AMA Report Evaluates PBM Competition and Vertical Integration With Insurers

In local markets in the United States where pharmacy benefit managers (PBMs) provide services to commercial health insurers, there is a widespread lack of competition, according to a new report from the American Medical Association (AMA).

The analysis uses 2020 data for individuals with a commercial drug benefit tied to a medical benefit, as well as the PBMs used by insurers, to provide insight on PBM services performed for insurers. Five PBM services are reviewed: rebate negotiation, retail network management, claim adjudication, formulary management, and benefit design.

“The American Medical Association already has serious concerns about PBM business practices that can have a detrimental impact on patients’ access to and cost of prescription drugs,” AMA President Jack Resneck Jr, MD, said in a statement. “PBM markets require careful scrutiny as less competition and more vertical integration can embolden anti-competitive business practices to the detriment of patients.”

PBMs were first created in the 1960s and manage the drug insurance benefits for the majority of Americans today. When PBMs were created, the goal was to contain drug spending by creating competition among substitute drugs. Manufacturers provide rebates to PBMs for favorable placement on the drug formulary, and PBMs are supposed to pass those rebates on to the insurer or employer.

“It is not clear whether PBMs are (fully) passing on those rebates,” the report notes. “Perhaps in response to this incomplete pass-through of rebates, health insurers have been vertically integrating with PBMs. As a result, the largest insurers in the country and even some smaller ones already have their own PBM or share the same owner with one.”

The analysis looked at enrollment in commercial drug insurance obtained directly from health insurers through health plans combining the medical and drug benefit. The analysis did not include carved-out lives.

More than a third (37%) of the national markets for formulary management and benefit design are managed in house by insurers rather than through PBMs.

Across the remaining 3 functions—rebate negotiation, retail network management and claims adjudication—the report found little difference in market shares. The 4 largest PBMs collectively have a 66% share of the national PBM commercial market, according to the report. Furthermore, 10 PBMs control 97% of the market share.

The largest PBM in the commercial drug coverage market is Express Scripts with a 22% share, followed by OptumRx with 17% and Prime Therapeutics with a 15% share. The data used reported on CVS/Caremark and Aetna separately, but their merger was approved at the end of 2019. When they are combined, CVS has a market share of 17%.

In addition, the report highlights “a significant degree of vertical integration between health insurers and PBMs.” The 8 largest insurers have a collective national market share of 61% and are affiliated with the 8 biggest PBMs.

Looking at PBM market concentration at the local level, the results show that 78% of state-level markets and 85% of metropolitan statistical areas–level markets are considered highly concentrated for rebate negotiation. Results were similar for the retail network management and claims adjudication markets.

While there is a large extent of vertical integration at the national level, the same is not necessarily true at the local level, according to the report. “In fact, most health insurers don't have a national presence and instead operate at the local level as they are typically licensed to operate in a single state,” the report explains.

While 69% of drug lives are covered by a vertically integrated insurer on the national level, there is wide variation at the local level. On average, 63% of state-level lives are vertically integrated, but this varies from South Dakota with only 6% of lives and North Carolina with 97% of lives vertically integrated.

“The novel data presented by the AMA analysis is intended to help regulators, lawmakers, researchers, and policy makers better evaluate merger proposals in the future that may harm patients by raising prices, lowering quality, reducing choice and stifling innovation,” Resneck said.