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U.S. Department of Health and Human Services

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2.4 The Influence of Pharmacy Benefit Management Companies (PBMs) and Health Maintenance Organizations (HMOs) on Prescription Drug Prices

Prescription Drug Marketing Act Report to Congress (2001): Back to Table of Contents 

Previous Section: 2.3 Retailers

Department of Health and Human Services conducted a major study, published in April 2000, assessing prescription drug pricing (DHHS, 2000). This section summarizes one set of findings of the study's profile of price setting.

Most drug purchasers, almost regardless of their health care coverage or insurance plan, eventually receive their prescription products at a pharmacy. Table 2-2 describes how the groups discussed above, including PBMs and HMOs, influence the prices set. The table provides an illustrative hypothetical example of how prices are set under different schemes for a brand name prescription product using a relatively simple set of wholesale transactions.


Table 2-2
An Illustrative Example of Pricing for a Brand Name Prescription Drug
Data Element Cash Customers (No 3rd Party Payment at Point of Sale) Insurers and PBMs HMOs [a] Medicaid Federal Supply Schedule
List Price (AWP) $50   $50 $50 $50 $50
Manufacturer's price (Manufacturer to wholesaler other entity) $40
(AWP - 20%) .
$40 [b]
(AWP - 20%)
(AWP - 33%)
$40 [b]   $24
(AWP - 52%)
Acquisition price (Wholesaler to pharmacy) $41   $41 NA $41    NA
Retail price at pharmacy (Total of amounts paid by customer and reimbursed by 3rd party payer) $52
(AWP + 4%)
$46 [b]
(AWP - 13% + $2.50)
NA $43.50
($41 + $2.50)
Retail price, less typical manufacturer rebate NA $30 to $44 (5% to 35% rebate) NA $30 to $37 (15.1% to 30% rebate) NA
Ultimate (net) amount paid by final purchaser and/or consumer $52 $30 to $44 $30 to $37 $30 to $37 $24
Source: DHHS, 2000
"NA" = Not applicable
[a] The column refers only to those HMOs that buy directly from manufacturers.
[b] Without rebates
[1] Prices are based on a composite of several commonly prescribed brand-name drugs for a typical quantity of pills. For some cells in the table, the relative relationships have been calculated based on relationships reported in the literature and on other relationships widely reported by industry sources. 
[2] The prices are used for illustrative purposes only and do not represent and type of overall average.
[3] Prices reported in the table include both amounts paid by third-party payers and amounts paid by the consumer as cost sharing.

The table shows that the first transaction, that from manufacturer to wholesaler, occurs at a discount from the average wholesale price (AWP). The AWP serves as a list price for drugs, but most sales occur well below this list price. DHHS reports that average sales occur at a 20 percent discount from AWP as indicated by various industry sources. In the illustration provided in Table 2-2, the HMO has bought the drug directly from the manufacturer and negotiated a steeper discount than that received by insurers or PBMs. This deeper discount would be representative of some of the largest HMOs such as Kaiser Permanente that are running their own pharmacies. Other HMOs use PBMs to manage their clients' drug purchases.


The wholesaler's markup to the manufacturer's price is modest, generally at 2 to 4 percent. In this case, the wholesaler's markup is shown to increase prices from $40 to $41 dollars, where it is applicable.


Next, the price is marked up by the pharmacy by a percentage amount and, in some cases, by a fixed charge for the dispensing function. The study indicates that the pharmacy will commonly add 20 to 25 percent to the drug cost, or in this case $11 on a $41 drug, for a total $52 purchase for a cash customer. Where insurers or PBMs are involved, they will negotiate discounts from pharmacists (as well as from drug manufacturers), thereby lowering the price paid by consumers and/or insurers. The DHHS authors note that little is known about the average extent of such discounts offered by pharmacies though a $5 markup on the $41 drug is assumed in their example.


Insurers and PBMs generally negotiate manufacturer rebates on their drug purchases. DHHS estimates the possible range of such rebates as 5 to 35 percent, reducing the $46 drug cost to $30 to $44. PBMs that use restricted formularies are best able to negotiate rebates with manufacturers.


Federal programs pay for drugs according to the Federal Supply Schedule. As a very large purchaser of drugs, the Federal government can negotiate steep discounts from retail prices.

Prescription Drug Marketing Act Report to Congress (2001): Back to Table of Contents 

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