An Introduction to Pharmacy Benefit Managers (PBMs)
Rapid change and increasing complexity across healthcare and pharmacy over the past several years are keeping many employers up at night. Pharmacy costs are higher than ever, driven not only by meaningful advancements in care and the introduction of high-cost therapies, but also by the broader pressures of inflation. At the same time, new programs and profit-driven strategies introduced by PBMs are compounding these challenges, making it even more difficult for employers to manage pharmacy spend effectively.
Organizations at every level are searching for meaningful relief. Specialty medications represent just 2% of pharmacy claims, yet account for roughly 55% of total pharmacy spend, with average annual costs nearing $84,000 per treatment. As these costs continue to rise, employers and plan sponsors are increasingly demanding greater transparency across an often complex and opaque pharmaceutical supply chain.
PBMs are positioned to negotiate, and in theory, help control drug costs. However, the nuances of this segment of the supply chain often make it difficult to fully understand where dollars are going and how to optimize a pharmacy benefits strategy.
What is a PBM in healthcare?
PBMs are third‑party organizations that administer prescription drug benefits on behalf of health insurers, employers, and government programs. They act as intermediaries among pharmaceutical manufacturers, pharmacies, and plan sponsors, with a goal of managing drug utilization and negotiating pricing to help control costs while maintaining patient access to medications.
Despite this role, PBMs occupy a somewhat controversial position within today’s U.S. healthcare system, an industry under significant strain from rapidly rising costs. PBMs were created, in part, to address these pressures, yet their presence also adds an additional layer to an already complex supply chain.
In the current model, the function of the PBM is to act as a go-between, seeking discounts, rebates, and other advantages in the prescription drug market on behalf of insurers, employers, and patients. As a for-profit business, the PBM must also account for its own profits in the exchange, which means that the discounts must be substantial if it is to be worthwhile of both the PBMs and the employers/patients. This is sometimes possible, but it is not always the case.
What does a PBM do to reduce costs?
PBMs negotiate with drug manufacturers, wholesalers, and pharmacies for the most competitive prices for benefits plans. An employer or insurer working with a PBM is hoping to see reduced pharmacy costs negotiated into the PBM’s contract with drug manufacturers in the pharmaceutical supply chain.
You may wonder: Why would drug manufacturers and pharmacies sell products to the PBM at reduced rates? The PBM offers manufacturers a preferred placement on their formulary drug list and offers pharmacies inclusion in the PBM’s pharmacy network. Both of these preferential placements are valuable incentives for the drug manufacturers, and can sometimes lead to more affordable patient access to those specific drugs (through the PBM). As part of formulary management, PBMs also manage utilization management programs such as prior authorizations, step therapy, and quantity limits to drive appropriate and cost-effective medication use.
However, a PBM’s role in price-setting in the pharmacy space has created heightened publicity for large PBMs, specifically around rich profit margins, which come from their plan sponsor customers and the plan members. Negotiations for discounts on high-cost drugs may be contingent on the exclusion or unfavorable placement of other, lower-cost drug options on the formulary. The outcome could potentially result in a net increase in employer/patient costs from which the PBM could benefit financially.
A PBM may also leverage alternative funding sources in an attempt to make pharmacy benefit plans more cost-effective for both plan sponsors and members, including copay assistance programs, government pharmaceutical assistance, charitable programs, or international drug sources.
An a la carte, unbundled approach to pharmacy services is also trending as a strategy for maximizing pharmacy spend (and competing against the drive for PBM profits), so PBM action is not the only way to potentially reduce costs.
What is a PBM’s connection with health insurance plans?
The relationship between the PBM and the overall health insurance benefit will be directly tied to whether the pharmacy benefit is carved in or out.
There are two strategies self-insured employers use to manage their pharmacy benefits, “carved in” (as a part of the larger medical benefit) or “carved out” (complemented by a standalone benefit managed outside of a health plan). Whether the pharmacy benefit is carved in or out will depend on the precise arrangement of the plan and the employer.
When carved in, the pharmacy plan is essentially bundled with medical benefits and will usually be run by a large health plan. Many large PBMs are owned by a well-known medical carrier. For example, United Healthcare and Optum, Aetna and CVS, or Cigna and Express Scripts. This allows for simpler administration across medical and pharmacy benefits, but less transparency in some cases.
Carving out becomes a viable method for controlling costs with a self-funded plan. A carved-out pharmacy benefit provides a certain level of customization that can potentially control and contain costs on a deeper level, although the details should be carefully compared with the expected costs of carved-in options.
Is my PBM providing the best possible market competitive pricing?
It can be overwhelming for employers to examine the many players in the drug supply chain and get a clear and accurate view of where things stand. Between physicians, direct manufacturers, wholesalers, pharmacies, health insurers, PBMs, and the many layers of health benefit plan design, the landscape is complex. At the same time, demand for expensive new drugs such as GLP-1 agonists is surging, putting pressure on employers to find a solution
A neutral outside expert can be instrumental in maximizing the value of your PBM contract. A partner like Truveris brings the data-driven tools, focus, and expertise you need to carefully analyze the value of the relationship or better manage your contract throughout the pharmacy benefits lifecycle.
Preview some of what’s possible with the proactive application of expertise in pharmacy benefits procurement in these case studies.
Watch “PBM 101” For More Quick, Actionable Insights
There’s no need to feel intimidated by the surface complexity of pharmacy benefit management and its sometimes-obscure terminology. The experts at Truveris have put together PBM 101, an easy-to-digest video breakdown of everything you need to know about Pharmacy Benefit Managers, what they do, and how to determine the value you’re getting from your pharmacy benefit contract.
In this overview of the PBM ecosystem, we’ll walk you through:
- The role of the PBM in the drug supply chain
- How PBMs have changed over the last 50 years
- The typical services provided by a PBM
- How employers pay PBMs
- How PBMs make money
- The latest industry trends impacting PBMs
Access the PBM 101 video to learn more and ensure that you’re getting the most from your PBM relationship.
