Pharmacy Benefit Managers

Publication Date: November 2000

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

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Abstract:

The provision of prescription drug coverage to Medicare beneficiaries was a major issue in the 106th Congress, and is likely to continue to be a major issue in the 107th Congress. Much attention is being focused on this issue because of reports about the financial burden that prescription drug prices place on the elderly. Several legislative proposals introduced in the 106th Congress, which may be reintroduced in the 107th Congress, seek to create a prescription drug benefit for the Medicare population that is managed by private entities, including pharmacy benefit managers (PBMs).

All of the major bills introduced in the 106th Congress that would provide a prescription drug benefit for seniors would use private entities (including PBMs) to manage the benefit. Under S. 2342 (the President's bill), S. 2541 (the "MEND" bill), and S. 2758 (the "MOD" bill), the federal government would provide prescription drug coverage to Medicare beneficiaries, but the benefit would be managed by private entities, such as PBMs. H.R. 4680 and S. 2807 (the "Breaux-Frist" bill) would allow private entities contracted by the federal government (likely insurers, or other riskbearing companies) to provide coverage; these private entities could use PBMs to manage the benefit.

A PBM manages a prescription drug benefit on behalf of the benefit sponsor, which may be a health plan, a health maintenance organization, or an employer. To control costs, PBMs help determine which drugs are used and negotiate prices for those drugs. PBMs control costs by employing mechanisms such as formularies, prior authorization, tiered co-payments, therapeutic substitution, generic substitution, mail order pharmacy services, disease state management, and drug utilization review. Additionally, PBMs negotiate rebates with manufacturers and discounts with retail pharmacies.

This report examines various options that are available to policymakers as they consider whether to make use of PBMs to deliver a prescription drug benefit to seniors under Medicare. With respect to a PBM benefit, the central (though not the only) issue is implementation of cost-control mechanisms. Various techniques are used in the private sector to control costs. As with private sector providers of benefits, policymakers face an array of options that will determine the extent to which the prescription drug benefit is restrictive. This report describes the operation of the PBM industry, its techniques for serving its benefit sponsors and clients, and various issues that are raised by the prospect of employing PBMs under Medicare. This report will be updated as necessary.