Employer Clinic, Employer Health Benefits

PBM Has Become a Four Letter Word

A Brief History

PBM stands for Pharmacy Benefit Manager and was originally created out of health insurers efforts to manage prescription claims processing. As these third party administrators of prescription claims grew, they began to aggregate the purchasing of prescription drugs for patients across multiple payers. Then negotiated pricing directly with manufacturers and the distribution channel. The original vision was to give payers leverage and drive their cost of prescriptions lower.

As PBM power grew, manufacturers began paying rebates to get their products added to the reimbursed prescription list, or formulary. The pay to play approach created incentives to drive patients toward certain medications. Though originally designed as discounts, the rebates warped the process and remained hidden from payer customers.

Though originally designed as discounts, the rebates warped the process and remained hidden from payer customers.

Over time, PBM’s figured out that they had the power to cut deals with retailers as well as with manufacturers and “spread pricing” was born. Spread pricing is the PBM practice of negotiating a price with a pharmacy and with a payer, then keeping the difference. At this point, the PBMs were able to charge administration and claims processing fees from health plans, get rebates from manufacturers on drugs prescribed to plan members, and keep a portion of the drug spend by virtue of their role as the nexus in the drug acquisition, distribution, and payment process. In this model, the PBM’s financial incentives diverged from those of the payer.

PBM’s: Who Keeps the Money?

Today, the opaque nature of the PBM’s negotiated contracts with manufacturers has come under intense scrutiny as payers battle continually rising healthcare costs. Ultimately, the question comes down to who keeps the money: the PBM, the manufacturer, or the payer. For self-funded employers, the “who keeps the money” question is important not just because of the fight to remain competitive in a global economy, but also because of employers’ concerns for the well-being of employees. As access to life extending or quality of life enhancing medications becomes more difficult for patients who are having to absorb more of the direct cost of care, the battle over “who keeps the money” will only increase.

In the PBM space, “transparency” has become the buzzword du jour. The cry for transparency in pricing has only gotten louder as payers battle for lower costs. Some PBM’s claim transparency in pricing and passing through rebates but it is still a difficult claim to verify. The sheer volume of prescriptions processed creates massive complexity that is not easily unwound. A multitude of confusing industry terms don’t help: average wholesale price (AWP), maximum allowable cost (MAC), average manufacturer price (AMP), actual acquisition cost (ACP), average sales price (ASP), wholesale acquisition cost (WAC) to name a few. (For more fun with industry terms, click here.) In this world, what exactly does “transparency” mean? A standard PBM contract can look confusing and more than a little intimidating to even an educated buyer.

Difficulties in Complexity

Even worse, procuring the services of a PBM is a daunting task. The process normally starts with something called “repricing,” a rearview mirror look at the previous year’s claims and spend with a comparative pricing proposal from a competing PBM. Of course, this assumes you can drag clean claims data out of the existing PBM, often a challenging in itself. From there, a complex web of things called formularies, therapeutic interchange, step therapies, specialty medications, prior authorizations, retail networks, and co-payments round out the proposed bundle of services. Along the way, the PBM may offer patient compliance or advocacy services, access portals, discount cards, or any of a number of other “value -added services.” Generally, the process is so complex that the employer pays an advisor/consultant to help navigate and evaluate competing proposals.

The complexity, the confusion, and the efforts taken to hide details all add up to frustration.

The complexity, the confusion, and the efforts taken to hide details all add up to frustration with organizations bucketed under the heading “PBM.” Some PBM’s work to separate themselves from the traditional model by claiming a “transparent” or a “fiduciary” approach. These are improvements in intent and move the model closer to its original purpose of being a vehicle to improve buying power and thereby lowering costs. However, hesitations remain as self-funded employers struggle to determine who to trust and how best to manage the process; all the while knowing that more than costs are at stake. Looking over the entire process, the patient’s health and well-being seems to take a backseat in the wrangling over who keeps the money.

An Answer in Simplicity?

If PBM has become a four letter word, what is the answer? Perhaps simplicity is the operative word. Employer worksite clinics provide an interesting example of what can happen when complexity is removed from the prescription management process. Onsite clinics that offer medications to employee patients can generally save self-funded employers 25-40% compared to having those medications filled at the retail pharmacy. The simple, direct access to these prescriptions at the point of care removes any gamesmanship inherent in the PBM model. Why? Because the employer is basically in a direct contract for those medications. An extension to this model is wholesale home delivery which enhances the savings game with a broader formulary and direct-to-home access. No rebates. No PEPM. No admin fees. No alphabet soup of acronyms to confuse the issue. Simply a medication provided at a set price.

Onsite clinics that offer medications to employee patients can generally save self-funded employers 25-40% compared to having those medications filled at the retail pharmacy.

Can the pharmacy benefit be provided in a similar, straightforward fashion? Perhaps. The first step is to break the process down and remove the mystery. Where there is mystery, there is margin…for somebody. The goal is not to remove all margin for trading partners, the goal is to align margin with value. Getting medications to patients doesn’t have to be a convoluted process. The supply chain is straightforward. The regulatory environment is straightforward. Self-funded employers should look for ways to leverage their buying power and find partners that simplify the process of getting prescriptions to their employees.

The Name of the Game: Value

Gamesmanship around rebates and discounts should be eliminated by having a net price for a medication at the point-of-care. Incentives to direct patients to particular medications because of those same games should be removed and employers should have clinical partners that help them manage the medical benefit to cost calculation to get the patients the ideal prescription. This doesn’t have to happen in some hidden and mysterious way. Clinicians with no financial bias should identify the best meds based on cost and efficacy.  Value is the name of the game. Driving more value out of the drug spend is the goal. From there, we can begin to figure out how to decrease the overall spend while continuing to improve value.

Ultimately, the best way to decrease prescription costs is to reduce the number of patients needing prescriptions.

How do we increase value? By improving clinical impact. Ultimately, the best way to decrease prescription costs is to reduce the number of patients needing prescriptions.  Or, reduce the number of prescriptions each patient needs. Prevention. Wellness. Disease management. Outcomes. The game changing impact points for self-funded employers center on helping their employees be healthier. Part of the reason that “PBM” has become a four letter word is because the PBM makes more money as patients take more medications. This doesn’t make the PBM evil, it is simply a by-product of getting patients what they need. However, it runs counter to the goal of decreasing spend unless those meds are helping avoid adverse events. Somewhere in between the two is high impact value. Perhaps it’s time to realign the prescription benefit with the value objective and push it closer to the clinical side of the equation.

A Simpler Approach

The time has come for a better approach. A simpler approach. We need to get the best medication at the best price to the patient at the best time. Self-funded employers are in a unique position to affect change in this regard. Through employer-directed health initiatives like onsite clinics, nearsite relationships with direct primary care providers, and direct contracting with pharmaceutical suppliers that can help them manage their spend simply and efficiently. It does not have to be complex. In this way, they can better answer the question “who keeps the money?” and view their pharmacy benefit as something other than a four letter word.

Schedule a free claims analysis now.

Let’s Talk now


Betsy Bigler | Mar 7th, 2024
INDIANAPOLIS, March 7, 2024 – Northwind has announced the addition of Tony Purkey as Senior Vice President, Client Strategies. “Demand from our self-funded employer and union clients is driving rapid growth,” said Phillip Berry, CEO. “Tony Purkey joins Northwind at a time when we need high-integrity leaders with expert knowledge in employer-sponsored health and the … more »

continue reading

Voices Lost in the Noise

Phillip Berry | Jan 31st, 2024
In the health benefits world, the mad scramble toward January renewals/starts has subsided and attention has turned to the annual cycle of review necessary to gauge progress. How did we do? The plan review process generally centers on analytics to gauge progress or regress and to identify “areas of opportunity.” Good. The right data with … more »

continue reading