Pharmacy benefit managers, or PBMs, are companies that manage prescription drug benefits on behalf of health insurers, Medicare Part D drug plans, large employers, and other payers.[1] PBMs play a significant role in consumer drug costs and can be categorized into three different PBM business models: traditional, pass-through transparent, and hybrid business models.
How Do Traditional PBMs Make Money?
Many traditional pharmacy benefit managers (PBMs) use spread pricing as a means to profit, although this method has come under increased scrutiny. In this model, PBMs are reimbursed at a higher rate by health plans and employees for drugs than what the PBMs are actually paying the pharmacies for these drugs. The PBM keeps the difference created as a result of this spread pricing.
Many clients have no knowledge regarding the actual drug cost before spread pricing is applied, making it very difficult for them to determine how much the PBM is adding to their total spend. In a market consisting of thousands of drugs and prices, it is virtually impossible for the payor to monitor this on their own.
Also, because many traditional PBMs keep Rx rebates, they may be motivated to favor a drug that is rebated even when it may not be the most cost-effective choice or produce the lowest net cost for their client. Additionally, if the rebates are calculated as a percentage of the manufacturer’s list price, the PBM may also favor a higher-priced drug over its lower-cost alternative if a rebate is being offered. There is very little transparency with a traditional PBM business model.
What Is a Pass-Through Transparent PBM?
Instead of spread pricing and rebate holding, pass-through transparent PBMs operate based on actual costs. With the transparent model, clients have opted to contract with their PBM to have predictable drug costs for the year by paying the price the PBM has negotiated with the pharmacies – in other words, the amount billed to clients for pharmaceuticals is equal to what the PBM is paying the pharmacies.
Transparent PBMs pass all Rx rebates and discounts through to clients, or plan sponsors, and do not use spread pricing as a means to profit. As a result, some clients have realized a 15% to 30% savings when they’ve transitioned from a traditional PBM to a transparent PBM.
A transparent PBM’s business model is supported by separate, clear administrative fees generated as a result of providing their services to the client. Because transparent PBMs do not benefit from rebates, there is no incentive to choose a drug based on compensation. In contrast to traditional PBMs, transparent PBMs work to ensure the most cost-effective medications are used to treat patients’ conditions.
How Transparent Are Hybrid Business Models?
As you might expect, hybrid PBMs are a cross between traditional and transparent PBMs. It may appear to the client that they’re getting the best of both worlds at first glance, but transparency is also limited in these models. Some hybrid PBMs share or pass along rebates to clients, while others keep all rebates in house. Spread pricing is also used in some hybrid PBM business models and may or may not include PBM administrative fees.
1. Pharmacy Benefit Managers and Their Role in Drug Spending, The Commonwealth Fund, April 2019
