Pharmacy benefit spread pricing can be shocking to plan sponsors. Often, this practice is not transparent or disclosed.
PBM spread pricing can be explained by saying that it’s where a PBM turns around and charges the sponsor more than they pay the pharmacy for individual medications. The PBM then keeps the difference (or spread) as their own profit.
An overall increase of 15%-30% to the plan sponsor can happen with spread pricing, so it’s definitely in your interest to understand what it is, how it works, and how it impacts your drug benefits. Individual drugs are often priced many times more than their actual acquisition cost, driving that percentage up even more.
What Is a Pharmacy Benefit Manager (PBM)?
A pharmacy benefits manager is a company that manages the prescription drug benefits for health insurance companies, employers, Medicare Part D drug plans, and others.
A PBM is the one that negotiates prices with pharmacies and pharmaceutical companies. PBMs, because of this, are those determining the end-user cost to individuals and the access they have to various medications.
What Is Spread Pricing?
Spread pricing occurs when the cost to the plan sponsor or policyholder is more than what the PBM pays the pharmacy for the medications. The spread pricing model has been inflating prescription drug costs for consumers.
Because actual claims costs are lower than what the plan sponsor winds up paying, the pharmacy benefit managers then make a profit off of this spread. Often, spread pricing is not disclosed to the plan sponsor. Meanwhile, plan sponsors wind up paying more than they know, due to the markups that are passed along to them.
An Example of Spread Pricing
Drug A is a commonly prescribed drug. The PBM has contracts in place with pharmacies to purchase Drug A at $15. When a PBM is using spread pricing, it may charge the plan sponsor $50 for drug A, adding $35 in cost back to the plan. When spread pricing is not being used the plan sponsor is charged $15 plus a small administrative fee. Over the course of a year, in a spread pricing arrangement, the plan sponsor is paying $420 extra – and that’s just for an individual’s prescription drugs.
The pricing in the above example most closely represents a generic drug spread scenario. Brand name drugs may have as much as a $200 spread per month.
When PBMs use spread pricing, prices, and costs add up quickly and wind up adding to the factors driving up the cost of prescription drugs.
Transparent PBMs like Araya, however, choose not to make money by using spread pricing. Instead, Araya charges a flat administration fee so you always know exactly how much you’re paying.
What Role Do Pharmacy Benefit Managers Play in How Much We Spend on Prescription Drugs?
Generally, PBMs are supposed to negotiate lower prices for prescription drugs so that consumers spend less on filling their prescriptions in the long run. Because pharmacy benefit plans cover large numbers of consumers needing medications, PBMs are often able to negotiate lower prices by serving as large buying networks for those prescriptions.
However, due to spread pricing practices, passing the savings on doesn’t always happen with non-transparent PBMs. Medicare Part D, commercial insurers, and Medicaid all rely upon PBMs to manage drug procurement. This means that when you’re paying for your prescriptions, there’s always a middle tier, and how that particular PBM operates can mean you pay more or less for your prescription medications.
How Do Traditional PBMs Increase Drug Prices?
Prescription drug prices have been increasing steadily in the current climate. Initially, pharmacy benefit managers were supposed to lower prescription drug costs by leveraging the power of many buyers to negotiate discounts at the pharmacy and pass the savings on to consumers.
PBMs often raise drug costs by up to 30% because of the prescription drug costs they charge payers. This spread pricing practice, occurring even with generic drugs, can derail pharmacy benefit plans.
Traditional PBMs do not generally disclose their spread pricing practices. This means that the true cost to a company when it comes to pharmacy benefits spread pricing may not be apparent.
How Are Transparent PBMs Like Araya Different?
There’s good news, though. There’s a movement toward PBM transparency. PBMs like Araya operate based upon the actual costs of the prescription drugs rather than employing spread pricing. This means that the price of your prescription drugs is predictable.
This is the pass-through model of prescription drug benefits. This means that all savings that your PBM receives will be passed along to the health insurance company, and ideally, the patient.
In addition to embracing a pass-through model for pharmacy benefits management, transparent pharmacy benefit managers share the data involved in their services with plan sponsors to support quality of care and other health improvement initiatives. This helps to build confidence in the decisions being made – and empowers informed healthcare decisions.
The cost of prescription drugs in this model is the price that the PBM negotiates with the pharmacies along with the administrative fee for services that have been provided. This leads to aligned incentives between the plan sponsor and PBM as the PBM revenue is not tied to the medication being dispensed but to a predictable fee to manage the benefit.
There are no spread pricing practices in the transparent PBM model, so consumers and end-users get maximum savings. Transparent, or pass-through, PBMs like Araya allow 100% of the rebates and discounts to go through to the plan sponsor. They make all of their money through administration fees.
What About Hybrid PBMs?
There is also a hybrid model. This is exactly how it sounds – they generate some revenue from spread pricing, but they also share more revenue with their plan sponsors. This model is slightly more transparent.
The hybrid model also allows for some sharing of pharma rebates, incentives, and discounts with their plan sponsors, but this model still lacks full transparency, so end users will not know how much of that revenue their PBM keeps. The hybrid PBM may charge an administration fee, but they may not.
Questions to Ask Your PBM About Prescription Drug Benefits
When you’re working with a PBM, the first question you’re going to want to ask is whether they use spread pricing. If you don’t know the answer to this, then it’s very likely that your PBM is using spread pricing.
Another question to ask your PBM is are there any other revenue streams that are not disclosed in your current contract, such as manufacturer marketing fees, revenue from copay assistance programs, and/or Direct and Indirect Reimbursement fees.
Why Worry About Spread Pricing?
Not only does avoiding and limiting spread pricing benefit end-users in terms of cost, but it also benefits them in terms of safety. When a company uses spread pricing and keeps rebates to themselves, they can be incentivized to make healthcare decisions for an end-user they’ve never met based on profits rather than need.
When a company is not motivated by potential profits gained through rebates and discounts offered by drug manufacturers with expensive products, it means they can support the medications that will best serve the patients’ needs.
When it comes to transparent PBMs like Araya, it’s a win-win situation – medications cost less, and they are likely to be the medications that are safest for the individual they’re prescribed to.
