Pharmacy Benefit Managers (PBMs) serve as intermediaries between insurance companies, pharmacies, and drug manufacturers. Large PBMs are often accredited with securing lower drug costs through volume discounts and aggressive negotiations with manufacturers, which has the potential to make prescription medication more affordable. Unfortunately, many large PBMs lack the transparency that would be required to validate their impact on the cost of prescriptions. 

As employers work to find optimal partners, it is important to understand the primary PBM models available in the market and how they align with each employer’s corporate culture. Each model has its own set of pros and cons, so there is not one optimal solution. The key when evaluating is to understand the strengths and weaknesses of the model you are leveraging so you continue to move toward the best approach for your organization and employees. At a high level there are three types of PBM pricing models:

1. Traditional Pricing
2. Pass Through Pricing
3. Hybrid

Traditional Pricing

In Traditional Pricing, also known as spread pricing, PBMs are reimbursed at a higher rate by health plans and self-insured employers than what they are paying manufacturers and pharmacies for the drug. The PBM keeps the difference to offset their administrative costs as well as profit margins. This model is sometimes referred to as spread pricing, which is leveraged by most of the largest PBMs in the market. The model has been highly scrutinized as very little financial data is available and contractual gag clauses often leave insurers and employers with little knowledge of the actual price of the drug. In addition, some prescriptions also have a rebate payment made but only aggregate information is shared, making it impossible for health plans and employers to understand the true cost. With that said, given the buying power of these large PBMs, even with increased spread, employers may still save money within a traditional pricing model.

Pass-Through Transparent Pricing

The Pass-Through Transparent model operates based on the actual costs of the drugs. Clients are billed the amount the PBM is paying the manufacturer and/or pharmacy. All Rx rebates and discounts are passed onto the client. The PBM is compensated not through traditional/spread pricing but through an administrative charge, typically at the prescription level. Although this model seems more economical, PBMs leveraging a pass-through model may not always have the buying power of the traditional pricing PBMs and therefore savings may or may not be realized by health plans or self-insured employers. It is often hard to quantify savings in advance since pharmacy utilization under traditional pricing PBMs are steering utilization to those prescriptions that have the most margin for the PBM in the form of discounts and rebates. 

Hybrid

The Hybrid model is a mix between the Traditional Pricing and Pass-Through Transparent models. In this model, rebates and discounts are typically passed to client(s), but it may or may not be in full. Some hybrid models indicate all received rebates are passed back to clients but may have an intermediary that receives some spread that is not disclosed and not considered a rebate. In short, hybrid PBMs have diverse disclosure practices. At a quick glance it may seem more transparent, but it’s difficult to validate.

Solving for the Transparency Issue

With the lack of transparency, some policies at the state and federal level aim to decrease the complexity. For example, most states with transparency laws require reporting from manufacturers when wholesale cost is increased above a certain threshold. The first drug transparency law was passed in 2016 in Vermont, but now over 20 states (including CA, CT, ME, MN, NV, NH, ND, OR, TX, UT, VA, WA, WV) have implemented their own requirements. Maine has one of the more robust approaches, collecting and analyzing the data with the goal of identifying each supply chain’s average net, allowing the public and policymakers to follow the money through the supply chain[1].

The Consolidated Appropriations Act also has requirements for pharmacy reporting that will require PBMs to report on some data that is rarely shared, including but not limited to rebates by drug for the top 25 prescriptions. In some instances, PBMs will share that data with health plans and self-insured employers; in other instances, they will file directly with Centers for Medicare & Medicaid Services (CMS) without employers understanding those plan details. 

More recently, on May 24, 2022, the Pharmacy Benefit Manager Transparency Act of 2022 was introduced. Sponsored by Senator Chuck Grassley (IA) and Senator Maria Cantwell (WA), this bill will empower the Federal Trade Commission (FTC) to increase drug pricing transparency and hold PBMs accountable for unfair practices that increase cost. It also will require PBMs to report to the FTC the amount of money they make through spread pricing and pharmacy fees[2].

While we wait to see if the Pharmacy Benefit Manager Transparency Act is passed, other solutions are available. There are companies that are striving to help clients save money when it comes to prescription drug costs. They often run analyses on current employer prescription drug costs to determine how much they could save if they moved away from traditional PBM models.

At edHEALTH, we work hard with our member-owner schools to bend the trend in healthcare costs. Pharmacy continues to be an expensive cost-driver, at a national level, and something we’re addressing head-on. We continuously look for opportunities to bend the trend in healthcare costs, including exploring all options to reduce prescription drug costs.

Tracy Hassett, President and CEO of edHEALTH

When our client, edHEALTH, carved-out prescription drug benefits, the goal was to provide additional savings and transparency to its members. edHEALTH continues to work with their vendors and evaluate various options so that they can offer additional transparency and cost savings. To learn more about potential solutions, talk to your current advisor or reach out to Spring Consulting Group.

[1] https://www.nashp.org/drug-price-transparency-laws-position-states-to-impact-drug-prices/

[2] https://www.natlawreview.com/article/pbms-continue-to-draw-federal-scrutiny-pbm-transparency-act-2022#:~:text=The%20Pharmacy%20Benefit%20Manager%20(PBM,and%20state%20attorneys%20general%20in