When trying to control employee benefit costs, employers typically look at specific plan designs. However, another opportunity for controlling costs is to look at the prescription drug benefits you're offering your employees through a pharmacy benefit manager, or PBM.
Many employers, and even many insurance professionals who are new to the benefits market, don't understand the often jargon-filled and confusing terms and pricing arrangements created by PBMs, which might allow the PBM to manipulate the value proposition and maximize their own profits.
The more you know about PBMs, the more you can help your clients maximize the value they get from PBM relationships.
A PBM manages an insurer's, or self-insured plan's, relationships with retail pharmacies and drug manufacturers. A good PBM can provide cost savings and value-added benefits for your group health clients.
There are generally two pricing models PBMs use with plan employers to deliver prescription benefits to employees: The traditional pricing model and the pass-through pricing model.
The traditional pricing model
In a traditional pricing model between a PBM and a plan sponsor or employer, the PBM charges its client an agreed-upon price for prescription drugs, along with a rebate that's paid on a per drug brand basis. All administrative fees are waived. The agreed-upon price may be different from what the PBM pays the pharmacy for prescription drugs. This is called the spread. Rebates offered are also often quoted with terms that allow the PBM to keep specific types of rebates (like specialty drugs) or any excess beyond the promised rebates. These two margins, along with profits from mail and specialty pharmacies, are how PBMs make money.
As a client of the PBM, employers typically don't have a window into details of this pricing structure and they can't tell how much profit the PBM is making off transactions or what rebates are actually available.
For generics, a PBM will set prices based on a maximum allowable cost, or MAC, list, and then use this to manage the pricing and agreed-upon discounts. Each PBM uses different criteria to decide which generic drugs they include on a MAC list and the way they calculate the maximum allowable price. PBMs then use different versions of a MAC list for different parties—the MAC paid to the retail pharmacy is typically lower than the MAC charged to the client, allowing another opportunity for spread.
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The pass-through pricing model
In the pass-through model, the PBM charges the employer or plan sponsor the same price for the medication that they pay the pharmacy (thus passing through the cost), plus an administrative fee charged on a per prescription or per member metric. This fee enables the PBM to profit from the service. The actual point of sale discount that a PBM may receive from the pharmacy is disclosed and reflected in the price a plan sponsor pays. Additionally, 100 percent of the rebates offered on specific drugs are passed along to the plan sponsor so long as the contract language defines the details in favor of the client.
