In the complex world of healthcare, pharmacy benefit managers (PBMs) play an outsized role in how self-funded employers and third-party administrators (TPAs) manage their prescription drug costs. When it comes to PBM services, two distinct pricing models dominate the market: traditional (spread) pricing and transparent (pass-through) pricing. Let’s explore these two pricing models, as each one has its own set of advantages and disadvantages:
Traditional (Spread) PBM Pricing
Traditional PBM pricing is the older and more commonly used model. In this arrangement, the PBM negotiates with drug manufacturers and pharmacies for discounts and rebates. The PBM then charges its client a negotiated price for prescription drugs and pays the pharmacy a different price, typically a lower price. The difference between the two prices is the PBM’s profit. Here are the pros and cons of traditional PBM pricing:
- Cost Predictability: With a well negotiated PBM contract containing the correct terms and guarantee language, plans have a clearer understanding of what their overall pharmacy benefit costs will be, making budgeting more manageable
- Potential Cost Savings: Traditional PBMs may be able to negotiate substantial discounts with manufacturers and pharmacies, resulting in cost savings for clients so long as they have competitively negotiated discounts with their PBM
- Opacity: The primary drawback of traditional PBM pricing is the lack of insight into what makes up their pharmacy benefit costs. Clients may not have full visibility into the actual costs, rebates, and discounts secured by the PBM, potentially leading to overpayment
- Conflict of Interest: Traditional PBMs may be incentivized to choose higher-cost drugs or formulary options that offer larger rebates, which can conflict with the best interests of the client
Transparent (Pass-Through) PBM Pricing
Transparent PBM pricing, on the other hand, offers greater visibility into the actual costs and fees associated with managing pharmacy benefits. With this model, PBMs pass on all discounts, rebates, and fees directly to the client, eliminating the profit “spread” that a traditional PBM makes between what they charge the client and what they pay the pharmacy. Transparent PBMs predominately generate revenue by charging a separate, fixed administrative fee for their services on each claim. Here are the pros and cons of transparent PBM pricing:
- Visibility: Clients can see all costs, including discounts and rebates, ensuring that they know exactly where their money is going
- Fewer Conflicts of Interest: Transparent PBMs have no incentive to favor higher-cost drugs or formulary options, as their revenue is derived solely from administrative fees
- Customization: Clients have more flexibility to customize pharmacy benefit plans and formularies to suit their unique needs
- Administrative Costs: While the administrative fees are fixed, they might be higher than the PBM markup in the traditional model, potentially increasing overall costs for clients
- Cost-management: Transparent pricing can be more expensive than traditional pricing since the PBM isn’t incentivized to aggressively manage the price a client pays a pharmacy
- Additional Middlemen: Many transparent PBMs contract with “aggregators” for their rebates. If the rebate aggregator keeps a portion of the rebates as a fee, the client may receive fewer rebates than they would from a traditional PBM, even if the transparent PBM is passing through 100% of the rebates
Recent Changes in the PBM Landscape
In recent years, there have been a number of changes within the PBM pricing models. One of the most significant changes is the increasing adoption of pass-through arrangements. This is due to the growing demand for transparency from self-funded entities. In April 2023, Express Scripts began offering pass-through pricing to some of its clients. This is a significant change for one of the country’s largest PBMs.
In addition to these changes, PBMs are also experimenting with new pricing models, such as risk-sharing models. These models involve the PBM sharing some of the financial risk of prescription drug costs with its clients if a prescription drug does not do what it is supposed to do.
The future of PBM pricing models is uncertain. However, it is likely that there will continue to be a trend towards more transparent and accountable pricing models.
Now more than ever, the recent changes in the PBM landscape have made it crucial for plans to assess their pharmacy benefit options and align them with their long-term goals and values. There is no universal “perfect” PBM and the key to a well-operated pharmacy benefit plan is determining if you as the client prioritize cost-effectiveness and transparency differently.
Maximizing the cost-effectiveness through transparent pricing might require more aggressive management on behalf of the client or taking new approaches like carving out specialty drug cost management to specialist vendors. Some self-funded plans are willing to take those steps to lower costs while other prefer the simplicity of plan that exists entirely under one PBM.
With our objective, PBM-agnostic approach to pharmacy benefit consulting, Innovative Rx Strategies is equipped with the expertise to help you identify the PBM that is best for you and manage your pharmacy benefit plan to maximize the value you are receiving from them. If you’d like to learn more about how we can help you save, don’t hesitate to contact us by clicking the link below.