PBM Pricing Models: Pass Thru vs. Traditional

PBMs, or Pharmacy Benefit Managers, are a crucial component of the U.S. health care system, acting as conduits between plan sponsors, pharmacies and drug manufacturers. One frequently debated topic regarding PBMs is their pricing models. The two primary approaches are Traditional Pricing and Pass-Through Pricing. Understanding the differences between these models can help insurers, employers and consultants make sound, informed decisions when negotiating PBM contracts.

Definitions

Traditional Pricing (also known as Spread Pricing):

• Involves spread pricing, in which a PBM receives a margin based on the difference between what it bills the plan sponsor (usually higher) and what it pays the pharmacy, as negotiated by the PBM and the pharmacy.
• The PBM captures the spread as a source of profit and payment for services.
  • Example: If the negotiated pharmacy reimbursement rate for a drug is $2.00, but the PBM bills the client $2.50, the PBM retains $0.50 as margin or spread. 
• To protect margins, the actual cost of medication and reimbursement rates are usually not disclosed or only conditionally disclosed to the client, creating a lack of transparency.

Pass-Through Pricing (also known as Transparent Pricing):

• Unlike spread pricing, the amount paid to a pharmacy equals the amount billed to the client.
• PBM revenue is collected in the form of an administrative fee.
• The PBM has no incentive to inflate drug prices since its profit comes from an administrative fee rather than spread pricing.

Key Points

Traditional (Spread) Pricing:

• Allows a proprietary approach to PBM pricing and revenue streams.
• Incentivizes PBMs to aggressively negotiate purchase discounts with manufacturers and retail pharmacy networks.

Pass-Through (Transparent) Pricing:

• Clients have full transparency over billing and payments.
• PBM margins are clear and tightly managed.

Rebates and Reimbursement Models

Rebates are additional discounts pharmaceutical manufacturers provide to PBMs for preferring certain brand-name drugs over competitors within the same drug class. Manufacturers also pay manufacturer administrative fees (MAFs) to PBMs for processing rebate billing and collection.

Traditional Rebate Model:

• Rebates can be shared with plan sponsors based on a negotiated amount in the contract.
• PBMs may retain a percentage of rebates collected, similar to spread pricing, to increase profitability.
• PBMs may also retain MAFs as payment for rebate billing and collection.

Pass-Through Rebate Model:

• All rebates are passed directly to the client.
• In best practices, MAFs may be passed through as well.
• PBM revenue continues to be driven by the known administrative fee.

Even in the most transparent of situations, plan sponsors rarely get a true 100% of rebates from manufacturers. Most PBMs acquire rebates through a Group Purchasing Organization (GPO). In those cases, a portion of those rebates is paid back to the GPO as an administrative and participation fee, making that portion inaccessible to the client. Depending on the PBM, the GPO may be owned by the same entity, leading to the vertically integrated company retaining the administrative and participation fee amount. 

No single PBM pricing model is superior to the others. Every organization must consider its priorities when deciding between spread pricing and pass-through pricing. If transparency and PBM profit predictability are a priority, pass-through pricing may be the preferred model. However, organizations prioritizing lower administrative fees might lean toward traditional pricing despite reduced transparency. Ensure you fully understand the terms and conditions of the PBM pricing model outlined in your contract to secure the best financial and operational outcomes for your company.