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Pharmacy Benefit Management (PBM) 101

Tuesday, December 1, 2020
Pharmacy Benefit Management (PBM) 101
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Many employers typically use prescription drugs covered through their insurers. But new options for self-insurance let businesses hire pharmacy benefit managers (PBMs) independently from their insurance carriers to reduce their health benefit costs. 

Self-insured plans, where the business assumes more risks in paying employee health care expenses, give employers control over the care they cover and insight into the costs they pay. PBMs are projected to save employers and consumers as much as 30%, or $654 billion, on drug benefit costs over the next decade, according to the Pharmaceutical Care Management Association

However, PBMs are not always transparent. They are jokingly called “Perfect Business Models” because there are so many ways for them to make money – many of which the client never sees. Here’s how they are typically broken down: 

  • 47% – Manufacturer Revenue aka “rebates”  
  • 22% – Mail order markup/spread 
  • 22% – Retail pharmacy markup/spread 
  • 10% – Admin fees 

This is the worst possible scenario that you can place a client: when a PBM offers to waive admin/dispensing fees, RED ALERT.  That means they are going to markup your mail order and retail pharmacy that much more. The preferred PBM pricing model makes 100 percent of their revenue from admin fees.  

How do PBMs get away with markups?  

The drug pricing standard, which forms the basis for discount prices, is known as Average Wholesale Price (AWP).  However, AWP is virtually never what is actually paid.  It is an inflated price that purchasers of PBM services negotiate and rely on far too often.  

Generic drugs have two prices:  AWP (which is heavily inflated and set by the manufacturer) and Maximum Allowable Cost or MAC (closer to the actual acquisition cost or AAC).   

In simple terms, groups negotiate a discount off of AWP.  Here is an example: 

  • Nadolol Tab 20MG AWP = $339.10 
  • Group negotiated 75% discount off of AWP = $84.75 discounted cost for Nadolol (this is what the plan pays) 
  • Pharmacy’s cost = $23 
  • Pharmacy Dispensing fee = $5 
  • PBM Admin fee = $5  
  • Net spread for PBM = $84.75 – $33 ($23+$5+$5) = $51.75.  This is their spread.   

To sum this up, the PBM just made their admin fee and spread for a total of $56.75 by filling ONE PRESCRIPTION.  

Here at The Horton Group, we help individual employers reduce pharmacy costs by millions of dollars annually by choosing the right pharmacy benefit manager. Our PBM partners are completely transparent and have it written into the contract that the only way they can make money is by their admin fee.

How do small, independent PBM’s compete with the CVS/Express Scripts of the world on maximizing their rebates?   

They can compete by using rebate aggregators, which are contracted to work with hundreds of small PBM’s across the country to go to the drug manufacturers and negotiate as one unit.   

Here is the traditional cycle for a transparent PBM: 

  1. Processing Rx claims for client
  2. Rebates being calculated by rebate aggregators (who take their cut of the group’s rebate for their fee) 
  3. Rebates sent back to PBM who hold them for +/- six months, earning interest on the group’s rebate $$ 
  4. Rebates sent from PBM back to the group 

Transparent PBM’s make money through admin fees and interest revenue from holding their groups’ rebate money. Strong consultants recommend transparent PBM’s with creative specialty prescription carve-outs to their clients.  

The Horton Group partners with PBMs that don’t accept any rebates, which ultimately results in greater savings for our clients. We work with them to create the most creative and cost-effective programs to help manage specialty prescription spend. Instead of worrying about a PBM holding their rebate dollars for 180 days, our clients can put that money directly in their bank accounts.  

If you need assistance partnering with the right PBM, give us a call at (800) 383-8283 to set up an appointment with one of our consultants

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.

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