The hidden costs of legacy PBMs and spread pricing.

In the past decade, legacy pharmacy benefit managers (PBMs) have seen their profits skyrocket by over 300%. These PBMs are driving up the prices of prescription drugs and padding their profits with hidden fees, leaving employers and their teams to bear the brunt of inflated expenses. They have long concealed their dubious practices behind complex and confusing policies and contract terms. However, employers are beginning to wake up to the fact that their PBMs, more often than not, are failing to act in their best interests.

Initially, pharmacy benefit managers were designed to lower prescription drug costs by leveraging their power to negotiate discounts and pass the savings on to employers and patients. However, they have failed to deliver on this objective by leveraging the self-benefitting, anti-competitive practice of spread pricing. As their opaque tactics contribute to higher Rx costs, it's crucial to understand their games so you can ensure you are getting the most value out of your PBM. 

What is PBM spread pricing?

Spread pricing is a practice where PBMs charge plan sponsors more for a prescription drug than what they pay back to the pharmacy. Essentially, the PBM retains the difference (the spread) between what they charge and what they pay out as profit. 

For example, a PBM may have contracts with pharmacies to purchase Drug A at $10 but they charge the plan sponsor $50 for that same drug— a $40 spread. Over the course of a year, for an employee’s prescription of Drug A, the PBM ends up pocketing an additional $480 that the employer or employee never sees.

The cost of PBM spread pricing for employers.

Legacy PBMs have mastered the art of using spread pricing to their advantage to bolster their profits. PBMs have operated without scrutiny for decades, enabling them to build and maintain control over the market. As PBMs line their pockets with the spoils of spread pricing, employers and their teams face the consequences. 

The historical lack of PBM transparency enhances the effectiveness of spread pricing because employers can’t understand how their money is being allocated. This discrepancy leads to elevated pharmacy spend for plan sponsors. Consequently, employees face increased out-of-pocket costs, manifesting in higher premiums, copayments, or deductibles. The financial incentive for PBMs to prioritize high-cost or specialty drugs, also contributes to the unwarranted overutilization of expensive medications. They push high-dollar drugs even when more cost-effective options may be available, further driving up spend for both employers and their teams.

How to avoid PBM spread pricing.

To address the lack of transparency in PBM spread pricing and improve financial oversight, benefits leaders should consider the following best practices:

1. Opt for pass-through pricing models.

Partner with PBMs that use pass-through or transparent pricing structures. These models return 100% of manufacturer rebates and discounts to the employer or plan sponsor, and instead charge a flat administrative fee—eliminating profit from price markups.

2. Ensure contractual clarity.

Carefully review PBM contracts and include clauses that explicitly prohibit spread pricing. Require full disclosure of all revenue sources, including rebates, fees, and pricing differences, and include audit rights to enforce compliance.

3. Monitor claims and financial reporting.

Establish a process for regularly reviewing claims data. Compare pharmacy reimbursement rates to PBM charges to uncover pricing gaps, identify discrepancies, and support smarter decision-making.

4. Explore transparent PBM alternatives.

Consider using carve-out PBMs that focus on transparent pricing and align their goals with yours. These PBM partners often allow greater customization and provide clearer insights into drug spending.

Partner with a transparent PBM that puts employers first.

The intentional complexity in PBM contracts makes it challenging for employers to understand their pricing structure and negotiate better deals. Luckily, not all PBMs engage in shady practices like spread pricing. Instead, they practice pass-through pricing, a model that charges clients the exact amount the pharmacy is reimbursed. This approach restricts pricing abuses by ensuring that employers benefit directly from a favorable drug mix made up of high-value medications. Pass-through pricing creates a system where both PBMs and clients share a common interest in controlling prescription drug costs while directing patients to optimal medication.

Spread pricing may sound like a technical term reserved for industry insiders, but its consequences reverberate throughout the entire healthcare landscape. Employers must recognize that understanding these intricacies is crucial for their organizations. By demanding transparent PBM practices, they can reshape the narrative and set the stage for a future where pharmacy benefit managers prioritize the well-being of their clients over their own financial gains.

Uncover a new level of PBM transparency with Rightway. Our model passes back all savings so you can have confidence in your PBM partner. Schedule a demo.