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Prescription Drug Pricing 101

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When trying to control employee benefit costs, employers typically look at specific plan designs. However, another opportunity for controlling costs is to look at the prescription drug benefits you’re offering your employees through a pharmacy benefit manager, or PBM.

Many employers, and even many insurance professionals who are new to the benefits market, don’t understand the often jargon-filled and confusing terms and pricing arrangements created by PBMs, which might allow the PBM to manipulate the value proposition and maximize their own profits.  

The more you know about PBMs, the more you can help your clients maximize the value they get from PBM relationships.

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A PBM manages an insurer’s, or self-insured plan’s, relationships with retail pharmacies and drug manufacturers. A good PBM can provide cost savings and value-added benefits for your group health clients.

There are generally two pricing models PBMs use with plan employers to deliver prescription benefits to employees: The traditional pricing model and the pass-through pricing model.

The traditional pricing model

In a traditional pricing model between a PBM and a plan sponsor or employer, the PBM charges its client an agreed-upon price for prescription drugs, along with a rebate that’s paid on a per drug brand basis. All administrative fees are waived. The agreed-upon price may be different from what the PBM pays the pharmacy for prescription drugs. This is called the spread. Rebates offered are also often quoted with terms that allow the PBM to keep specific types of rebates (like specialty drugs) or any excess beyond the promised rebates. These two margins, along with profits from mail and specialty pharmacies, are how PBMs make money.

As a client of the PBM, employers typically don’t have a window into details of this pricing structure and they can’t tell how much profit the PBM is making off transactions or what rebates are actually available.

For generics, a PBM will set prices based on a maximum allowable cost, or MAC, list, and then use this to manage the pricing and agreed-upon discounts. Each PBM uses different criteria to decide which generic drugs they include on a MAC list and the way they calculate the maximum allowable price. PBMs then use different versions of a MAC list for different parties—the MAC paid to the retail pharmacy is typically lower than the MAC charged to the client, allowing another opportunity for spread. 

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The pass-through pricing model

In the pass-through model, the PBM charges the employer or plan sponsor the same price for the medication that they pay the pharmacy (thus passing through the cost), plus an administrative fee charged on a per prescription or per member metric. This fee enables the PBM to profit from the service. The actual point of sale discount that a PBM may receive from the pharmacy is disclosed and reflected in the price a plan sponsor pays. Additionally, 100 percent of the rebates offered on specific drugs are passed along to the plan sponsor so long as the contract language defines the details in favor of the client.

Related: Drug benefit managers called big cost cutters

Pass-through pricing attempts to remove the mystery around pricing and promotes competition by focusing on AWP (or, any willing provider) discounts from the drug manufacturers and wholesalers achieved by PBMs, as well as administrative fees. These administrative fees are sometimes used by employers or plan sponsors to help them compare PBM pricing.

Pass-through pricing is generally more transparent than the traditional model—so much so that in 2009, the Centers for Medicare & Medicaid Services declared that a pass-through model must be used to price and report on Medicare Part D contracts.

Still, there are instances in which a traditional model might suit a plan sponsor better. PBMs are increasingly using spreads and rebate margins to create value-added services that are useful to employers like drug adherence programs and formulary reviews. These programs help employers keep their costs down and help employees stay healthy.

Related: To cut health claims, wean employees off popular brand-name drugs

Plan sponsors in a traditional PBM arrangement may also negotiate elements of a contract to protect themselves from increasing costs through widening spreads or other fees. Guarantees can be included that set a minimum discount or ensure a review of costs at a specified time in the contract. This allows plan sponsors to review any price increases and renegotiate terms of the contract after a year or 18 months, for example.

While the pass-through model is more transparent and straightforward, the value-added benefits provided in many traditional pricing arrangements are helping employers keep employees healthy and the total cost of the pharmacy plan low.

A little bit of education on different models and a close inspection of what is right for you can help you decide which arrangement is best for your company.


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