Pharmacy Benefit Managers

Pharmacy benefit managers - or "PBMs" - are fiscal intermediaries that specialize in the administration and management of prescription benefit programs. PBMs contract with a range of clients, including HMOs, employers, preferred provider organizations and other health plans.

PBMs purchase in huge volumes and have extensive networks of participating pharmacies. Bulk purchasing enables PBMs to negotiate rebates from drug manufacturers and discounts from retail pharmacies. PBMs process hundreds-of-millions of pharmaceutical claims per year. In addition, they run mail-order fulfillment centers and provide other services to health plans.

PBMs also develop and manage drug formularies. Formularies are drug lists that PBMs develop and use to manage drug spending. By charging less for certain brands of drugs, PBM formularies steer health care consumers and their physicians into using particular drugs for particular therapeutic needs. The consumer pays a higher co-pay (and the health plan pays the PBM more) for drugs that are not in the "preferred" category on the PBM's formulary. The health plan may provide no coverage for drugs that are not on the list.

Control of formularies gives PBMs tremendous influence with drug companies. The manufacturers typically compete -- and pay a combination of rebates and fees--to secure most favorable placement on a formulary. Drug manufacturers typically pay PBMs: (i) access rebates for placement of products on the PBM's formulary; (ii) market share rebates for garnering higher market share than established targets; (iii) administrative fees for