The Opaque Industry Secretly Inflating Prices for Prescription Drugs

Americans are paying too much for prescription drugs.

It is a common, long-standing complaint. And the culprits seem obvious: Drug companies. Insurers. A dysfunctional federal government.

But there is another collection of powerful forces that often escape attention, because they operate in the bowels of the health care system and cloak themselves in such opacity and complexity that many people don’t even realize they exist.

They are called pharmacy benefit managers. And they are driving up drug costs for millions of people, employers and the government.

The three largest pharmacy benefit managers, or PBMs, act as middlemen overseeing prescriptions for more than 200 million Americans. They are owned by huge health care conglomerates — CVS Health, Cigna and UnitedHealth Group — and are hired by employers and governments.

The job of the PBMs is to reduce drug costs. Instead, they frequently do the opposite. They steer patients toward pricier drugs, charge steep markups on what would otherwise be inexpensive medicines and extract billions of dollars in hidden fees, a New York Times investigation found.

The PBM negotiates with drug companies, pays pharmacies and helps decide which drugs patients can get at what price. In theory, everyone saves money.

“We’re really, really good at what we do,” Jon Mahrt, president of UnitedHealth’s PBM, Optum Rx, said in an interview. The main lobbying group for the PBMs says that in 2022 they saved their clients and patients $286 billion.

But those savings appear to be largely a mirage, a product of a system where prices have been artificially inflated so that major PBMs and drug companies can boost their profits while taking credit for reducing prices.

The Times interviewed more than 300 current and former PBM employees, patients, physicians, pharmacists and other industry experts, and reviewed court documents and patient records. The investigation found that the largest PBMs often act in their own financial interests, at the expense of their clients and patients. Among the findings:

— PBMs sometimes push patients toward drugs with higher out-of-pocket costs, shunning cheaper alternatives.

— They often charge employers and government programs such as Medicare multiple times the wholesale price of a drug, keeping most of the difference for themselves. That overcharging goes far beyond the markups that pharmacies, like other retailers, typically tack on when they sell products.

— The largest PBMs recently established subsidiaries that harvest billions of dollars in fees from drug companies, money that flows straight to their bottom line and does nothing to reduce health care costs.

— The PBMs, which are responsible for paying pharmacies on behalf of employers, are driving independent drugstores out of business by not paying them enough to cover their costs. Small pharmacies have little choice but to accept these lowball rates because the largest PBMs control an overwhelming majority of prescriptions. The disappearance of local pharmacies limits health care access for poorer communities but ultimately enriches the PBMs’ parent companies, which own drugstores or mail-order pharmacies.

— PBMs sometimes delay or even prevent patients from getting their prescriptions. In the worst cases, patients suffer serious health consequences.

Many patients learn about the existence of PBMs only when they have a problem getting medications and spend hours navigating a byzantine system of approvals and restrictions.

In Oklahoma, for example, CVS’ PBM, Caremark, overcharged the health plan for state employees by more than $120,000 a year for one patient’s cancer drug, according to his insurance documents.

In Illinois, a woman with cancer paid hundreds of dollars more than she should have for her pain medication because Caremark required her to use a more expensive version.

In New Jersey, Cigna’s PBM, Express Scripts, wanted Joseph Kaplan, a 77-year-old retiree, to pay $211 for a three-month supply of his allergy drug when he could have paid $22 at Costco. “It’s just nuts,” he said.

Smallish sums quickly add up when applied across the health care system. It is a big reason the PBMs have become a fast-growing and profitable industry.

If they were stand-alone companies, the three biggest PBMs would each rank among the top 40 U.S. companies by revenue. The largest, Caremark, generates more revenue than Ford or Home Depot.

Because of recent mergers, they are becoming more dominant, collectively processing roughly 80% of prescriptions in the United States. In 2012, the figure was less than 50%.

Executives at the PBMs say their size is essential to counteract the companies that make brand-name drugs.

“The biggest driver of cost in this country is the brand manufacturers,” David Joyner, president of CVS Caremark, said in an interview. “Size and scale really matters in order to be able to influence and be able to lower the overall cost of branded pharmaceuticals.”

Officials at Caremark, Express Scripts and Optum Rx defended their business models. Some executives acknowledged that there were times when they overcharged for specific drugs, but the companies said they offered the lowest overall prices to their clients. (The system’s opacity makes that claim impossible to verify.)

The PBMs also say that tightfisted employers are to blame when patients are charged high out-of-pocket costs or can’t get their medications. Indeed, many employers skimp on the health benefits they offer workers.

The modern PBM emerged in 2018. The giant health insurers Aetna and Cigna were trying to achieve the growth demanded by Wall Street. They sought to merge with the PBMs, whose profits were soaring. Aetna and CVS combined. Cigna bought Express Scripts. (UnitedHealth had built its own PBM.)

It would turn out to be a seminal moment, one that would rapidly and radically change the American health care system by further shifting power into the hands of giant conglomerates and away from employers and patients.

Today, PBMs feed off a system where everything is extraordinarily complicated — including how much a drug actually costs.

Here’s how it works.

When you hear about a $16,000-a-year obesity drug or a $275 vial of insulin, that’s not the final price of the medication. This sticker price is just the starting point for negotiations between PBMs and drug companies.

The drug companies generally agree to reduce prices on brand-name medications by giving rebates and other payments to the PBMs. The PBMs then share most of that with employers. But they also pocket a portion — sometimes about 10% — for themselves. Because of the huge national volume of drug spending, that adds up to billions of dollars.

Greater discounts do not necessarily benefit patients. While lower costs for employers can translate into lower insurance premiums for workers, some out-of-pocket costs are set as a percentage of the original sticker price. So when sticker prices are higher, patients pay more.

The PBMs’ demands for greater discounts often lead drug companies to increase sticker prices so that they can maintain their profit margins.

As a result, it is common for a drug’s final price after discounts to plateau even as patients’ out-of-pocket costs for that drug go up.

The Federal Trade Commission is concerned that the rebate payments from drug companies to PBMs may be illegally distorting the market.

“We’ve heard a lot of complaints about the rebate system and whether the rebates may effectively be functioning as kickbacks that are diverting people to more expensive medicines at the expense of lower-cost generics,” FTC Chair Lina Khan recently told reporters.

She was alluding to a bizarre incentive that will sound familiar to many people who routinely take prescription drugs: Even when an inexpensive generic version of a drug is available, PBMs sometimes have a financial reason to push patients to take a brand-name product that will cost them much more.

A short walk from the bustling pubs and shops in central Dublin, a glass-paneled office building houses the latest secret to the PBMs’ success. Inside is a subsidiary that Optum Rx — itself a subsidiary of UnitedHealth — set up to negotiate discounts with drug manufacturers.

The creation of the subsidiary, Emisar, has allowed UnitedHealth to retain billions of dollars of those savings, without having to share them with employers.

Emisar and similar subsidiaries established by Express Scripts and Caremark are known as group purchasing organizations, or GPOs. They were created, starting in 2018, amid growing pressure from employers to share with them more of the manufacturers’ discounts.

In response, the PBMs altered their business model. The new subsidiaries still received rebates from drug companies, and they passed on those rebates to the PBMs, which in turn sent the savings to employers. But the GPOs also began imposing new fees on drug manufacturers.

Because those were fees, not rebates, the PBMs weren’t contractually obligated to share them with their clients.

Perhaps the clearest example of how the PBMs find creative ways to profit is Humira, the blockbuster medication for conditions such as arthritis.

After two decades of the brand-name drug being the only version available, lower-cost alternatives came on the market in 2023. Collectively, employers, insurance programs and patients stood to save up to $6 billion a year by switching to copycat drugs, according to the data company IQVIA.

But PBMs would lose money from switching. Humira had become a big moneymaker for PBMs, in large part because its manufacturer, AbbVie, was shelling out hundreds of millions of dollars in fees to the benefit managers’ GPOs. Those fees would vanish if the PBMs switched patients off Humira.

The PBMs moved slowly. In March, 14 months after the first cheaper version became available, 96% of prescriptions for the drug in the United States were still for the brand-name version, according to IQVIA.

PBM executives denied that this was motivated by greed. CVS Caremark officials, for example, said they had struck all-or-nothing arrangements with AbbVie. If Caremark steered some of an employer’s workers toward cheaper versions of the drug, that employer would not receive any rebates from AbbVie for patients who stayed on Humira. As a result, Caremark said, sticking with Humira was better for many employers until a critical mass of patients switched.

Caremark has recently stopped recommending Humira, instead primarily favoring a copycat version called Hyrimoz.

There was more to the switch than saving money for clients. CVS had struck a deal with Hyrimoz’s manufacturer to promote the drug to employers in exchange for a cut of its sales.

One of the clients to whom Caremark recommended Hyrimoz was the health insurance program for state employees in North Carolina. Caremark didn’t tell state officials about the company’s stake in Hyrimoz. They only learned of it when an official, Dr. Peter Robie, stumbled upon an online mention of the partnership.

“The appearance is that you are encouraging the prescription of a medicine that will financially benefit CVS,” Robie said during a meeting with CVS in February.

At the meeting, the company’s representatives played down the conflict of interest. But a few months later, CVS apologized.

This article originally appeared in The New York Times .