Top 3 Things You’ll Learn
- What determines the cost of a prescription drug in your client’s pharmacy plan
- The difference between aggregate and client-level pharmacy contract guarantees
- How PBMs earn revenue through pharmacy benefits contracts
A common misconception in drug pricing is that the cost of a prescription medication for a particular health plan is tied directly to the particular pharmacy used to fill the prescription. The truth is that the pharmacy benefit manager (PBM) determines the cost of a prescription drug for a health plan. Regardless of the pharmacy, a PBM can charge any amount to a plan for a given prescription. It is imperative that self-funded employers have a competitive, auditable pharmacy benefits contract that places constrains the PBM and ensures financial guarantees are achieved.
At the end of the day, the pharmacy and the prescriptions are simply variables because the PBM is determining what plan sponsors pay for their prescription drugs. Without a contract, there’s no limit to what a plan can be charged.
At the end of the day, the pharmacy that members go to and the prescriptions they fill are simply variables because the PBM is determining what your clients will pay for their prescription drugs.
How Pharmacy Contract Guarantees Work
When you review a typical pharmacy benefits contract, you will see one of two types of guarantees: a client-level guarantee or an aggregate “book of business” level guarantee. In a client-level guarantee, all of the terms in the agreement are guaranteed to that individual employer. This means that if there is a discount target to be achieved, that employer will collect that particular discount based on their utilization.
An aggregate or book of business-level guarantee is not really a guarantee at all. It is a target for the book of business covering many employers, typically of an insurance carrier or coalition. Under these terms, clients performance will be scattered, some better and some worse than the targets. These terms can’t be audited, and the any shortfall is required to be paid to the carrier/coalition, not to the end client. Leaving underperforming clients holding the bag.
How PBMs Make Money
There are several areas within a pharmacy benefits contract where PBMs can generate revenue. The most common way in a traditional contract is through spread pricing, which is when the PBM bills the health plan more than the amount they pay the pharmacy. Other areas where the PBM earns revenue include:
- Rebate retention – When the PBM makes a collective rebate from a drug manufacturer and does not pass on 100% of it to the client.
- Administrative fees – Under a pass-through contract, the PBM typically charges fees to service the account.
- Owned pharmacies – When the PBM owns a retail, mail-order, and/or specialty pharmacy, they have revenue sharing agreements and make additional money from dispensing medications and managing patient through those channels.
- Clinical programs – Additional revenue is made through clinical programs and running various clinical fees associated with them.
To ensure your clients’ pharmacy benefit plan works in their best interest, having a clear understanding of the PBM’s contract options can provide valuable insight into what your clients can expect and what the PBM gains from the arrangement.
Check out our Contract Best Practices e-book for more tips on how to ensure your self-funded clients’ pharmacy benefits contracts align with their best interests, not the PBM’s.