We hear the term Pharmacy Benefit Managers (PBM) from time to time and read on occasions about some of their activities. But I wonder how many folks really know what PBMs are and what they actively do. My guess is that most folks don’t have a clue. For the uninformed, PBMs administer almost every prescription drug insurance plan in the U.S. The first PBMs were created in the 1980s, and in recent years, they have taken on great importance.

The three largest PBMs managed drug benefits for over 200 million Americans, representing 95% of folks in this country with prescription drug coverage. Up until recently, the PBM industry was dominated by there three large companies, Medco, Caremark and Express Scripts. Together they administered 80% of insured prescriptions and 90% of insured mail order prescriptions. Each of these companies had annual revenues of over $15 billion. But now because of a recent transaction, there are two main players. Express Scripts bought Medco Health Solutions in December of last year for $29.1 billion, further increasing the power and influence of PBMs.

The PBMs are now working hard to increase their size and negotiating power. The PBMs process prescriptions for the groups that pay for drugs, usually insurance companies or corporations, and use their size to negotiate with drug makers and pharmacies. This latest deal continues the consolidation trend. It also illustrates how the industry is becoming more than just an administrator and negotiator. For example, it should be noted that the PBMs operate extensive mail-order pharmacies. That has the potential to drive out local competition and that’s very dangerous for persons buying prescription drugs. Once they control the market, the cost of those prescription drugs will go up sharply and consumers will again be the loser.

There is another area of abuse concerning the PBMs. They increase their profits by retaining payments from drug companies to promote their drugs. The PBMs are allowed under the existing law to accept rebates from the drug companies and that has been a tremendous money-maker for them. The goal of the drug companies is to increase sales of their most profitable products, which plays into the heads of the PBMs. This allows the PBMs to rake in tremendous profits through this rebate system. It’s most significant that the PBMs don’t pass these huge profits on to the insurance plans or to consumers. The bottom line is that the rebate system has developed into a great thing for the drug companies as well as for the PBMs. It also has a huge potential for abuse. Congress must take a serious look at how the PBMs operate and then take the actions necessary to protect the American people.