Healthcare costs in the U.S. are continuing to shoot up and are nowhere near stopping. PBMs, the middlemen between employers and drug manufacturers, play a big role in these increasing costs by often keeping employers in the dark about real drug prices, leading to higher expenses for everyone involved while they profit. The key takeaway? It's important to understand how your PBM operates to avoid unnecessary costs.
Each year healthcare costs keep rising, even as employers adopt more sophisticated cost cutting strategies. The facts speak for themselves:
Frustrating, isn’t it?
That is why we decided to spend some time researching this ever-increasing trend. While many sources pointed out the role of rising drug prices, accounting for more than 20% of total healthcare costs, they seemed to overlook a significant player– the Pharmaceutical Benefits Manager (PBM).
To shed some light on this we recently hosted a webinar for a small group of benefits consultants that aimed to unravel the mysteries behind what PBMs do and how their practices are adding to the overall healthcare expenses. The feedback was overwhelmingly positive with many attendees seeing great value in their new learning as they all know that for you to stay a leader in the field, you must understand your spending!
So if you are a benefits leader at a self-insured company, and want to ensure that your company is truly getting what it pays for, continue reading as in this post we will explore the mysteries of PBMs, how they operate, and in what way they exploit the system and drive up costs.
Even though they don’t like this description, PBMs are essentially middlemen between a self-insured employer’s health plan dollars and the drugs it is buying. They negotiate discounts and rebates for prescription drugs with drug manufacturers and pharmacies to secure the best prices for prescription drug plans purchased by employers. However, these negotiation processes are often complex and include various pricing structures that are not always transparent. So often the employer is left in the dark and trusts that their PBMs are acting in their best interest. The question is, are they?
The answer is NO, PBMs don’t always act in their clients’ best interest. They often exploit the trust of their clients and do not disclose all details of their negotiations. This is quite a scary reality, yet the solution is quite simple. Get to know your PBM!
We believe that the best way to do so is to learn how PBMs get paid. In other words, you just have to follow the money. To help you out with this we will review the cash flows in the pharmaceutical distribution system by following the example of a fictional company CoolClaim that is looking to purchase a health plan.
The first step for CoolClaim is to hire a benefits consultant that advises them on what healthcare plan they should purchase. Similarly to other employers, CoolClaim recognizes the value of benefits consultants as they have a deep understanding of the benefits market and can help companies find the most cost effective healthcare plan while freeing up HR teams to focus on other tasks. This is a win-win!
After CoolClaim receives advice from their benefits consultant they choose a PBM that best fits their needs. They pay the PBM for a prescription plan where their employees can access specific drugs at lower prices, negotiated by the PBM.
The PBM takes CoolClaim’s money and keeps some in administration fees for their services (i.e. price negotiations and claims processing). The remainder of the money is then given to the pharmacy in exchange for the negotiated prescriptions.
Aware that they have a new client demanding prescriptions, the pharmacy pays their wholesaler to restock their inventory of drugs. Here more negotiations take place as pharmacies try to negotiate the most beneficial wholesale rates.
Lastly, the wholesaler purchases drugs from a drug manufacturer to have enough drugs to distribute to the pharmacies they work with.
But wait…there is a catch.
We already discussed that PBMs make money by charging admin fees to the employer they work for, however what we did not mention is that PBMs have a so-called “second customer” through which they generate revenue. These customers are the drug manufacturers. This might seem counterintuitive, especially because our example above does not show any link between the PBM and the drug manufacturer. However, as PBMs create this link using the power they have over employers' drug purchases. That is, PBMs promise to include the manufacturer's drugs in their drug list sold to the employer for additional rebate payments.
So to make our understanding of the cash flow in the pharmaceutical distribution system complete we have to add a 6th step.
Does it look like everyone other than the employer (and their consultant) is “stuck in a loop”?
The previous section made it clear that PBMs occupy a very powerful position in the pharmaceutical supply chain. Unlike any other actor they are able to bring both ends of the industry together – the manufacturer and the employer. This not only allows them to generate revenue from both sides but also benefit from information asymmetry, where they block the complete transmission of information from the drug manufacturer to the employer.
To illustrate more clearly let's return to the example of our company CoolClaim. When CoolClaim hired their PBM they relied on their expertise to provide them with the best drug prices in the market. The PBM put together a list of drug prices and highlighted the drugs for which they gained a $20 rebate from the manufacturer. However, instead of offering the prescriptions for $20 less they conceal the details of their deal and make CoolClaim pay the price prior to the rebate. The PBM did not stop there, for the rest of the drugs they concealed the details of their negotiations with pharmacies and charged CoolClaim higher rates while keeping the spread. Eventually, CoolClaim ended up substantially overpaying for its healthcare plan and was forced to cut costs on other priorities. Not the bang for the buck you should be looking for, if you ask us.…
“PBMs can present the employer with a higher prescription price than the negotiated rate and then keep the difference.”
Similarly, PBMs can also pressure the other side of the market– the prescription suppliers– which also results in higher healthcare prices. An example of this is the recent antitrust lawsuit filed against one of America’s largest PBMs – Express Scripts. They are accused of colluding with rival PBMs Prime, Benecard and Magellan to increase their bargaining power when negotiating rebates with pharmacies. By this pharmacies are saving less and thus increase drug list prices to reduce the additional financial burden that this collusion caused. This ultimately reflects in increased healthcare costs suffered by employers while PBMs continue to increase their revenues.
There are also significant issues with PBMs who own their own pharmacies, known as PBM-owned pharmacies. Here PBMs are essentially negotiating prices with themselves which gives them significant monopoly power and puts upwards pressure on prescription prices. This is a whole other topic full of PBM intricacies which we will explore in our next post!
Even though we unraveled some scary truths about PBMs we also have some good news for you. Lately, there has been a great push towards transparency within the industry which allowed for the emergence of transparent PBMs. Also known as pass-through PBMs, these benefits managers operate with full disclosure of their pricing models and negotiating practices, limiting their strategy to just a simpler fee schedule focused on admin fees. According to the managing director of the pass-through PBM Transparency-Rx, employers can save approximately $20 per prescription when switching from their traditional spread-pricing PBMs which can accumulate up to 30% of savings on healthcare costs. Not bad, right?
The outcomes of transparent PBMs have certainly impressed us, and the growing demand for their services reassures us that we are on the right path to improving healthcare in the U.S. That is also why we are always looking to partner with PBMs that prioritize transparency in their pricing model. So stay tuned for more product updates on our side!
So what is the main takeaway? Next time you make changes to your healthcare plan, make sure you know your PBM!
However, even if you are still unsure about your stance on the topic, don’t fret! We simply hope that you either learned something new, confirmed your suspicions or affirmed yourself in what you already knew. And of course if you want to dive into this topic further, let us know! We can always schedule another webinar exploring more PBM complexities.
Contact the TrueClaim team to learn more!
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