A Pharmacy Benefit Manager, or PBM, is a third-party administrator of prescription drug programs for a variety of health plans including commercial health plans, self-insured employer plans, union plans, Medicare Part D, Medicaid, and federal and state government plans.
Their major role is to work with drug makers and pharmacies to control access and costs for patient medications. They also play a role in determining costs for insurers and how much pharmacies are paid.
PBMs play a role in shaping prescription costs by:
- Determining a scheduled list of drugs, or a formulary, that provides what medications are covered by health insurers; and therefore, what medications insureds receive access to, and what out-of-pocket costs they are required to pay.
- Work contractually with pharmacies to reimburse for drugs provided to covered plan insureds.
- Negotiate rebates or other discounts from drugmakers that can be passed on to plan beneficiaries.
In the United States, there are three major PBMs – Express Scripts, CVS Caremark, and OptumRx of United Health Group, making up over 75% of the market share.
How do PBMs work with employers to save costs?
PBMs play a role in improving the management of prescription drug programs, and therefore costs, by:
Improving access: PBMs negotiate pricing with retail and mail pharmacies, providing greater access to medications and competitive pricing. They help administrate drug usage through programs such as prior authorization, or plan administrators that help ensure drug usage and safety. By negotiating discounts with drug manufacturers and wholesalers, they can mitigate rising costs that help enhance drug usage and adherence, improving patient outcomes.
Setting safety precautions: PBMs routinely review drug utilization to determine effectiveness, interactions, or other safety concerns. PBMs set criteria by which drugs can be administered, such as requiring testing or a diagnosis.
While PBMs can provide greater negotiating power with setting drug prices, the glass isn’t always clear.
Recent Criticism
PBMs have faced recent criticism by insurers and employers alike for not passing on savings to health plan insurers and their beneficiaries. Instead of placing a lowest-priced drug on a formulary, they may supply a drug with the highest rebate, but still a higher cost than the lowest-priced drug. If rebates are not passed on to insurers, employers and their plan beneficiaries end up paying higher premiums and/or out-of-pocket costs.
Another issue is “price spreading,” in which a PBM charges an insurer a higher dollar amount for a generic drug than what is paid to a pharmacy. The PBM can keep the price difference.
Policymakers have considered reforms to regulate PBMs by requiring greater transparency around rebates and eliminating pricing spread, but unfortunately, those discussions by lawmakers have stalled.
Self-Funded Plans
There is however an opportunity to bring added prescription cost savings to health plans, by evaluating PBM’s and their ability to provide lower up front prescription costs on generic and brand name drugs and providing full rebate refunding to the employer.
When an employer reaches 25 or more employees, they may want to consider moving to a self-funded insurance plan, where they take on the financial risks to their benefits plan by paying claims as they happen, instead of a bundled monthly premium. Self-funded insurance arrangements have more flexibility by unbundling medical and pharmacy benefits, giving employers more power in designing a unique program that’s best for them and their employees.
In our next blog post, we’ll share some ways we’ve worked with our clients to partner them with the right PBM for their needs and provided transparency to their prescription drug spend, ultimately lowering costs to employer and employees. We’ll also share how we have carved out high-priced prescriptions in self-funded plans to save employers and their insureds more money.
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