Most of us don't give much thought to the pharmacy industry until we find ourselves in front of a pharmacist, prescription in hand. What many people don’t realize is that there are entities working behind the scenes to determine the type of medication we receive, assess its clinical appropriateness, decide where we can pick it up, and administer the benefit based on our employer's plan to determine our medication costs. While we may be able to name our medical carrier, how many of us can actually identify our pharmacy benefit manager (PBM)? PBMs are not well understood and often go unnoticed despite their critical role in the prescription-filling process.
Let’s face it, the pharmacy industry is extremely complex and involves multiple stakeholders, including PBMs, drug manufacturers, insurance plans, wholesalers, and various pharmacies (e.g. retail, mail-order, specialty, and online). Understanding how these groups interact and the important role PBMs play is crucial in prioritizing what is right for the health and well-being of your teams. So, what are the relationships between these entities? And how can you, as an employer, navigate this complicated system to make the best choices for your members and their families?
Understanding the pharmacy ecosystem.
The journey that a medication takes from the manufacturer to the patient involves many parties and agreements. After a drug is produced, drug manufacturers sell it directly to pharmacies or wholesalers, who then negotiate with insurance companies to determine its end cost. The drug is then dispensed by the pharmacy and taken by the patient. While the process appears relatively simple, there is an additional layer of complexity known as a PBM.
PBMs are sometimes called "middlemen", acting as a direct link between the plan sponsor and drug manufacturer or a hidden link between the plan sponsor and insurance company. They negotiate with drug manufacturers to get discounts on prescription medications and work with insurance companies or plan sponsors to design and manage Rx benefit plans. PBMs are also responsible for coordinating with pharmacies to ensure that patients have access to the prescriptions they need.
Employers contract directly with PBMs, or with their insurance carriers that utilize a backend PBM, to manage their Rx benefit programs and provide their members with affordable, comprehensive drug coverage. Here’s how PBMs do it:
Develop and maintain drug formularies.
Drug formularies, or lists of covered medications, determine which drugs members have access to within their Rx benefit plan based on negotiations with drug manufacturers. These formularies are typically organized into tiers based on clinical efficacy and cost, with lower-tier drugs having lower out-of-pocket costs for patients.
Negotiate rebates and discounts.
To secure lower costs for medications, PBMs negotiate rebates and discounts with drug manufacturers. These rebates and discounts are often in exchange for giving the manufacturer’s drug preferred placement on the formulary. However, instead of passing the savings down to patients, PBMs have found a way to turn a profit by prioritizing higher rebate negotiations (vs. lower list prices) with drug manufacturers.
Process and pay prescription costs.
PBMs administer the plan sponsor's benefit plan design to process the patient's copay and reimbursement amount for each medication. They then pay the pharmacy for dispensing the patient's prescription.
Choosing the right PBM partner.
Healthcare costs are projected to increase 6.5% this year, with Rx spending representing 20-30% of total healthcare costs. Traditional PBMs have come under greater scrutiny for their role in rising drug prices and taking advantage of their position in the drug supply chain. The legacy PBM model tends to favor negotiating higher rebate dollars instead of driving down the net cost of medications. In fact, PBMs have been incentivized to promote higher-cost drugs that achieve greater profits by excluding certain medications from their formulary. As a result, PBMs often fail to actually help employers reduce their year-over-year Rx spending, prioritizing their own profits over the well-being of patients.
The current system doesn't provide PBMs with strong incentives to offer favorable deals to employers and pass on pharmacy cost savings. So how do you know if a PBM has your company's best interests in mind? When selecting a new PBM, make sure they:
1. Place members at the center of care.
Member utilization management is a key quality to look for in a better PBM. It's no secret that the higher the cost of the drug, the more money traditional PBMs stand to make. In fact, everyone in the pharmaceutical supply chain benefits when drug utilization is increased - drug companies want more pills dispensed and greater market share, pharmacies want more prescriptions in their stores, and traditional PBMs want more, higher-cost prescriptions to keep a portion of the profit for themselves.
When it comes to putting the member first, managing Rx costs is just one part of the equation. To truly prioritize the member, a PBM must go beyond simply managing the costs of medications and also focus on directing members toward appropriate, high-quality, low-cost care with pharmacy navigation to effectively manage utilization. This requires building a strong relationship based on trust and empathy, and ensuring that members feel supported throughout their healthcare journey.
2. Deliver an aligned, transparent model.
How a PBM makes money can have a significant impact on the quality of care your members receive. Many legacy PBMs own their own pharmacies - specialty, retail, and mail order - and make money when patients purchase from a PBM-owned pharmacy, creating a conflict of interest. Additionally, some PBMs prioritize drugs with higher rebates over clinically appropriate alternatives, which can lead to higher costs for employers and their teams.
That's why it's important to choose a PBM with an aligned, transparent model that passes rebates back to the employer and eliminates spread pricing (the practice where a PBM collects the difference between what it charges a payer for a prescription vs. what it charges the dispensing pharmacy) to truly reduce pharmacy costs. A PBM aligned with your needs will direct members to the best pharmacy options without letting financial incentives get in the way of their care.
3. Prioritize advanced tech with simple delivery.
The use of outdated technology by many legacy PBMs has made it challenging to maintain and upgrade their systems to keep up with new developments and modern online consumerism. This can lead to inefficiencies and delays in processing claims, impacting the member experience. By automating and scaling administrative processes, technology-forward PBMs can reduce overhead expenses and pass on the savings to plan sponsors and members.
PBMs should also invest in intuitive member-facing technology. An easy-to-use consumer app should give members easy access to their healthcare information, including their prescription history, drug formulary, and cost comparisons. This can increase member engagement and adherence to medications, ultimately leading to improved health outcomes and cost savings.
Selecting a PBM can be overwhelming when you try to balance economics with effectiveness and legacy with innovation. By taking the time to carefully evaluate and select a PBM model that aligns with your organization's goals and values, you can ensure your members have access to high-quality, cost-effective prescription benefits that support their overall health and well-being.
Are you ready to tip the scales back in your favor and partner with a better PBM? Talk to us.