PBM 101: The Complexities of Pharmacy Benefit Management

Self-funded plans have a responsibility to ensure that their pharmacy benefit plan meets the need of their members while also being mindful of cost. With the cost of prescription drugs consistently rising year-over year, that can feel like an impossible task for many plans. Here are a few reasons why:

PBM Contracting

The contract between a pharmacy benefit manager (“PBM”) and a self-funded health plan is a complex document full of jargon and legal terms that make it difficult to understand. In addition, there is often ambiguous or missing contract language that creates an opportunity for the PBM to be less than transparent.  The contract will typically specify the services that the PBM will provide and the annual aggregate pricing for prescription drug dispensed at retail, mail, and specialty. Additionally, the contract will include language about administrative fees the PBM will charge and rebates the PBM will pay based upon a client’s brand drug utilization.  Having a strong PBM contract is paramount to ensuring you are not overpaying for your prescription drugs.

Pharmacy Benefit Pricing

The pricing of prescription drugs through PBMs can be a “smoke and mirrors” game  if you do not have a clear understanding of what you are paying for. There are several different factors that can affect the price of a prescription drug, including:

• The PBM contract’s costing basis, Average Wholesale Price (“AWP”), is a calculated price based off the manufacturers list price or Wholesale Acquisition Cost (“WAC”), which can be manipulated.
• The PBM’s negotiated discount rate for drugs dispensed at retail, mail, and specialty which is based on a discount off AWP and heavily dependent on the key definitions on the contract like Brand Drug, Generic Drug, Specialty Drug and AWP
• Manufacturer revenue, which includes things like rebates, price protection, inflation caps and administrative fees, a PBM receives either from a pharmaceutical manufacturer or a rebate aggregator. Some PBMs may keep more than 10-15% of manufacturer revenue if your definitions are not strong.
• The PBM pricing model– pass-through pricing or traditional “spread” based pricing.
• The PBM administrative fee

Without a detailed understanding of each contributing factor that goes into the final price of a drug, it’s easy for a plan sponsor to think they are receiving a great “deal” on certain drugs (like brands) while overpaying for others (like generics and specialty drugs).

Formulary Management

PBMs play an important role in managing the prescription drug benefit for self-funded plans. They are responsible for deciding what drugs should be included on their formularies, managing, and negotiating discounts with their pharmacy networks, and negotiating rebates with drug manufacturers or a rebate aggregator.

There are a number of factors that a PBM considers when developing a formulary, including:

• The clinical effectiveness of the drugs
• The cost of the drugs (including rebates)
• The safety of the drugs
• Patient access to the drugs

Most self-funded plans have delegated the responsibility of formulary management to the PBM’s.  Often the PBM incentive to add a drug to the formulary may not align with the goals of the self-funded plan.  For this reason, it is important for plans to  ensure contractual latitude to make your own drug coverage decisions.

How an Experienced Pharmacy Benefit Consultant Can Help

The complexities of PBM contracting, pricing, and formulary management make it difficult for self-funded plans to manage their pharmacy benefit effectively on their own. This is why it is important to work with the right pharmacy benefit consultant whose incentives are aligned and fully transparent

An experienced pharmacy benefit consultant can help self-funded plans:

• Negotiate contracts with PBMs that are favorable to the plan
• Hold the PBM accountable to the pricing terms and financial guarantees of the contract
• Monitor the market and ensure plan always has the most market competitive contract and financial guarantees
• Decide which PBM formulary will be the most effective based upon the plan’s drug utilization and plan design
• Advise the plan on custom drug coverage decisions
• Identify opportunities to save money through cutting-edge clinical strategies

Not all pharmacy benefit consultants are the same.  To find the right pharmacy benefit consultant ask these questions:

• How do you make money?
• Are you paid by anyone in the pharmacy supply chain?
• Are you paid by PBM’s in any way, i.e., a retainer fee, new business payments, client retention payments, coalition payments
• Do you operate your own pharmacy benefit coalition?
• Are you PBM agnostic or do you only offer certain PBMs opportunities?

By working with the right pharmacy benefit consultant, self-funded plans can improve the quality of their pharmacy benefit for their members while saving money on their prescription drug costs. Did you think you couldn’t do both? Think again!

To see how you can get the most out of your pharmacy benefit contact us.