Contrary to What Wall Street and the FTC Say, the PBM Business Model Is Misaligned

Abstract

Pharmacy benefit managers (PBMs) say that they earn more from mail order generics than brands and that their interests are aligned with clients’ interests. Wall Street and the Federal Trade Commission (FTC) concur.The analysis of both Wall Street and the FTC is flawed. The failure in the analysis can be traced to the use of broad averages of rebate rates in estimates of the relative profitability of drug types.Both Wall Street and the FTC fail to realize that potential misalignment of interests is limited to situations involving “rebatable” brands and that rebate averages across all brands are significantly less that rebate averages across rebatable brands.They also failed to realize that business segment profitability is due as much to transaction volume as average unit margin. It turns out that mail order generics are a relatively high average margin, but relatively low volume business for PBMs.When these failures are corrected, the result is that PBMs earn more per rebatable transaction and in the aggregate from brand name drugs than mail order generics.