What is a Pharmacy Benefits Manager (PBM) and How Does a PBM Impact the Pharmacy Benefits Ecosystem?

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A pharmacy benefits manager, also referred to as a PBM, is the intermediary between each stakeholder in the pharmacy benefits marketplace – connecting pharmaceutical manufacturers, employers, pharmacies, and health plans. Many people assume that pharmacy benefits come directly from health insurance providers, but in reality, PBMs are doing the bulk of the work in connecting people to prescriptions for a majority of employers in the U.S.

PBMs are hired by corporate employers, health plans, labor unions, and other organizations to interface with drug manufacturers and to process prescription-related claims. The PBM’s objective is to negotiate drug prices with drug manufacturers and pharmacies on behalf of payer. Having an effective pharmacy benefits strategy and selecting the right PBM to meet an employer’s needs is critical to ensure the success of a benefits plan, optimize drug spend, and protect the well-being of employees.

What exactly does a pharmacy benefits manager do?

PBMs have two main objectives: to curate pharmacy benefits plan options for plan sponsors, and to help patients (or “plan members”) access and afford the medications they need.

Objective 1: Negotiating with Pharmacies

PBMs negotiate pricing with a large network of retail or mail pharmacies. Due to their size and thus leverage, PBMs can also buy drugs from manufacturers at a discount. This scale enables them to offer patients and employers greater access to medications across multiple retail chains at more affordable prices.

Objective 2: Negotiating with Drug Manufacturers

PBMs increase a patient’s access to medications by negotiating directly with drug manufacturers or wholesalers. PBMs negotiate discounts from Wholesale Acquisition Cost (WAC) for quantity discounts, which the PBM is then able to pass on to their clients. This means patients are able to get coverage for a drug they need at a lower cost.

In addition, a PBM can often serve as an advisor to employers by providing recommendations on different pharmacy plan designs, clinical programs, and more.

It’s fair to think of the relationship between the PBM, the pharmaceutical manufacturer, and the employer a little bit like a game of tug-of-war. The PBM is in the middle, connected to both the manufacturer and the employer, and is being pulled in both directions — with the goal of getting both parties a fair deal and offering solutions to minimize prescription benefit costs.

How does a PBM work with pharmaceutical manufacturers?

The relationship between PBMs and pharmaceutical manufacturers is complicated. There are a number of financial challenges and complicated contract terms involved with interactions between drug companies and PBMs. As an intermediary between pharmaceutical companies and patients, PBMs are responsible for determining the affordability of a drug and putting programs in place to help patients access medications and use the most effective treatments. These programs include:

1) Rebate programs

PBMs negotiate with pharmaceutical companies to determine the level of rebates the manufacturer will pay the PBM for certain drugs. Depending on the contract between the PBM and the employer, the PBM will pass all, some, or none of the manufacturer’s rebate to the employer.

2) Formulary coverage

A drug formulary is a list of drugs, both branded and generic, that a certain plan covers. The formulary list is determined by PBMs (with the assistance of physicians and other clinical experts) to include the drugs that will be most effective and affordable. Given the volume of medications that go through a PBM, when a drug is covered on the formulary, it’s much more likely to be prescribed by a physician. Ideally, a pharmaceutical manufacturer wants to make sure their drugs are covered in the formulary in order to reach the patients that need them.

3) Prior authorization programs

Prior authorizations are a cost-savings feature of pharmacy benefits plans that help ensure the appropriate use of prescription drugs. In essence, they act as a guardrail to make sure that patients are receiving the best possible medication for their unique needs. PBMs identify specific types of drugs that require a prior authorization. When a prior authorization occurs, the patient must then get approval from their carrier before the insurer agrees to cover the drug and allow the patient to begin treatment.

4) Step therapy programs

Step therapy programs are a type of prior authorization program that applies to both traditional and specialty drugs. PBMs want patients to at least try a less expensive drug that has shown proven effectiveness for their specific condition before they move on to a more expensive drug. Therefore, PBMs often create step therapy programs for patients to adhere to, with the goal of saving the employer (and patient) money.

PBMs are also responsible for implementing other important programs designed to reduce waste and increase adherence, manage high cost specialty medications, and manage clinical drugs.

How does a PBM work with employers?

When an employer signs a contract with a PBM to design and maintain a pharmacy benefits plan, they typically contract for a three-year relationship. During the initial discovery phase, both parties work together, and in some cases with brokers and industry experts, to build their ideal pharmacy benefits plan. This includes choosing from different deductibles, co-payments, co-insurances, and clinical programs.

After the employer has approved the plan design, they’ll rely on the PBM to correctly administer their prescription benefits, and to educate their employees about their coverage. PBMs typically offer call centers for member support and can answer questions about the in-network pharmacies or different co-payments for different drugs. Most PBMs also offer websites or apps that offer easy access to information about eligibility, refills, pricing, and coverage rules.

Throughout the contract, PBMs are responsible for four main components of the agreement with the employer:

1) Claims processing

PBMs are responsible for processing and paying prescription drug claims within a prescription benefits plan.

2) Rebate reimbursement

As previously noted, PBMs negotiate rebate programs with pharmaceutical companies. There are many complicated models for rebate programs, but the PBM is in charge of administering these rebates. Depending on the contract between the PBM and the employer, all, some, or none of the rebate amount goes back to the employer.

3) Clinical programs

Clinical programs are designed to encourage the best clinical outcomes for members within a pharmacy benefits plan. PBMs review data and monitor drug usage on an ongoing basis to determine what adjustments should be made to meet plan goals.

Clinical programs include prior authorization, quantity limits, and step therapy, and are all instituted to ensure the highest quality of care is delivered to the patient in the most appropriate setting.

4) Drug utilization review

PBMs play an important safety role within pharmacy benefits plans. Drug utilization review is a life-saving program that calls for the review of a drug to determine the effectiveness, potential dangers, drug interactions, and other safety concerns. Since PBMs oversee their own pharmacy networks, they have access to a patient’s prescription history and can alert patients or physicians to potential negative drug interactions that could occur by mixing different prescriptions.

The PBM also sets the specific criteria that that a patient’s care must meet before distributing certain drugs. These criteria could include healthcare providers verifying the diagnosis, determining if there’s a genetic component involved, making sure the right testing is done, and instituting a specialist during treatment. This is all in an effort to make sure a patient is taking the proper steps for treatment, isn’t exceeding the quantity or dosage needed, and is responding well to the medication.

On the back end, employers rely heavily on PBMs to bring them trends and information regarding the performance of their plan and how to make improvements. It’s critical for employers to maintain an ongoing dialogue with their PBMs to ensure that their members are always receiving the best possible care at the lowest possible cost.

How to find a PBM that’s right for your organization

There are dozens of PBMs and innovative vendors to choose from to administer your pharmacy benefits plan. Sometimes insurers even create their own in-house PBMs to handle relationships with drug manufacturers, and other insurers are vertically integrating with PBMs directly.

It can be difficult to compare offers between different PBMs to select a vendor that serves the needs of your population and saves your organization money. Therefore, it’s critical to use an independent pharmacy marketplace that allows for more visibility into what PBMs are offering you, so that you get the most competitive PBM contract. But buyer beware, you must ensure that your procurement marketplace is 100% transparent – and not actually affiliated with preferred PBMs or vendors. A transparent procurement marketplace is the only way to ensure that you actually are getting the best rate on your PBM.

To learn more about PBMs, watch our PBM 101 Education Session and Contact Truveris today to learn more about our fully-transparent pharmacy Marketplace.