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While some pharmacy benefit managers (PBMs) have been talking about transparency for years, it has become an increasingly hot topic lately in the health care industry. Lawmakers are aiming to lower prescription costs and are subsequently evaluating the transparency (or lack thereof) of sharing actual costs with consumers.
In March 2023, Congresswoman Eshoo asked a simple question in a Health Committee on Energy and Commerce hearing – “What do you think PBMs have to gain by keeping their costs so high?” While we all know the answer is money, the example she cited was no less shocking: CivicaScript had recently released a $160-per-month generic prostate cancer drug. This cost was $3,000 less than the average cost for someone on a Medicare plan.
In Adam Fein’s “Drug Channels: Do Plan Sponsors Understand How Their PBMs Make Money?” he states, “Concepts like ‘transparency’ and ‘pass-through’ are slippery.” He considers how some PBMs are “making their business models both more and less transparent.” This means a PBM may increase transparency in one area while decreasing it in others.
So what does transparency really mean? Let’s start by taking a fast five (minutes) to look at PBM pricing models.
1. When it comes to retail pharmacy pricing, what is the difference between a traditional and transparent PBM model?
With a traditional PBM pricing model, the PBM keeps a portion of drug costs which include drug ingredient costs, dispensing fees, and retail pricing.
- To make a profit, traditional PBMs often charge plan sponsors more than the PBM pays the pharmacy for the medications.
- The PBM benefits from the revenue achieved by the difference or “spread.”
Transparent PBMs offer full disclosure with 100% pass-through on pharmacy network reimbursement rates.
- There is no spread built into this model.
- Plan sponsors and members typically benefit from receiving the fully contracted discount.
- Rather than retaining spread, pass-through PBM revenue is based on a single administrative fee.
2. What about specialty pharmacy pricing? Does it work the same as retail?
Yes. In fact, with a traditional model, the PBM profits when patients fill high-cost prescriptions at PBM-owned specialty pharmacies. The client may be charged the specialty pharmacy’s drug cost plus a significant mark-up plus various shipping and patient management fees. The more specialty drugs filled at the PBM’s pharmacy, the more revenue they receive. This is evidenced by current pharmacy revenue and market share of PBMs who own specialty pharmacies.
On the other hand, with a pass-through, transparent model, the PBM does not receive revenue from patients who use specialty pharmacies. Even smaller PBMs who own their own specialty pharmacy won’t be on top of market share or revenue lists.
With a transparent approach, the client pays the actual cost of the specialty drug, plus a flat patient management fee and flat-rate shipping. Interestingly, this actual acquisition cost model or cost-plus model is viewed as new and innovative in the industry. However, Lumicera Health Services, for example, has been doing business this way since 2014.
When a patient moves to a new PBM and therefore uses a new specialty pharmacy, the difference they see in pricing can be staggering. We encourage you to listen to Eddie’s Story. The pricing increase due to the mark-up with a traditional PBM model can cause patients to stop taking their medications to save money. For diseases like cancer, multiple sclerosis, and hemophilia, the stakes are high when the PBM chooses profits over patients.
3. How do the models differ when it comes to rebates?
In a traditional PBM pricing model, only a portion of drug rebates is shared with clients, while the PBM retains and profits from the spread. In a transparent PBM pricing model, 100% of all drug rebates received are shared back with clients.
In 2023, about 60% of employers reported they receive 100% of traditional drug rebates from their PBM, compared to 30% ten years ago (Fein, Drug Channels, Surprising Data on Employer-PBM Pass-through Arrangements in 2023 as cited in PSG Trends in Drug Benefit Design Report).
The remaining 40% either receive a percentage or a flat guaranteed amount per prescription. The desire for full pass-through of rebates has increased over the last ten years. Employers are moving away from a flat guaranteed per-script amount in favor of full pass-through of rebates.
However, while transparency in this area increases and traditional PBM profits decrease, big traditional PBMs need to make up the difference. To do this, they find new ways to drive up utilization at their specialty pharmacies, thus becoming more and less transparent.
4. What does formulary management look like for a traditional versus a transparent PBM?
Formulary management and rebates go hand-in-hand in a traditional pricing model. Traditional PBMs are incentivized to push products that will give them higher rebates, not necessarily what products are best for the client or patient.
A transparent PBM’s formulary includes low-cost generics or less expensive brand options so patients can get the medications they need at the lowest price. With all rebates received from pharmaceutical manufacturers passed back to the client, formulary development can focus on clinically appropriate, safe, and cost-effective drug therapy.
5. What should an employer be aware of when evaluating PBM pricing models?
Savvy, unbiased advisors (consultants) will help plan sponsors evaluate both pricing models effectively. For example, they can look beyond a traditional pricing spreadsheet which may show large rebate figures and effectively evaluate a transparent PBM with a pass-through and lowest-net-cost offer. Some advisor models are built around traditional deals and therefore any pass-through offer may not be evaluated fairly.
The right advisor knows how to compare the two models in an “apples-to-apples” approach. For example, the administrative fee may be lower in a traditional offer because that PBM is making money elsewhere. However, with a transparent, pass-through PBM, the administrative fee is their only or primary source of revenue. The advisor should take this into account and look at per member per month (PMPM) costs that highlight the full value the PBM provides. Case studies are also critical in this regard.
It is also important to remember that in a traditional or spread pricing deal, the PBM is managing to the guarantee only. If the discount is better than the guaranteed amount, the PBM will always retain the difference. In a transparent, pass-through pricing deal, the PBM will pass through discounts even if they overperform that guarantee. This is where the advisor’s overall experience comes into play. They can anticipate and model actual performance outside a skewed spreadsheet.
We recommend looking at the PBM’s trend report if they publish one (and many do not for reasons outlined here). Sharing the PBM’s average net cost trend is an indicator of how they truly manage pharmacy costs for their clients and provides evidence of true transparency.
At EpiphanyRx, we believe transparency is table stakes. It is the approach that employers deserve.