Deciphering the Black Box of Prescription Drugs in a PBM Pricing Model

Corporate Synergies

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When trying to control health & welfare benefits cost, employers typically look at specific plan designs. However, another opportunity for controlling costs is to look at the prescription drug benefits offered through a third-party administrator (TPA) Pharmacy Benefit Manager (PBM). Many employers don’t understand the often jargon-filled and confusing terms and PBM pricing models, which might allow the TPA to manipulate the value proposition and maximize their own profits.

PBMs manage relationships with retail pharmacies and drug manufacturers, and can provide cost savings and value-added benefits to plan sponsors. There are generally two PBM pricing models used 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.

2 PBM pricing models for Rx benefits: traditional and pass-through.

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 of transactions or what rebates are actually available.

For generics, a PBM will set prices based on a maximum allowable cost (MAC) list, and 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.

The Pass-Through Pricing Model

In the pass-through pricing 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% 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.

Pass-through pricing models attempt to remove the mystery around pricing and promotes competition by focusing on average wholesale price discounts from drug manufacturers and wholesalers achieved by PBMs, as well as administrative fees. These administrative fees are sometimes used by employers or plan sponsors to help them compare PBM pricing.

A pass-through pricing model is generally more transparent than the traditional pricing model—so much so that in 2009, the Centers for Medicare and Medicaid Services declared that a pass-through pricing model must be used to price and report on Medicare Part D contracts.1

Still, there are instances in which a traditional pricing model might better suit a plan sponsor. PBMs are increasingly using spreads and rebate margins to create value-added services that are useful to employers like drug adherence programs and formulary reviews. These programs help employers keep their costs down and help employees stay healthy, too.

Plan sponsors in a traditional pricing model may also negotiate elements of a contract to protect themselves from increasing costs through widening spreads or other fees. Guarantees can be included that set a minimum discount or ensure a review of costs at a specified time in the contract. This allows plan sponsors to review any price increases and renegotiate terms of the contract after a year or 18 months, for example.

While the pass-through pricing model is more transparent and straightforward, the value-added benefits provided in many traditional pricing models are helping employers keep employees healthy and the total cost of the pharmacy plan low.

A little bit of education on different models and a close inspection of what is right for you can help you decide which arrangement is best for your organization and help you control health & welfare benefits cost.

1 Milliman, “Pharmacy benefit management: pros and cons of various approaches


©2016 Corporate Synergies Group, LLC. No part of this material may be republished or distributed without prior written consent.

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