Pharmacy benefit managers, or PBMs, who act as middlemen between drug manufacturers and health plans/employers, are a needlessly maligned lot, according to Lawton R. Burns, Wharton professor of health care management. PBMs negotiate volume discounts for drugs and pass on some or all of them to enrollees’ health plans — a role ripe for accusations of profiteering. In a recent interview with Wharton Business Daily on SiriusXM, he lightheartedly called PBMs “the Rodney Dangerfields of health care,” a takeoff on the signature line of the late standup comic and actor: “I don’t get no respect.” (Listen to the full podcast above.)

Burns testified before the U.S. Senate on March 30, 2023. (Photo by John Klemmer)

On a more serious note, Burns has been doing the rounds of Senate testimonies, explaining the role of PBMs and clarifying misunderstandings. He took a close look at the work of PBMs and group purchasing organizations (GPOs) in his recently published book, titled The Healthcare Value Chain: Demystifying the Role of GPOs and PBMs. According to him, PBMs are being made a scapegoat for problems in the health care industry that originate elsewhere. Burns will also speak about PBMs at an upcoming Penn LDI conference titled A Prescription for the Future of Drug Pricing.

An edited transcript from the conversation is included below.


A Win-win in Drug Pricing?

Wharton Business Daily: Why is it important to focus on PBMs at this point in time?

Lawton R. Burns: PBMs are just the latest in a series of middlemen in the health care supply chain. And most people don’t understand what middlemen do. They get no respect. They’re misunderstood at the least, and they’re vilified at the worst, and that’s what’s going on right now. PBMs are the ones who buy branded drugs from drug manufacturers. The PBMs exist to negotiate price discounts on those branded drugs, and every one of us benefits from that.

Wharton Business Daily: Could you elaborate on the role of PBMs?

Burns: Drug manufacturers have to sell their products through health plans. The health plans engage these intermediaries, the PBMs, to act as their agents to set up formularies where consumers, or health plan enrollees, can get those drugs on different tiers [of their health plans]. If you want a generic drug, you can get it cheaply. If you want a high-priced branded drug, you can get that, but you may pay a higher copay or cost share.

The PBMs assist health plans in setting up formularies and ask for price discounts from drug manufacturers in exchange for selling their drugs to enrollees. They tell drug companies: “If you want more favored access on our formulary, which means lower copays and cost share [for enrollees], then we want an even bigger discount. You can sell more volume, but we want a lower list price, a lower net price.”

Wharton Business Daily: This is part of a larger discussion on the pricing of drugs and around health care in general, is it not?

Burns: Correct. And it covers the commercial/employer-based health insurance, Medicaid, and Medicare Part B (medical services like doctors’ services). Everybody uses the PBMs.

‘Seismic Shifts’ and Tradeoffs in the Drug Supply Chain

Wharton Business Daily: Has this been the revenue model for PBMs historically? Or are those revenue models tweaking and adjusting as we move forward here?

Burns: They’re more than just tweaking and adjusting. There are some seismic shifts going on here. PBMs get criticized endlessly for getting discounts — or rebates – from drug manufacturers to enable the latter to get on formularies. What does a PBM do with those rebates? Well, they pass almost all of them, sometimes all of them, to the health plans.

Given that they’re passing on those discounts to the health plans, they are not as big a portion of their revenue model as they used to be. In fact, in Medicare Part D (which covers the prescription drug benefit), which is one of the growing markets in health care, the PBMs keep less than 1% of those discounts/rebates.

What’s happening now is that the revenue models of the PBMs are shifting more towards specialty pharmacies. More and more of the new drugs that are approved are specialty medicines, which are high-priced drugs for special conditions, or orphan conditions (drugs to treat medical conditions with small patient populations). There is very little competition in the markets for orphan drugs. The PBMs make their new revenues by dispensing those drugs, not by rebates. Few people understand that.

Wharton Business Daily: You’ve talked of tradeoffs in the health care industry.

Burns: Yes, the entire health care ecosystem is a series of tradeoffs. I published a textbook two years ago called The U.S. Health Care Ecosystem: Payers, Providers, Producers. Everything in health care involves a tradeoff, which means you can’t have it all, you’re trading off one thing to get another thing.

And so with the PBMs — they’re trading off. They’re giving the manufacturers more access (volume) to the market, but in exchange for that greater access to the market and the ability to sell more products, the drug manufacturers have to cut their prices. Of course, the drug manufacturers aren’t crazy about all that. They’d like to sell more drugs at a high price, not more drugs at a low price.

Reassessing the Role of PBMs in the Pharma Supply Chain

Wharton Business Daily: So, does the PBM sector or some elements of it need a reassessment?

Burns: It depends on who you talk to. The biggest and most vocal critics of the PBM industry are the manufacturers that they contract with upstream and the pharmacies that they contract with downstream. But it’s interesting that the customers of the PBMs, or the health plans and the employers for whom the health plans work, don’t complain that much about the PBMs.

So you begin to wonder, well, just how much do we have to worry about here? The only people complaining are the ones who have to contract with the PBMs, not the ones who are their customers downstream. That should give everybody pause for thought.

Wharton Business Daily: I should note that the Leonard Davis Institute at the University of Pennsylvania has planned a conference on drug pricing in May. Could you elaborate on the importance of these conversations in our health care industry?

Burns: Both the House and the Senate are holding hearings on the PBMs. I appeared before the Senate Finance Committee last Thursday, and then spoke with several members of the Senate Health Education, Labor and Pensions Committee. There are parallel committees elsewhere in the Senate and in the House.

Everybody’s up in arms about what they perceive to be these serious and supposedly evil practices of the PBMs. My view, and I expressed this verbatim before the Senate last Thursday, is that “You’re treating the PBMs as your scapegoat. The problems lie elsewhere.” It’s all misguided and misdirected.