Facing criticism, PBMs may be downplaying profit margins

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Pharmacy benefits management companies may have larger profit margins than it seems. Image: Getty/BeeBright

As the spotlight intensifies on the issue of high drug prices, pharmacy benefit management companies (PBMs) may be trying to deflect criticism by downplaying their profit margins.

CVS, Express Scripts and OptumRx had operating-profit margins last year of 4-7%, which are significantly below the 16% average among S&P 500 companies, Bloomberg reported. That’s because they may be booking revenue in a way that shows lower margins.

At issue is the PBMs’ reporting of “pass-through revenue,” or transactions in which the companies processed payments but didn’t handle products. If that is stripped out, Express Scripts’ operating margin more than doubles to 15% in 2016 and CVS’ to 10%, the article noted, citing a recent Morgan Stanley report.

That report said pass-through revenues “cloud the true economics of the PBM business.” It did not speculate as to why.

The article noted that the companies’ practices comply with generally accepted accounting principles, and regulators haven’t taken issue with it. But Ravi Mehrotra, a partner at the MTS Health Partners investment bank, shared one take with Bloomberg: “It hides a lot. It’s as simple as that,” he said.

PBMs have received considerable scrutiny as healthcare industry stakeholders and policymakers debate how to curb rising drug costs. For example, some pharmaceutical industry executives have argued that the rebates PBMs receive from negotiations with drugmakers can lead manufacturers to increase prices.

In addition, Anthem and Express Scripts are locked in a court battle over whether the PBM withheld prescription drug savings from the insurer.