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Are PBMs Downplaying Their Profits?

Unstandardized accounting methods can lead to differing profit margins for PBMs.
Published Online: Apr 05,2017
Laurie Toich, Assistant Editor
A majority of companies across industries try to present their financial dealings in the best light to increase investors, while remaining ethical. Critics of pharmacy benefit managers (PBMs) have begun suggesting that the companies use an accounting method that narrows its profit margins.
 
The 3 largest PBMs only had an operating-profit margin of 4% to 7%, which is 16% below average among S&P 500 companies, according to an article in Bloomberg. Had the PBMs calculated their revenue in the same way other companies do, their margins would dramatically increase, the article alleged.
 
While this tactic may not attract new investors, it can, however, reduce criticism related to the companies’ practices.
 
“It hides a lot. It’s as simple as that,” Ravi Mehrotra, a partner at the MTS Health Partners investment bank, told Bloomberg.
 
High margins can be a double-edged sword – on one hand, higher profits are desirable, but very high margins are likely unsustainable.
 
The accounting methods used by big PBMs are in line with accepted practices, and regulators have not investigated the ways they present their revenue, costs, and profits, according to the article. In essence, PBMs are not being deceitful to the public, and their methods are justifiable.
 
PBMs have said that their accounting reflects the nature of their business, since they manage the process of getting prescription drugs to customers, increase their credit risk, and negotiate costs.
 
“We believe gross accounting is appropriate as we are the principal in these transactions,” CVS spokeswoman Christine Cramer told Bloomberg via email.
 
A driving factor behind using these accounting methods could be the call for increased transparency by lawmakers, including President Donald Trump. Both pharmaceutical manufacturers and PBMs have accused each other of causing drug price increases.
 
PBMs have been criticized recently over recent issues regarding direct and indirect remuneration fees that pharmacies allege threaten their viability, but PBMs say this is just the cost of doing business.
 
Manufacturers and pharmacists have also alleged that PBMs are not transparent, which makes it difficult to detect their profitability, according to the article.
 
Since PBMs are a unique operation, it is difficult to determine whether they should calculate their profits similarly to a commerce-based or retail-based institution, according to Bloomberg. For example, a travel site may only have to report profits from fees, while other retailers have to account for the full value of the goods they sell.
 
In general, PBMs claim the entire value of the drug transaction as revenue since they are taking ownership of the prescriptions prior to dispensing, according to the article. However, some revenue is generated when PBMs handle transactions rather than the product itself (pass-through revenue), Bloomberg noted.
 
When the pass-through revenue is deleted from the picture, large PBMs’ operating margins more than double, which makes PBMs the most profitable player in the healthcare supply chain in 2015, according to a Morgan Stanley report presented in the article.
 
Since accounting methods for PBMs are not regulated, nor standardized, the companies must use their best judgement to determine their profitability, while critics of PBMs will likely continue to question their motives behind their accounting tactics, the article concluded.