Pharmacy Benefits Managers (PBMs)
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Pharmacy Benefit Managers and their Market Design for Formulary Positions: forthcoming paper October 2024
A key function of pharmacy benefit managers (PBMs) is to manage a list of prescription drugs (Rx) covered by healthcare insurance. That list is known as a formulary. In select therapeutic classes where there are 2+ drugs with equivalents, PBMs have created a market design where off-invoice rebates are exchanged for favored formulary positions. This purpose of this paper is:
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Apply taxonomies of market design to support our classification of this as a multi-round combinatorial auction;
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Apply auction theory to evaluate its strengths and weaknesses;
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Provide a list of specific changes to the current Big 3 PBM auction design we think could produce better outcomes than the current vague proposals for business model transparency and piece-meal 100% pass-throughs.
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 twitter @larrywabrams on issues relating to PBMs, biosimilars
investing in biotech stocks in my portfolio and issues relating to Monterey
County, California where I reside.
My writings are at the intersection of economics, accounting, financial
analysis, and high tech. I have received no remuneration for these articles
and have no financial relation with any company discussed in these articles.
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 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 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
