmacies to tell patients about lower cost options, requiring PBMs to register in the state and limiting how much patients must pay for covered drugs.
Upchurch said not all PBMs are bad and can provide useful functions. Her organization, Senior PharmAssist, uses one that she said reimburses pharmacies fairly and helps make sure that only covered medications are billed to the agency.
While PBMs are under attack, many employers and governments that prioritize mail order pharmacies also hurt independent brick and mortar pharmacies, Upchurch said.
“[PBMs] do have a function. It’s just that they’ve exploited a loophole that allows them to keep it opaque, send people to their ‘friends and families,’ and basically rip off pharmacists,” Upchurch said. “And people are tired of it.”
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