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How Payers and Pharmacy Benefit Managers Work Together to Lower Costs
Pharmacy benefit managers negotiate prescription drug prices with drug manufacturers and pharmacies on behalf of payers.
As prescription drug spending rises in the United States, healthcare stakeholders and policymakers constantly look for ways to curb costs. Many payers turn to pharmacy benefit managers (PBMs), which aim to negotiate lower drug prices with pharmaceutical manufacturers.
PBMs are third-party entities that act as intermediaries between health insurers and drug companies. PBMs manage prescription drug benefits for commercial health plans, self-insured employer plans, Medicare Part D plans, and Medicaid managed care organization plans. They are tasked with negotiating rebates and discounts with manufacturers, creating formularies, establishing pharmacy networks, and processing claims.
Although PBMs were created to reduce prescription drug spending, the companies have faced scrutiny from other industry stakeholders. Some say that PBMs are incentivized to favor expensive drugs over more cost-effective drugs, as PBMs often receive rebates that are calculated as a percentage of the manufacturer’s list price. This can lead to higher out-of-pocket costs for health plan members.
Additionally, there have been concerns about PBMs pocketing rebates instead of passing them on to payers and members.
Given the role PBMs play in prescription drug costs, the relationship between payers and PBMs can have significant implications for member experience and drug spending. In the following article, HealthPayerIntelligence explores how payers choose which PBMs to work with and how this partnership functions.
Choosing a PBM partner
Payers must contract with a PBM that both fits their needs and delivers quality service to their members. Payers may look at a PBM’s reputation in the industry, experience, financial state, and past performance managing pharmacy benefits when considering a partnership.
PBMs also contract with pharmacies, so payers should ensure that those pharmacies are a good fit for their member population, including their locations and sizes. PBMs manage payers’ drug formulary lists, which include the medications that payers cover for members. Before contracting with a PBM, payers may want to look at its ability to manage formularies and past experiences with negotiating drug prices.
Like most entities in the healthcare industry, PBMs often leverage different technologies to assist with claims processing, data analytics, utilization management, and member engagement. Payers often assess if certain technologies are efficient and produce positive results before partnering with a PBM. In addition, payers consider the evidence-based clinical programs PBMs use to promote medication adherence, keep costs low, and manage chronic conditions.
Types of contracts
Contracts between payers and PBMs generally fall into one of two categories: risk-mitigation models or pass-through models. PBM and pharmacy payments differ based on the type of contract that is in place.
Risk-mitigation pricing model
This model is considered the traditional PBM contract and may also be referred to as a spread pricing model. Under this type of contract, administrative fees are not collected from the payer by the PBM. The payer receives a predicted price for what the PBM will reimburse the pharmacy, and the payer and PBM agree on a rate.
If the pharmacy charges more than the rate, the PBM must pay the pharmacy more than what the PBM will receive from the payer. If the pharmacy charges less than the rate, the PBM earns a margin. This model allows PBMs to take on the risk of drug price and pharmacy charge fluctuations.
Pass-through pricing model
In a pass-through contract, the amount the PBM pays the pharmacy is passed through to the payer, and the PBM is compensated through administrative fees. The payer takes on more risk for each prescription dispensed under this model. Additionally, the payer has less cost predictability and there is more transparency from the PBM.
The payer-PBM partnership
While payers use PBMs to help lower prescription drug costs, they also contract with them to simplify prescription drug benefit management. PBMs coordinate and execute communication with drug manufacturers and pharmacies on behalf of health plans.
PBMs negotiate drug prices with manufacturers, usually by offering a spot for a drug on the payer’s formulary in exchange for paying the manufacturer a lower price and receiving a rebate. PBMs may also negotiate with pharmacies, offering them a place in the payer’s network for specific drug prices.
PBMs then pay the pharmacies drug dispensing and administrative fees while receiving reimbursement from their contracted payers.
Aside from negotiating drug prices, PBMs also perform various administrative functions that payers complete for non-drug benefits, including processing pharmacy claims, setting coverage terms, and establishing networks. Furthermore, PBMs often require physicians and patients to go through a prior authorization request before they approve certain medications.
The PBM market
Several large health insurers own PBMs or are a part of a company that owns PBMs.
Three PBMs owned by payers accounted for 79 percent of all prescription drug claims in 2022. CVS Health’s Caremark had the biggest market share, managing 33 percent of prescription claims. Cigna’s Evernorth/Express Scripts was second, managing 24 percent of claims, and UnitedHealth’s OptumRx managed 22 percent.
The six largest PBMs—the remaining three being Humana Pharmacy Solutions, Prime Therapeutics/Magellan Rx, and MedImpact Healthcare Systems—managed 96 percent of all claims in 2022. These PBMs and their contracted payers play a crucial role in facilitating members’ access to affordable treatments.
