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Drug Cost Control Game: Cooperation and competition between PBM and Insurance CompaniesPBM means Pharmacy Benefit management. Born in the 1960s in the United States, PBM is the third-party Manager of prescription drug projects. According to the American Pharmacists Association, PBMs are primarily responsible for developing and improving prescription services, signing cooperative agreements with pharmacies, negotiating discounts with drug manufacturers, and processing and paying claims for prescription drugs.Since its establishment, PBM has played a great role in managing drug benefits and controlling medical costs. As of 2016, the PBMs were responsible for the drug benefits of 266 million Americans. In 2017, the largest PBMs generated more revenue than the largest drugmakers, indicating their growing role in the US healthcare sector, and as a result, more PBMs are appearing in the US market. But along the way, the number of PBMs dwindled to the point where Express Scripts, CVS Health, and OptumRx, a unit of UnitedHealth Group, now account for more than 70% of the market.In addition, PBMs, which began as independent third parties, now operate within integrated health care systems like Kaiser Permanente or the Veterans Health Administration, or as part of retail pharmacies, Like CVS Pharmacy or Rite-Aid, or part of an insurance company like UnitedHealth Group.If PBM is so useful, why hasn't it blossomed in today's expensive prescription drug market in the United States? Why in the process of continuous development, PBM gradually lost its independent status, attached to the health care system or the insurance agency? In today's market, what is the relationship between PBM and medical and insurance institutions, and what is the game between them?Third-party administrators of prescription drug plans:Claims of transparency are still controversialAmerican health insurers hire outside companies to handle price negotiations, insurance claims, and prescription drug distribution when they launch commercial health plans, out-of-pocket insurance employer plans, Medicare, the Federal Employee Health Benefit Plan, and the State Employee Plan. The companies that are hired are what we call PBMs, and their purpose is to help set the list of drugs or prescriptions covered by insurance companies, pool purchasing power, and help insurers get lower prescription drug prices. PBMs are primarily responsible for negotiating price discounts with retail pharmacies, and for negotiating with mail-service pharmacies on how to get prescriptions to their patient audiences, bypassing pharmacists.PBM's core competency is to build and maintain a network of pharmacies. The network is made up of pharmacies that have agreements with PBMs to supply prescription drugs to health plan providers that work with PBMs. The network of pharmacies managed by a PBM varies depending on the size of the PBM and the impact of related interests, including preferred pharmacy networks and limited distribution networks operated by pharmaceutical manufacturers.Preferred pharmacies in the network offer competitive drugs and promote the promotion and use of the drugs by giving higher discounts to PMB parties in exchange for preferential referrals. Limited distribution networks (LDNs) limit the distribution channels of drugs to one or a small number of distributors, so as to distribute drugs in short supply more effectively and to safely distribute high-risk drugs to fewer patient populations. In recent years, some drug companies have used LDNs to prevent generic and biofilm companies from getting the samples they need to avoid cutthroat competition.There are several ways to generate revenue for PBM:1. Collecting management or service fees through a contract with an individual health plan;2. Through participation in government programs, especially Medicare D and Medicaid: in 2016, PBM managed 74% of the Medicare D portion of the drug benefit; In 2017, PBM administered prescription drugs for 38 million Medicaid recipients;3. The rebate provided by the pharmaceutical manufacturer;4. Direct or indirect fees (DIR) paid by the pharmacy for joining the preferred network.The most controversial revenue generation for PBM is drug maker rebates. Although some data suggest that PBM has diverted most of the rebates to insurers, PBM has always been criticized for its transparency and rebate model. For one thing, PBM does not disclose the prices it negotiates with drugmakers, so the market is sceptical of this proportion, even though it claims to give the bulk of the rebates (more than 90 per cent) to insurers. Critics, on the other hand, argue that PBM's high rebate model may drive up drug prices because insurers want higher rebates, and that pressure is passed on to drugmakers, which then become a source of higher drug prices. Another concern is that because the percentage of rebates PBM transfers to insurers has been increasing, PBM may collect fees from drug makers under other names that aren't included in the rebates, so they don't pass them on to insurers, but instead pocket them.Until now, PBM has seen some new revenue streams. For example, a growing number of PBMs have specialty pharmacies that can distribute specialty drugs. Under the pretext of health management and prescription supervision, PBM will require members to fill prescriptions at professional pharmacies to promote the sale of special medicines and thus generate revenue.The PBM market dominated by three giantsThe number of PBMs has increased since they were born, according to some data, because of their role in controlling medical costs. In the years after 2000, the PBMs market was fiercely competitive. In 2013, there were about 60 PBMs managing prescription drug spending. By 2016, that number had dropped to fewer than 30. By 2018, the PBM market was dominated by Express Scripts, CVS Health, and OptumRx, with 76% of the market, according to the Drug Channels Institute.There are two main reasons why the number of PBM increases and then decreases: the role of PBM in medical cost control attracts more competitors and then fierce competition leads to M&A transactions. Insurers facing rising prescription drug prices have relied heavily on PBMs to negotiate discounts, since they slashed drug costs in their early days.In the later stages of development, the stock price and even business growth of PBM institutions are largely influenced by the size and membership of the insurance companies that sign up. Driven by this interest, the PBM market has seen M&A deals. Through mergers and acquisitions, PBM rapidly expands its scale, gathers a large number of customers in the insurance end, and brings greater sales volume and profits to the drug end. In the drug end, PBM is able to get through a wider network of drugstores and drug manufacturers at the fastest speed, so as to provide the most complete drug supply and the lowest discount for the insurance end.In addition to PBMs, pharmacies and insurance providers are also merging with PBMs. On the pharmacy side, such mergers often occur due to the synergies between pharmacies and PBMs. Express Scripts, for example, acquired Medco Health Solutions in April 2012 for $29.1 billion; Rite Aid, the largest drugstore chain in the United States, acquired the small PBM EnvisionRx in 2015. In addition, it is also common for insurance providers and related healthcare organizations to acquire PBMs, such as the three PBM giants mentioned above.Loss of independence: whether the merger of PBM and insurance companies is a game or a win-win situationBased in Missouri, Express Scripts was the largest U.S. PBM organization by revenue in 2017, working with major organizations including the U.S. Department of Defense (TRICARE), AHTHMN (no longer partnered), and Wal-Mart. On March 7, 2018, Cigna announced that it would acquire Express Scripts for $67 billion. The transaction closed on December 20, 2018, making Express Scripts a part of Cigna.CVS Health, based in Rhode Island, is a healthcare company that owns the CVS drugstore chain, CVS Caremark and Health insurance provider Aetna. Although CVS Health and Express Scripts took different paths, they ended up on the same path, merging PBM with an insurance company. OptumRx was born from UnitedHealth, a managed care organization, and its development is bound to be closely related to UnitedHealth.PBM was born as an independent third party organization, but why did it lose its independence in the process of development? The main reasons are the embarrassing situation and cost of PBM.In terms of cost factors, the general model is that PBM negotiates discounts with pharmaceutical manufacturers and benefits insurance institutions. However, in this process, PBM will sign confidential rebate agreements with pharmaceutical manufacturers, which has aroused widespread controversy because of its opacity. In late 2019, Anthem ended its contract with Express Scripts, alleging that Express Scripts had overcharged $1.3 billion for prescription drugs and overcharged for its services. At this point, each large insurance institutions are trying to consolidate and buy their own PBM. The advantage of this is that the insurance company can know the rebate amount negotiated between PBM and the drug terminal to the greatest extent, so as to transfer all these rebates to the insurance company and the customer, truly realizing zero price difference. In addition, insurers would no longer have to pay PBMs for their services and would get access to a large amount of information about prescription drugs from PBMs.From the perspective of market environment, PBM is increasingly dependent on insurance institutions to survive in the process of gradual development. PBM is first responsible for centralizing drug dealers and drugstores to build a network. As the drug end of the seller, it is naturally willing to join in to obtain more sales possibilities. But it is important to note that these drug sales ultimately need to be channeled through insurance agencies to patients. So the insurance agency decides whether PBM lives or dies, so to speak. Without insurance customers, the PBM model would be hard to operate, which would also affect the retention of the drug side, which would be a double blow to PBM. This is also evident in the case between Express Scripts and Anthem, where Anthem is in the driving seat as the buyer, and Express Scripts is in a more passive position and has little to do with the loss of a big customer. After the PBM cooperates with the insurance company, the customers of the insurance company become the long-term customer source of PBM, so PBM does not need to worry about the survival problem.It can be seen from this that the merger of PBM and insurance companies more represents the interests of insurance companies. Insurers can co-operate with whatever PBM they choose, or they can build an internal PBM. For PBM, the merger is more of a last resort for survival. In essence, a PBM is a weak provider of services. Without the technology of a drug maker, the customer base and the financial resources of an insurance company, it cannot get angry or make a fortune on its own. It can only seek the protection of an insurance company or a pharmacy.