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Fact Sheet: Disclosing Relationships Between Pharmacy Benefit Managers and Drug Companies

Jan. 27, 2005

Disclosing Relationships Between Pharmacy Benefit Managers and Drug Companies

Pharmacy benefit managers (PBMs) are private companies that administer pharmacy benefits and manage the purchasing, dispensing and reimbursing of prescription drugs. PBMs provide their services to health insurers or to large health care purchasers such as public employee systems, other government agencies and labor union trust funds. PBM services to their clients may include negotiating rebates or discounts from pharmaceutical manufacturers, processing claims for prescription drugs and negotiating price discounts from retail pharmacies. PBMs also develop formularies and manage utilization of drugs through prior authorization or utilization reviews.

In the United States, Pharmacy Benefit Managers handle prescription drug benefits for between 160 and 200 million people. In July 2004, the Federal Trade Commission estimated that 95 percent of patients with prescription drug insurance coverage receive their benefits through a pharmacy benefit manager. The largest of about 60 PBMs operating in the United States are Medco Health Solutions, Express Scripts and Caremark Rx. According to the most recent estimates available, Caremark Rx represents 25 percent of “covered lives”, Medco 15 percent, and Express Scripts 12 percent, leaving 48 percent to be covered by smaller PBMs.

The Problem:

In recent years, PBMs have been accused of failing to act in the best interests of their clients.

  • Side deals and undisclosed payments:PBMs have allegedly failed to disclose and to pass on savings and rebates negotiated with drug companies. An estimated 10 percent of the $161 billion spent in the U.S. on prescription drugs in 2002 was spent on side deals and undisclosed payments from drug companies to PBMs. At least some, if not all, of that $16.1 billion should have gone to PBM clients, which would have reduced the amount consumers, businesses and governments spend on prescription drugs.
  • “Drug switching” that increases client costs and increases profits for PBMs:PBMs have been accused of steering clients towards more expensive drugs in order to increase their own compensation from drug companies. AdvancePCS (now a part of Caremark Rx) sent letters urging doctors to switch patients from a generic drug for ulcers costing 20 cents per day to the now controversial Celebrex, which cost 10 times more and yet is no more effective. In April, 2004, Medco, one of the three largest PBMs, settled a lawsuit brought by 20 state Attorneys General and the U.S. Justice Department. The suit accused Medco of switching patients’ drugs to get larger rebates for itself from drug companies. The case settled for $29.3 million. Lawsuits against many PBMs are still pending.
  • Lack of transparency: The complex system of prescription drug pricing, involving many different prices plus secret rebates and discounts, makes it difficult for PBM clients to know if PBMs are giving them a good deal. When combined with PBMs’ refusal to disclose financial information, however, clients are totally at the mercy of their PBM. Pharmacy Benefit Managers not only fail to disclose necessary financial data to their clients, they even refuse to disclose information to the GAO.

The Solution:

We propose legislation that would help prevent conflicts of interest and disclose financial relationships between PBMs and drug companies. Maine, South Dakota, Vermont and the District of Columbia have enacted similar laws; at least 24 other states have seen similar bills introduced. South Dakota estimates their state employee health plan will save 7-8 percent in drug costs because of the legislation.

What the Model Bill does:

  • Creates fiduciary duty for PBMs: this requirement helps ensure PBMs put their clients’ interests first and not their own.
  • Requires disclosure of conflicts of interest.
  • Requires disclosure of financial information requested by a client, subject to confidentiality protection for the PBM.
  • Requires disclosure of cost differences and payments to the PBM if the PBM makes a drug switch
  • Requires pass-through from PBM to client of payments, rebates and savings: If the PBM obtains cost savings from drug switching, or obtains volume discounts, those savings will be passed on from the PBM to the client.


1 Atlas, Robert F. “The Role of PBMs in Implementing the Medicare Prescription Drug Benefit.” Health Affairs. October 28, 2004.
2 MacDonald, John, “States want say on drugs; Pharmacy managers extending control,” Hartford Courant August 22, 2004. PA1, retrieved from Nexis database.
3 “Analysts ponder FTC’s ‘second request’ regarding Caremark Rx/AdvancePCS deal – Federal Trade Commission.” Drug Cost Management Report, October 24, 2003.
4 Pugh, Tony, “Prescription Drug Strategy Under Fire,” St. Paul Pioneer Press, February 10, 2003.
5 Martinez, Barbara, “Pharmacy-Benefit Managers Toil for Drug Companies.” Wall Street Journal, August 14, 2002.
6 Office of the Attorney General, Nevada Department of Justice. April 26, 2004.
7 Freudenheim, Milt, “Pharmacy Benefit Companies Won’t Disclose Fees,” New York Times, January. 10, 2003.