PBMs Play an Incredibly Important Role in The Drug Supply Chain. How Important? Over $145 Billion Worth Every Year

Recently, University of Chicago Economics Professor Casey Mulligan released a paper on the National Bureau of Economic Research about the value that PBM services create for society, The Value of Pharmacy Benefit Management. For those who like econometrics, I suggest you jump over there, as it’s a very worthwhile read. If you prefer a summary, I’ll hit the high points for you. From here on, I will refer to this paper as “the value paper.” 

Let’s start with the topline: PBMs create $145 billion in value to society annually. There are two things that I like very much about this finding (besides the obvious), which stretches this work beyond much of the research I put out here at PCMA. First is Dr. Mulligan’s conception of value to “society” as going beyond just the typical payer-PBM-patient triangle. In the value paper, he expands the sphere of influence of PBM services to other actors, including drug manufacturers, pharmacies, and governments, in addition to payers of all stripes, and of course patients.

PBMs create $145 billion in value to society annually.

Second, the way he conceptualizes value goes beyond simple dollar calculations of PBM savings for patients and payers. PBMs do far more than just negotiate rebates for customers. PBMs also improve patient health outcomes, creating medical benefit savings ($40 billion in annual savings), encourage generic drug use ($16 billion), accelerate the pace of new drug development ($6 billion), create pharmacy networks ($5 billion), decrease tax distortions (I had to look this one up, it means reduce the amount of money the government spends on health insurance subsidies; $47 billion). Let me note here that this isn’t a complete list of the PBM value services that Dr. Mulligan examines in his paper, just a few I find particularly noteworthy.    

In the paper, Dr. Mulligan introduces a new economic model, and I see so many possibilities deriving it, but I’m going to limit myself to sharing two of them here: savings and return on investment (ROI) – both calculated with Dr. Mulligan’s blessing. As I said above, the primary calculations in the paper are based on value, not on dollars and cents savings. But that doesn’t mean that we can’t calculate a dollar savings number from the model. Using the model, we can calculate dollar savings from three places: PBM-negotiated rebates ($99 billion in dollar savings) and discounts ($9 billion) and lower expenditures on other health care services from increased drug utilization ($40 billion). Together from just these three sources, PBMs generate $148 billion in savings for the health care system annually (at least – this is a floor, not a ceiling). And don’t confuse this $148 billion in savings with the $145 billion in value, they are different numbers that are coincidentally similar. 

One of my favorite calculations to show the value of PBMs has been the return on investment (ROI), which we calculate as 10:1. In other words, for every one dollar health plan sponsors spend on PBMs, PBMs generate $10 in savings. Specifically, this is a savings ROI that PBMs produce for their health plan payer customers. But we can derive a similar value-to-society-based ROI from the value paper model. The math looks like this:

Check out the math. . .

For simplicity, we’re going to round that down to a more conservative 7:1 ROI

So as derived from the original model: For every $22 billion of resources used by PBMs, they return (a rounded) $168 billion to the system, a 7:1 return on investment for the health care system.

PBMs are important players in the prescription drug payment and supply chain, and they touch many other actors in the chain. Far more than just $148 billion in dollar savings is the support that PBMs provide to patients, payers, drug manufacturers, pharmacies, and the government. That may sound like hyperbole, but I don’t think that it is: $145 billion in value to society, a 7:1 ROI, those numbers speak pretty loudly.