Understanding the World of Pharmacy Benefits Management By Dave Marley
Jun 1, 2012
For a country in which 200 million people receive prescription drug coverage through a pharmacy benefits manager (PBM), there are surprisingly few people who can explain just how PBMs affect prescription medication costs and consumer access to medication. In part, that’s because the PBM business model involves confusing contracts and financial transactions. But it’s also due in large part to the lack of regulation and transparency that have become common in the PBM industry, and employers and consumers are paying the price.
Pharmacy benefits managers are third-party administrators of prescription drug programs who contract with employers, insurers and pharmacies to manage prescription drug coverage for pharmacy patients. Initially, PBMs were put in place to create convenience. The idea was to create a simple, transparent process conducted for a flat administrative fee on a per-claim basis. Over time, as PBMs came to control a larger share of the pharmacy market, the industry evolved to include complex practices meant to increase PBM profits, often at the expense of employers and pharmacists.
Today, PBMs control an unprecedented portion of the prescription drug market. In April, the Federal Trade Commission granted approval for a $29 billion merger between two industry giants, Express Scripts and Medco. Even before the merger, Express Scripts and Medco controlled a large share of the market. Medco was ranked No. 36 on CNN’s list of the 2012 Fortune 500; Express Scripts was No. 60. Now, as the companies consolidate and PBMs exercise increased power, it’s vital for employers and consumers to understand the ways in which PBMs may be profiting at their expense.
PBM contracts are often riddled with language that makes fee structures confusing and jargon that makes it difficult to discern what employers are actually paying for. But just like with any other contractor, employers should know exactly where their money is going.
In part, the PBM model relies on employers and HR managers not asking the tough questions. But employers can ensure transparency between their company and PBM by making sure they have written, understandable answers to these three questions:
• Can you provide a detailed, itemized explanation of your fee structure and schedule?
This question will help employers understand exactly what they’re paying for and help them make sure they aren’t being charged mark-ups on drug prices that will go straight to the PBM’s profits.
• Do you use the same benchmarks in calculating price to clients and payments to pharmacies?
PBMs have been known to charge employers a higher price for some drugs than they reimburse the pharmacies. When they do, the “spread price” difference is money from the company’s bottom line going straight to the PBM.
• Can I review a copy of your contract with network pharmacies?
Employers should make sure they know what the pharmacies are hearing from the PBM too. This will help ensure responsibility and transparency and discourage the PBM from marking-up drug costs. If the PBM won’t agree to show the employer a copy of network pharmacy contracts, there’s a good chance there’s something the PBM is trying to hide.
UNDERSTANDING “THE SPREAD”
General practice is for employers to sign a contract where their “administrative fee” or “per member per month” (PMPM) cost is defined per transaction. However, there is often little disclosure by the PBM of the actual drug cost that the pharmacy is paid vs. what the employer is charged – on a transactional or holistic basis. The common assumption on the employer’s part is that they are paying pharmacy costs plus an administrative fee with no knowledge of the mark up that is happening in the middle, or the spread.
Meanwhile, pharmacists are contractually forbidden to tell the PBM’s clients how much they receive for the same drug. That lack of transparency gives the PBMs all the privacy they need to price-gouge consumers. When administering generic drugs, which are typically cheaper than their brand name counterparts, some PBMs charge employers large mark-ups and bill for “ingredient cost,” a fabricated term meant to confuse employers. It inflates the cost of the drug for the employer and allows the PBM to make incredible profits at the employers’ expense.
LOOKING OUT FOR THE REBATES
As medication costs continue to rise year after year, it would be reasonable to think that rising ingredient costs or increased research and development might justify a price increase. But the real reason for price increases is much less palatable. Manufacturer rebates paid to PBMs for preferential formulary placement ultimately drive drug costs up while contributing to PBM and manufacturer profits.
Here’s how it works: Typically, pharmacy benefit managers keep the majority of the rebate dollars from manufacturers while passing on small “discounts” to employers. To avoid losing money through rebates, drug manufacturers simply raise the price of a drug year after year to recoup the cost of the previous year’s rebate. That rise in cost is often much higher than any “discount” PBMs passed on to employer the year before. So the rebates that are supposedly saving consumers’ money are instead lining the pockets of the PBMs and increasing drug costs year after year.
If the employers are going to pay higher and higher drugs cost each year, they should be getting every penny of the manufacturer’s rebates and incentives paid to the PBM. It’s important to understand how rebates work and for employers to talk to their PBM to find out exactly how big a portion of manufacturer rebates the PBM retains and how much is passed on to employers and consumers. As the power of the nation’s largest PBMs increases, there’s never been a more important time for employers and consumers to ask the tough questions about medication costs and the PBM business model.
DAVE MARLEY BIO
is the President of Pharmacists United for Truth and Transparency (PUTT) an independent watchdog organization dedicated to exposing the role Pharmacy Benefit Managers play in driving up prescription drug costs for consumers and employers. PUTT is a growing coalition of independent pharmacists and pharmacy owners and a resource for employers, policy makers and members of the media. Visit TruthRx.org