BOOM: Congress Imposes Public Utility Rules on UnitedHealth, CVS, and Cigna

Last August, the storied century old pharmacy chain store Walgreens admitted it was in trouble. After years of shutting stores and firing employees, it finally sold itself to private equity firm Sycamore Partners for a fraction of what it had been worth just a few years earlier. The PE giant has continued the blood letting.

The reason was not some sort of internet-disruption, since it’s a regulated business with clear competitive barriers. And it wasn’t bad management, as independent pharmacies have been on the same trajectory of worsening profits and closures. It was that Walgreens, like most pharmacies, was on the wrong side of a set of monopolists known as pharmacy benefit managers, or PBMs.

PBMs are a bogeyman in modern American medicine, blamed for everything from driving up drug prices to denying people vital medicine to destroying access to pharmacies. They are a bad joke among doctors, running a process called ‘prior authorization’ to prevent physicians from giving people the care they need.

And yesterday, Congress finally decided to act. For real.

To understand what Congress did, we have to start with the business of prescribing and dispensing drugs. Managing this area is a complex endeavor. There are lots of drugs that do different things, each is made by someone with various dosages and prices. There are hundreds of thousands of doctors and more than ten thousand pharmacies that handle prescriptions.

A PBM sells the service of connecting all of these elements together. They are middlemen who organize how insurance companies handle drug spending. They negotiate which drugs insurers make available and their prices. They also assemble networks of pharmacies that customers of insurance companies can use, as well as managing reimbursements to those pharmacies. In other words, PBMs are payment networks that match pharmacies and insurers, while also handling negotiations among the different parties.

There’s nothing intrinsically wrong with a payment network, but PBMs are much much more profitable than networks running commodities should be. And the reason is that they have become monopolies with the ability to divert revenue that is supposed to travel over their networks to themselves. First let’s take the monopolization - it’s a heavily consolidated space after a spate of acquisitions in the 2000s and 2010s. Three PBMs - Caremark, OptumRx, and Express Scripts - control 80% of the market. It’s a vertically integrated industry; the big three are owned by the ...