The modern economy is rife with intermediaries. A car dealer stands between the buyer and the car manufacturer, a literary agent between a writer and publisher, and a real estate agent between the buyer and seller. Their roles vary by industry, from bridging the gap among parties to making sure transactions play by the rules.
The healthcare sector is no exception. At the point wherein the interests of drug makers, insurance firms, and pharmacies meet stands a pharmacy benefit manager (PBM). Whether as an individual or a company, a PBM negotiates with pharmacies and drug makers for lower prices of drugs and medical goods for the benefit of insurance firms.
While the consumer rarely knows about such arrangements, the savings that top PBMs secure are a boon. After all, if the PBM can help parties offer more for less, the consumer will also likely have to pay less. Here’s an in-depth look into this complex setup and what it means for the healthcare sector at large.
Healthcare costs in the U.S. have been going up since 1970, according to data from the Peterson-KFF Health System Tracker. The average American in 1970 spent USD$353 (USD$1,875 in 2020 dollars) on healthcare. Five decades later, that figure jumped over sixfold to USD$12,531. While out-of-pocket spending per person (except insurance premiums) dropped, it remains at an all-time high of USD$1,180.94 in 2020, roughly twice as much as in 1970.
This alarming trend has more or less put PBMs in the spotlight, but that isn’t anything new. As early as the 1960s, PBMs have been working to limit healthcare spending among insurance firms by deciding what qualifies for formularies and drug claims. It wasn’t until 30 years later that pharmaceutical companies began employing PBMs.
Throughout the next 30 years, the abundance of mergers resulted in a vast industry controlled by a few. According to the National Association of Insurance Commissioners, there are 66 PBMs in the U.S. The industry’s Big Three own roughly 90% of the market and provides services to about 4 out of 5 Americans.
Responsibilities and Best Practices
How much money PBMs help save depends on the tools and practices. A 2011 study sponsored by the Pharmaceutical Care Management Association (PCMA) estimates that the bare minimum cost reduction is 20% compared with unmanaged spending; at best, it can reach 50%.
The PCMA whitepaper cites six areas of responsibility that PBMs tackle.
The PBMs maintain and update a list of drugs, branded and generic, covered under a specific plan, known as a formulary. However, determining the medicines that go into the list is the responsibility of a Pharmacy and Therapeutics (P&T) Committee, a team of doctors and other healthcare practitioners.
If a doctor prescribes a drug registered on the formulary, the plan sponsor must shoulder a portion or all of the cost. Otherwise, the sponsor doesn’t have to shoulder the price, but the patient may have to foot the bill. The PBMs base their negotiating terms for lowering drug prices on the formulary.
As PBMs negotiate to offer drugs at a lower cost, they also must reimburse the parties involved. Setting up these copayment arrangements is essential, as the reimbursement to pharmacies is typically below the drug’s market value. As a result, every prescription drug that pharmacies dispense is a loss.
Copayment arrangements depend on the number of tiers in a formulary. Typically, PBMs employ four- to six-tier formularies, ranking drugs based on their cost. The lower two tiers mainly include generic medicines, which entail low- to medium-level copay. Higher ones are branded and specialized medications with a high copay.
The PCMA stresses that having as few as three tiers can result in modest savings. In one cited study, a 3-tier formulary helped payers save 17% on copayments due to generic substitution. Sometimes, the tier can also include non-preferred brands, which can reduce overall spending by 4%.
If the opioid crisis is any indication, drugs are prone to overuse and misuse. Not only are PBMs obligated to ensure the safety and efficacy of their formulary drugs, but they need to make sure the prescription is correct. These objectives also benefit the PBM’s clients, as it’ll also help reduce their overheads.
As such, PBMs engage in utilization management to lessen the risk of drug overuse and misuse. The relevant strategies mainly involve a hierarchical approach, which includes:
- Prior authorization: The PBMs have to clear the use of any formulary drug with the P&T Committee, ensuring its compliance with guidelines. Some PBMs refer to this process as pre-approval.
- Step therapy: The PBMs arrange for patients to try clinically cleared and less costly medication before moving to more specialized ones. If the low-end medication works, it’ll help the parties save on costs.
- Quantity limits: The PBMs arrange for their consultants to determine safe quantities of specific drugs for distribution. Apart from mitigating the risk of drug misuse and overuse, it also reduces drug waste.
Experts believe proper utilization management by PBMs will help reduce overall costs by roughly 7%. Another benefit is that the more potent drugs can be made available to those who need them more.
As the term implies, mail-service (or mail-order) pharmacies fulfill prescriptions and ship them to the patients’ doorstep. These services usually prescribe three months’ worth of drugs and deliver them within three to five business days or one to two days for urgent cases. They can also bring all the necessary prescription medicines in a single delivery run.
The PBMs operate mail-service pharmacies, having proven their cost-effectiveness in two federal health programs. The PCMA cites that these pharmacies achieved an estimated savings of 16% on medicines issued through TRICARE and Medicare Part D. The potential savings over 10 years is estimated at roughly USD$60 billion.
The reason for this substantial savings is the deep discount mail-service pharmacies offer. A report by the Government Accountability Office (GAO) states that they sell branded drugs at 27% and generic drugs at 53% less than the same ones sold by a retail pharmacy. They also only need to charge one instance of dispensing fee instead of three.
Retail Pharmacy Network
For a plan sponsor, extending its reach to as many locations as possible is essential. It’d be disadvantageous for plan holders to realize that the plan is accepted in the pharmacies close to home but not anywhere else. It defeats the purpose of having a policy and forces them to pay out of their pockets.
Because of this, insurance firms often ask PBMs for help with expanding their retail pharmacy networks. The latter negotiates with retail pharmacies to enter into a sound contract with insurance firms, generally concerning reimbursement. Apart from offering broader access to medicines, these networks also foster healthy competition.
While all this implies that more is better, the PCMA says it’s not necessarily the case. It suggests a shorter list of pharmacies that offer higher discounts is better than a long list. The same GAO report indicates that the sweet spot is 18% for branded drugs and 47% for generic drugs.
Specialty pharmacies are commonly more entrenched in an insurance firm or healthcare system for several good reasons. They carry drugs that a retail pharmacy doesn’t usually have in stock, said drugs are for treating more complex conditions, and they cost around USD$4,500 per prescription.
The circumstances that PBMs deal with in negotiating with specialty pharmacies are as unique as the pharmacies themselves. Whereas the previously-discussed responsibilities primarily entail agreeing on a lower price, this instance goes beyond that. These are some areas wherein the PBMs assess specialty pharmacies:
- Implementation of clinical and operational best practices
- Implementation of data gathering and analysis technology
- Specialty pharmacy accreditation (URAC, ACHC, or CPPA)
- Integrated business models that prioritize continued patient care
- Strategies for balancing quality patient care and cost reduction
- The extent of requiring Any Willing Pharmacy laws
The PBMs encourage parties to have access to specialty pharmacies. However, best practices also recommend only resorting to such options when a clinical need exists—all the more reason to employ utilization management strategies.
As the cost of healthcare in the U.S. grows, so will the role of the PBM. As intermediaries in the healthcare sector, PBMs are in an excellent position to aid insurance firms, pharmacies, and drug manufacturers in delivering affordable and accessible medical care. To sum up, PBMs:
- Maintain and update a list of medications acceptable to the client network.
- Negotiate copayments between the parties in exchange for offering discounts.
- Arrange for first-line prescriptions to diminish drug misuse and overuse.
- Manage mail-service pharmacies, especially for beneficiaries of health programs.
- Assist insurance firms with expanding their retail pharmacy networks.
- Evaluate and improve the capabilities of specialty pharmacies.