The Basics Of Pharmacy Benefit Managers

Ray Korson
By Ray Korson - Aug 31, 2016 6:30:00 AM

Pharmacy_Benefit_Managers.jpgWhether you sponsor a self-funded or a fully-insured medical and prescription benefit plan to your employees, there is a good chance you purchase drugs through a Pharmacy Benefits Manager (PBM). There is also a high probability you are completely unaware of what a PBM is and how it operates. You’re not alone!

PBMs are notorious for their opaque inner workings and have experienced periods of intense scrutiny over secret deals with drug manufacturers, development of drug formularies, rebates and “spreads,” and more. The purpose of this blog is to acquaint you with some basic insights on PBMs and what role they play in your prescription benefits plans.

What is a Pharmacy Benefits Manager (PBM)?

A pharmacy benefits manager is essentially an intermediary between companies & employers who sponsor health insurance plans, insurance carriers, drug manufacturers & wholesalers, and consumers. Plan sponsors typically hire or contract a PBM to completely manage their pharmacy benefits and access the following solutions:

  1. Retail pharmacy networks
  2. Development of formulary drug lists
  3. Mail order programs
  4. Drug discounts via bulk purchasing
  5. Clinical programs (i.e. step therapy, quantity limits, mandatory generics, prior authorization, etc.)
  6. Drug utilization analysis
  7. Eligibility determination
  8. Claims processing and adjudication (based on the plan sponsor’s plan design)

Though plan sponsors (especially under a self-funded arrangements) bear the risk of cost increases and higher-than-anticipated drug utilization, PBMs help plan sponsors manage the prescription drug supply chain by negotiating discounts with drug manufacturers/wholesalers and pharmacies and administer cost-saving clinical programs to help lower plan sponsors’ drug spend.

How Does A PBM Operate?

In order to understand what role PBM’s play, it’s important to understand the drug supply chain as a whole.

It all begins with drug manufacturers such as Pfizer, Mylant, and Valeant who develop and produce a variety of generic, brand name, and specialty medications. Pharmaceutical companies invest significantly in research and development for new drugs that can fetch a premium in the marketplace under patent protection. But they also offer financial incentives in the form of rebates and discounts to wholesale purchasers to stimulate demand in the marketplace.

Wholesalers purchase directly from drug manufacturers and warehouse/distribute drugs to mail-order and retail pharmacy networks across the country. Wholesalers typically sell drugs to pharmacies for a percentage discount off of the average wholesale price (AWP) – a reference price that in no way reflects the real price paid to the manufacturers. Think of AWP as the published “list price” suggested by a drug manufacturer, knowing full well that no one actually pays the full list price.

Once in the pharmacies, drugs are distributed to consumers. Patients without insurance benefits purchase drugs for the cash price. Those with insurance benefits are charged some negotiated price with a discount relative to the pharmacy’s cash price. PBMs are used by insurance companies and plan sponsors to negotiate discounted prices for drugs, steer prescriptions to cost-effective therapeutic equivalents, and to adjudicate the pharmacy claim against the patient’s insurance plan design. The pharmacy typically receives a “dispensing fee” and a reimbursement for the prescription from the PBM while the plan sponsor receives a bill for the transaction from the PBM.

How Does A PBM Get Paid?

Plan sponsors typically pay PBMs an administrative fee for processing claims, managing clinical programs and drug formularies, etc. But they also make money through price spreads and rebates.

PBMs will contract with a plan sponsor to obtain drugs for percentage off of AWP, but PBMs also have separate contracts with pharmacy networks with different percentages off of AWP. As an example, a PBM may contract with a pharmacy chain to reimburse AWP less 15% for the cost of a certain drug while offering a plan sponsor discount of AWP less 12%. The 3% differential is the “spread” the PBM maintains as a profit from the transaction.

PBMs also receive rebates from drug manufacturers since they have a direct role in steering utilization of certain drugs through drug formularies. PBMs maintain leverage over drug manufacturers in obtaining drugs at significant discounts through these rebates since they can exclude certain drugs from their formularies or discourage the use of others by placing them in higher-cost tiers. PBMs will claim to share a portion of these rebates with insurance companies and plan sponsors to lower costs, but they retain a good portion of these rebates as profit as well.

Just A “Peek Under The Hood”

While this is not all you need to know about PBMs and how they work in managing your prescription benefits, we hope this gives you some insight into their inner workings and what they do for your plan behind the scenes.

As a plan sponsor, you essentially are writing a blank check at the beginning of the year and trusting that your PBM is doing all that it can to control the ultimate as they negotiate discounts with pharmacy networks, steer utilization to generics and low-cost therapeutic alternatives, and eliminate Rx waste by administering clinical programs that match patients efficiently with the best medications.

Work with your benefits advisor to determine ways in which you can optimize that relationship with your PBM.

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Ray serves as Practice Leader for Employee Benefits at Gibson. Ray is tasked with leading strategy and operational excellence for Gibson’s employee benefits practice to deliver an unparalleled Gibson Client Experience. As an experienced navigator of the Gibson Protection System (GPS), Ray is focused on helping business leaders maximize their return on human capital by designing customized strategies to optimize their investments in employee benefits, employee engagement, culture, and total organizational health. Read Ray's Full Bio

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