Pharmacy Benefits Managers (PBMs)
Lawrence W. Abrams, Ph.D. Economist, 50+ papers on PBMs since 2003
Contact: labrams9@gmail.com
A Pharmacy Benefit Managers Insurance Business Model
click to download a .pdf
The purpose of this paper is to provide quantitative estimates of two transparent insurance business models as a solution to the PBM agency issue. The key parameter used is an 8% gross profit margin figure disclosed by the Big 3 PBMs themselves. Based on reported drug trend delivered to plans, we use a $1,200 to $1,500 per member per year (PMPY) as the range for this key performance indicator (KPI). We propose that discussions of PBM insurance business models start with the following figures: (1) a fixed premium model with medical loss ratio ranging from 92% to 85%; (2) a fee-for-service model ranging from $96 to $180 PMPY with risk sharing of deviations from a contracted PMPY delivered drug spend
A Combinatorial Auction Design for Formulary Positions
April 2025
click to download .pdf
The Wyden-Grassley 2019 Senate Staff Report confirms that rebate contracts between pharmaceutical companies (Pharma) and the Big 3 pharmacy benefit managers (PBMs) contain a combinatorial bid-menu for formulary positions featuring both exclusive and shared positions. Pharma bid-menus often include a separate bid option for “an incremental base rate” if the PBM outright excludes a named competing drug. The standard bid basis is a percentage off a publicly available list price. The purpose of this paper is to apply the economics field of market design to develop a simple algebraic and graphic model of a combinatorial auction for formulary position assignments. We suggest the following ways PBMs can improve their auction design: 1. a test for anticompetitive incremental exclusionary rebate bids. 2. a more incentive-compatible auction by limiting shared position bid-downs. 3. banning lump sum, bundled, market share, and all other non-linear rebate bid bases
Table of Contents: List of Paper URLs
Section 1: The PBM Business Model (click on titles to download .pdf)
Section 2: PBM Rebates and Formularies (click on titles to download .pdf)
Pharmacy Benefit Managers as Bargaining Agents --Paper presented at the Western Economic Association
International, 8th Annual Conference, July 2005
The Effect of Corporate Structure on Formulary Design: The Case of Large Insurance Companies Poster Presentation, ISPOR 10th Annual Meeting, Washington DC, May 2005
Section 3: PBM Policy and Law (click on titles to download .pdf)
Practical Issues With PBM Full Disclosure Laws Originally Published in FDLI Update Magazine, Issue 4, 2004.
About the author:
I have a B.A. in Economics from Amherst College and a Ph.D in Economics
from Washington University in St. Louis.
I post often on X @larrywabrams on issues relating to PBMs and recently
the the shift to fee-for-service business models and PMPY trend delivered.
In 2002, I started looking at the 10-Qs and 10-Ks of the drug store chains and pharmacy benefit managers
after an "aha moment" in a Mountain View CA. Longs Drug store (later bought out by CVS).
I had gone there to to pick-up my renewal Rx of Type 2 diabetes drug Glucophage.
Several things happened that night piqued my interest in PBMs and big drug store chains.
First, I found out that my Rx for Glucophage was now an Rx for Metformin without my prior knowledge.
I asked the pharmacist what was going on. He mentioned that my Rx now had a cheaper generic available
and that my drug benefit plan manager made the switch automatically.
That night I was also struck by the fact that here was a 12,000 square foot store and all the customers were lined up
at the pharmacy counter in the back. I asked myself, "Could it be that hole in the wall in the back generated
all the profits while the front store was just a relic of the bygone days of lunch counters and shopping on Main Street?
The question of relative source of pre-tax profits -- pharmacy vs front store -- piqued my interest all the more
as I compared the pathetic merchandising I saw in this big drug store chain versus the amazing health product
merchandising I saw a week earlier at the first Whole Foods store on the West Coast in downtown Palo Alto, CA.
Based on that "aha moment", I created an early Wordpress website https://nu-retail.com
to host the following 3 papers that embody that moment:
Nu-Retail: A Counter to the Web 2002
The Next Tom's of Maine - 2002
Walgreen's Transparency Issue - November 2003
In addition, I was an early adopter of PBM as acronym for pharmacy benefit managers and
I published the first publicly available papers that quantified the PBM business model and retained rebates.
Quantifying Medco's Business Model - April 2005
Estimating the Rebate Retention Rate of Pharmacy Benefit Managers - April 2003
