Pharmacy Benefit Manager (PBM): Basics and Three Ways to Save Money on Pharma

Buying in a group allows for discounts, everyone knows this.  This is what has caused the creation of the large networks, such as Blue Cross, United Healthcare, and the others, allowing the negotiation of heavy discounts with providers in behalf of patients.  Nevertheless, buying drugs from the local drugstore operates along the same principles: if everyone on a plan buys as a group, employers can get superior discounts.  The same is true for prescription drugs, which led to the creation of networks for buying pharmaceuticals known as Pharmacy Benefit Managers (PBMs).

The PBM is more behind the scenes for most employees; they don’t have a logo on the cards or on most of the materials.  The large carriers use the PBM to handle the pharmacy benefit in their “back offices” behind the scenes as well.  Nevertheless, these companies are huge and drive a large part of your medical spend through the tools and discounts they employ in behalf of your plan whenever a member buys a prescription drug.  The remainder of this post will explain a little more about the basics of the PBM, how it works, and three ways you can use this information to save money.

The best way to illustrate how a PBM works is with the example of a person buying a drug from a retail drug store, such as Walgreens, that would be valued off the shelf at $100 to someone off the street.  Let us imagine that Walgreens bought the drug from the manufacturer for $50, to earn $50 profit if sold at full price.  Let us now imagine that a member of a large health plan that is self-funded through his/her employer goes to buy the drug.  The employer uses a health network for regular claims (such as Blue Cross), but works with a large pharmacy benefit manager (such as Caremark), behind the scenes to negotiate drug discounts on the members’ behalf.  The PBM has negotiated with the drug store to accept payment of $70 for the drug.  The PBM then bills the plan $80, creating for itself a spread of $10.

From here, it gets a little more complicated.  First, the PBM pays a negotiated fee to the administrator for administering the claim.  Second, the PBM pays a percentage of the spread to the administrator as well.  Third, the PBM pays a fee to the health broker off of the claim as well.  Additionally, the manufacturer of the drug, from whom the drug store bought the drug, offers a rebate on the drug.  This rebate is paid to the PBM directly, and then the PBM shares the rebate with the employer and potentially the other parties as well.

As you can see, this can be very confusing.  It’s not necessarily good or bad, but it is extremely difficult to tell where all the money goes and to whom.  This confusion creates opportunity for both PBMs and employers.  The PBM has big opportunity in the smoke and mirrors to engineer tremendous economics and compete against each other.  The employer has huge opportunity in three areas:

(1) Negotiate Harder: There are so many dollars passing around behind the scenes that you should be able to get more dollars returned in per-scrip fees or a larger percentage of the rebate.  Push hard on the PBM and make them compete heavily against each other.

(2) Audit the PBM: There are vendors who audit the PBM payments and the discounts that are being stated.  Using an auditor to keep the PBM diligent in delivering everything it has committed to can generally pay a strong ROI.

(3) Go Transparent: Some PBMs have the ability to do a “transparent model” that allows you to pay a flat fee to them each month, and then pay the wholesale rate, keep all rebates, avoid a spread, and avoid additional hidden fees.  Sometimes the discounts paid to the pharmacy are a little more than the PBM would have to pay if there were a spread, but the employer is able to see everything that is going on and keep all the additional fees, rebates and the like.  Furthermore, specialty drugs, which are growing in cost insanely quickly, have some of the greatest spreads, so a transparent model can potentially help the most with the cost of these types of drugs.

Look back to Benefits Strategy for on deconstructing pharmacy expenditures.  Pharmacy spend represents one of the greatest opportunities for savings for most employers, and is frequently one of the least understood areas.