How IT Enables Pharmacy Benefit Managers to Keep Drug Prices High

Does healthcare IT really improve medical care?

Today we present the first in a series of articles that will explore how information technology (IT) is one of the most egregious enablers of the high cost of medical care in the United States. This series is inspired by a recent hospitalization of this author in Spain, after which the bill showed that medical care costs there can be less than 10 percent of those in the U.S. All of the services in Spain were about the same, except one – in Spain there is considerably less reliance on information technology.

This led to the hypothesis that IT may be a driver of high costs of medical care. To examine this idea, today we will look at the pharmacy benefit management (PBM) industry. PBMs are third-party administrators (TPAs) of prescription drug programs for various health plans, including Medicare Part D. They are giant, information-processing super-structures tying together pharmacies, drug manufacturers, self-insured companies, mail order houses, and government programs. In the Internet lingo of “e-commerce,” the PBM “disintermediates” the relationship between these different parties. The term “disintermediation” is a fancy way of saying “get in the middle of.”

Approximately 226 million Americans have their prescriptions processed through a PBM. Of those, 180 million enrollees are managed by three major PBMs: Express Scripts, CVS Health, and OptumRx. Although the advertised purpose of the PBM is to negotiate lower drug costs, a 2013 study by the Centers for Medicare & Medicaid Services (CMS) found these negotiated prices to be up to 83 percent higher than prices at community pharmacies.

Insulin might be one of many examples. In 1997, Eli Lilly’s Humalog was $21.84, but in 2017 it was $274.70, a rise of 1,157 percent in price.

What is going on? Below are four examples of how some PBMs use IT to reduce transparency in drug pricing. These are generic examples, given without reference to any specific PBM organization.

The value proposition of the PBM is to charge a flat administrative fee in exchange for managing a simple administrative process linking a health plan with your pharmacy. PBMs have gained control over the formularies of their client health plans. A formulary is a list of prescription drugs covered by a prescription drug plan or insurance plan offering prescription drug benefits. If a drug is not listed in the “formulary,” it is not covered by the insurance plan.

As PBMs gained control over the formularies, their power over drug manufacturers and pharmacies greatly increased. Then they asked themselves: how can this leverage be used?

Use of Spreads

One technique is the use of spreads. The patient submits a prescription. The PBM pays the pharmacy $10, but then invoices $90 back to insurance company, plus a $2 administrative fee, and makes a profit of $82. The information system allows the PBM to represent to the insurance company that the pharmacy was paid $90, not $10. It is not clear why this is legal, but it appears to be.

Repackaging and Repricing

The PBM sets up a mail-order pharmacy. The patient is encouraged to use this channel. The health plan is offered reduction or elimination of the $2 administrative fee. The patient is told their co-pay will be reduced or eliminated. The PBM then re-packages the drug, and when it does so, it can set a new price without informing the health plan. Example: a Lipitor prescription might be priced at $460 minus a 15 percent “discount,” plus the $2 administrative fee, leaving a cost of $393 to the health plan. When repackaged by the PBM, the price might be $700, minus a 20 percent discount, plus no administrative fee, leaving a cost of $560 to the health plan. So the mail-order plan costs the health plan $167 more than if the patient gets it through a local pharmacy.(*)


If a drug manufacturer’s product is being threatened by a low-cost generic, it may offer a $60 rebate to the PBM. In exchange, the PBM will exclude the generic from the formulary, then pay $10 of the rebate to the health plan. The PBM will pay the pharmacy the $150 for the brand-name drug, and then send an invoice to the health provider for $140 (giving credit for $10 of the rebate received from the manufacturer). The PBM keeps $50 of the rebate. So the health plan pays out the “discounted” rate of $140 instead of the $20 for a generic drug.

Mail-Order “Mistakes”

Even after drugs are no longer needed, the PBM keeps shipping them out. These “mistakes” lead to gigantic waste.

The result of this, and other IT disintermediation, leads to absurdities such as one neighbor finding out that they are paying 2,000 percent more for the same drug than their neighbor. Such is drug pricing in the United States.

In all of these complicated pricing strategies of the PBM, the common pattern is that cost eventually is shifted to the insurance provider, and thus to society and the individual.

The role of cyber in drug pricing is one of an enabler. It makes pricing non-transparent. Because there are so many transactions involving thousands of products, it is impossible to know what is going on with any specific drug. Cyber obscures what is happening. There is no notification system showing the true price of a drug through the distribution chain – all that is seen is the end result. For example, the insurance provider is not notified when a drug rebate is being given to the PBM. The various disintermediated parties – healthcare providers, patients, pharmacies, doctors – have zero view into the process. Each party sees only what it is enabled to see.

The way in which the information system is programmed to reap these profits for the PBM is treated as a confidential trade secret. It is not illegal.

So the role of IT in the PBM industry is an example of how technology that is meant to reduce costs and provide incredible efficiency has morphed into a tool for drastically inflating the price of healthcare in the United States.

Coming Articles

In the next article, we will continue our examination of the “informatization” of the healthcare industry in the United States. We will explore examples of high efficiency, but also look for evidence of waste and out-of-control costs. We also will look for fraud, security issues, and hidden costs about which few are aware.

In the next article, we will also begin to examine how the Medicare system has turned into an computerized juggernaut that is a high-cost provider, and impossible to reform.

See you then.


Note: (*) – These examples are from RxPreferred Benefits data.



Edward M. Roche, PhD, JD

Edward Roche is the director of scientific intelligence for Barraclough NY, LLC. Mr. Roche is also a member of the California Bar. Prior to his career in health law, he served as the chief research officer of the Gartner Group, a leading ICT advisory firm. He was chief scientist of the Concours Group, both leading IT consulting and research organizations. Mr. Roche is a member of the RACmonitor editorial board as an investigative reporter and is a popular panelist on Monitor Mondays.

Related Stories

Leave a Reply

Your Name(Required)
Your Email(Required)

Featured Webcasts

Implantable Medical Device Credit Reporting for 2023 – What You Need to Know

Learn how to save your facility hundreds of thousands of dollars in repayments and fines by correctly following CMS requirements for implantable medical device credit reporting. We provide you with all the need-to-know protocols, along with the steps for correct compliance while offering best practices to implement a viable strategy in your facility.

January 25, 2023

Trending News