A Pharmacy Benefit Manager (PBM) is a third-party administrator or TPA for pharmacy claims, and is analogous to a Medical TPA except the are paying pharmacy claims instead of medical claims. These are the following are primary responsibilities of PBM’s:
- Processing and paying drug claims
- Developing and maintaining drug formularies
- Contracting with pharmacies
- Negotiating discounts and rebates with manufacturers
- Customer service for members
- Case management programs
PBM’s can act independently or may have a relationship with an insurance company, administrator, or TPA. When a PBM is dealing with an insurance company this may be a proprietary or exclusive relationship – the PBM may even be owned by the insurance company. Other PBM’s may be aligned with a TPA or other administrators and provide all PBM functions exclusively for that TPA. Some TPA’s have more than one relationship with a PBM. Also a PBM may be freestanding or market their programs to a broker. These may be in addition to their other relationships.
Because most brokers really don’t know what they’re looking at when comparing PBM’s, brokers tend to rely on an insurance company or TPA to provide that service for them, or recommending a PBM on the TPA’s recommendation. If a broker does know or thinks they know what they’re doing when comparing PBMs, games can be played by PBM’s that make them appear to be more competitive, e.g. Maximum Allowable Cost (MAC) pricing, discounts below average wholesale price (AWP), administrative fees and rebates, which make it difficult to analyze. Some PBM’s offer additional services or outsource those services such as mail-order pharmacy, specialty drug programs, or diabetes kits, etc. Most brokers don’t want to spend the time examining all these aspects and therefore subsequently rely on other parties (insurers and/or TPAs) to make a recommendations for an employer.
Drug rebates are typically offered and negotiated by drug manufacturers to PBM’s for their self-funded clients A rebate is paid to a PBM by a drug manufacturer for placing them on the formulary list so that that more of the drug can be sold. The rebates are offered in a variety of different financial arrangements, but PBM’s then typically share these rebates or a portion thereof to self-funded groups. The question becomes whether or not they’re sharing 100% of the rebate with you or is your broker and/or other vendors keeping it?
On numerous occasions in my prior life as a broker, I’ve sat across from PBMs and they’ve asked me how much of the rebate would I like? Would I like $.25 on the dollar $.50 on the dollar? They then keep some of it and rebate the balance to the employer. These amounts can be significant if forfeited.
Brokers can also add on a variety of different fees and income sources to increase their revenue beyond what they may simply be disclosing to you. Generally speaking there is no disclosure of this information unless it appears in the PBM agreement or TPA administrative contract. A lot of brokers will charge on a per prescription basis, anywhere from $.05-$.25 per prescription. You can imagine that this is a sizable source of revenue for the broker at your expense.
It’s extremely important to know the details behind a PBM when selecting them. It’s not just what pharmacies do they have and how big is their network; it’s about the elements that you don’t necessarily consider. You broker should be examining these, but more often than not they don’t do so. For a small to medium size company the differences can be extraordinary.
Unfortunately the brokerage business is one which is over-promised and under-delivered. You don’t know what you don’t know.