Americans spend more on prescription medications than people in any other country in the world. High prescription drug costs have created affordability issues for many patients in the health-care system. According to a new report published by the US Department of Health & Human Services (HHS), the average prescription list price increased by nearly $150 per drug in January 2022 and $250 per drug in July 2022.
Pharmacy benefit managers (PBMs) play a direct role in the management of prescription drug benefits in the US. These powerful companies perform on behalf of large employers, health insurers, Medicare Part D drug plans, and other payers to better control drug spending. Learn more about PBMs and their role in rising prescription drug costs and spending.
What Is Pharmacy Benefit Management ?
Pharmacy benefit managers (PBMs) play a key role in the prescription drug market. These companies negotiate with pharmacies and drug manufacturers to gain control over drug spending. Their significant role in the industry directly impacts the total drug cost for insurance companies. PBMs also help shape patients’ access to prescription drugs and have a say in how much pharmacies are paid.
In the United States, pharmacy benefit managers operate in the middle of the prescription drug distribution chain. They perform a variety of tasks, such as:
- Create formularies or lists of covered prescription drugs on behalf of health insurance companies. This has a direct impact on which medications patients use and the out-of-pocket expenses that they pay for drugs.
- Use their purchasing power and experience in the industry to negotiate discounts and rebates directly from drug manufacturers. The savings from these discounts and rebates are often passed onto patients.
- Contract with individual pharmacies to get reimbursements for drugs that are dispensed to beneficiaries.
Navigating the Objectives of a Pharmacy Benefit Manager
PBMs generally work alongside corporate employers, labor unions, health plan providers, and other organizations that offer health-care benefits to members or employees.
The primary objective of a PBM is to facilitate a positive health outcome for patients by making prescription drugs more accessible and affordable through retail pharmacies and insurance providers.
There are several key responsibilities of PBMs, including the following:
- Negotiate prescription drug rebates
- Process and file claims
- Review patient compliance
- Conduct drug usage reviews
- Provide specialty pharmaceutical services
- Oversee the distribution of prescription drugs within networks
- Maintain formularies
PBMs have extensive technical knowledge and possess the interpersonal skills needed to retrieve the best discounts and rebates on medications. They also use these skills to assess economic factors, public health needs, and business strategies to help create fair pricing guidelines.
A Pharmacy Benefit Manager’s Power of Negotiation
There are many different parties at play within the insurance industry. From underwriters and reinsurers to pharmacy benefit management companies, each party plays a critical role in prescription drug costs and spending.
PBMs are often referred to as the middlemen as they are responsible for negotiating discounts and rebates with drug manufacturers on behalf of insurance companies in exchange for getting the manufacturer’s medications in front of patients. PBMs also negotiate contracts with pharmacies to develop networks of pharmacies for successful drug distribution.
PBMs are known to exploit multiple revenue streams, such as by charging fees for operating mail-order pharmacies, processing prescriptions, and negotiating with insurance companies, pharmacies, and drug manufacturers. When PBMs contract with larger insurance companies, it gives them even more power over negotiations with pharmacies and drug manufacturers.
Common Criticisms of the Pharmacy Benefit Manager Role
PBMs have long been targets of government scrutiny and lawsuits. A PBM is a third-party negotiator, meaning they are not required to always disclose discounts, rebates, the percent of savings passed onto insurance companies or even itemized billing statements. This has resulted in some criticisms of PBM practices.
Legislatures in many states are continuing to push for greater transparency among PBMs, as well as disclosure provisions to help regulate these companies. There is also ongoing pressure to place a fiduciary duty on PBMs which would force them to always act in the best interest of insurance companies and health-care plans. However, tighter regulations in the prescription drug market could possibly impact future profitability.
Policymakers across the US are looking to reform pharmaceutical reimbursement beyond common practices like rebates. However, these policyholders must also consider how these changes could impact new market competitors due to recent mergers between insurers and PBMs.
How Pharmacy Benefit Managers Handle Rebates
Prescription drug rebates have been around for decades and were initially paid for by nearly every brand-name medication on the market. However, drug manufacturers began to consolidate these rebates over time into fewer drugs. When more specialty drugs became available, PBMs were able to define which medications were eligible for specialty drug rebates.
Rebates are typically paid on a per-claim basis. The amount of the rebate may be held constant depending on the PBM, resulting in a higher rebate yield. Most rebates are connected to more expensive prescription drug brands, as well as specialty medications. PBMs may include or exclude some types of prescription drugs from rebate guarantees when quoting rebates that are relative to specialty drugs.
The biggest issue in how PBMs handle rebates deals with transparency. Many policymakers agree that drug pricing should not be kept secret and that price discrimination, in which no one really knows what anyone else is pricing, leads to larger discounts. Regardless, transparency is still needed to maintain a well-operating prescription drug market.
Pharmacy Benefit Managers Control Pharmacy Choice
There has been ongoing confusion over who really controls drug pricing in the prescription medication sector. PBMs claim that they work directly for insurance companies and negotiate to get low-cost medications from drug manufacturers. However, PBMs also claim that it is the drug manufacturers that are solely responsible for setting drug prices.
According to the Drug Channels Institute, PBMs increase drug costs by nearly 30 percent due to rebates charged to drug manufacturers to remain on their formularies. In 2019, PBM rebates reached $143 billion which adds almost 30 cents per dollar to the cost that consumers pay for their prescription medications.
So, who really benefits from prescription drug rebates? It is not the pharmacies or even the patients. Instead, it is the bottom line of PBMs and their executives that benefits most.
Passing the Savings to Employees with Competitive Plans
PBMs are believed to be driving up the cost of prescription drugs for patients across the US. Many employers are struggling to keep up with increasing health-care costs while continuing to provide their employees with the best coverage possible. Working with an experienced employee benefits consulting firm can help businesses overcome these struggles.
New City’s innovative solution to problems surrounding PBMs is to work with a transparent pharmacy benefit manager that charges only a small flat fee each time that a prescription drug is dispensed rather than face the large inflation of cost that is commonly seen with PBMs. For more information or to schedule a consultation with a member of our team, contact New City Insurance.