PMPM - Is It the Best Way to Measure or Track Anything?

Justin Venneri

Justin Venneri

What does PMPM mean?

PMPM, which is short for “per member per month,” is one of the most common ways spending on health benefits, including pharmacy, is measured and tracked by corporations, labor unions, and other payers. It can also be unnecessarily confusing. If you’ve ever wondered why you’re paying so much PMPM for a service or solution or why PMPM savings never seem to materialize, you’re in the right place. You’re also not alone.

Our point of view at Capital Rx, which we'll discuss in this article, is that PMPM represents the true cost for payers. Quite simply, a PMPM offer should allow someone to compare what was paid last year to a guaranteed spend next year. It’s about presenting a holistic offer that embodies unit price and drug mix and creates the predictability that has been missing around prescription drug spend.

While we believe PMPM is the most effective way to express a value proposition and monitor your costs, not all PMPMs are comparable, and PMPM is often misused.

Why does that matter?

I recently sat down with Mike Miele, FSA, MAAA, SVP, Business Development at Capital Rx, to discuss PMPM. He made some excellent points that may help explain why it seems like there are so many questions around a widely utilized datapoint: “If we’re using PMPM ‘our way,’ we may not be speaking the same language as the person across the table. Health plans do everything on a PMPM basis. That’s the budget. But labor might deal in cents per hour, as just one example. Also, how PMPM is calculated – i.e., what is or isn’t included – can be confusing. For Pharmacy, is it net of rebates? Are administrative fees considered?”

Additionally, in The Consolidated Appropriations Act & Prescription Drug Data Collection (RxDC): New Rules & Regulations Equal New Responsibilities, we covered some of the new responsibilities that stakeholders managing/overseeing pharmacy benefit programs have, especially those relating to broker/consultant compensation disclosure and vendor selection. There’s a risk that brokers and consultants may have conflicting financial interests, and that’s where we get back to PMPM variances and what a benefits director, for example, must be aware of when evaluating what's "reasonable" from a cost perspective.

What is PMPM good for? Is there a PMPM formula?

The traditional consultant RFP process is complicated. There are countless nuances and pricing terms in lengthy contracts but no accountability or predictability around the actual costs a client will experience. Average wholesale price (AWP) and rebate guarantees contribute to the problem, perpetuating poor formulary decisions that inflate per-claim rebates. PMPM solves for both unit cost guarantees and vendor behavior regarding drug mix representing clinical programs, prior authorization approvals, auto refills, and formulary.

Employers want to pay for things that solve specific problems. Amber Meranda, RPh, SVP, Client Services at Capital Rx, weighed in on PMPM as well: "I like PMPM because it accounts for everyone under the plan’s care, and you know how much each person costs, on average. It takes out all the individual fluctuations, and once there’s enough data, you can see cyclicality or seasonal trends, recognize outliers, and understand how the plan performs over time. All of that allows you to predict spending and decide where you want or need to invest.”

Here's an example of how gross pharmacy spend is usually calculated and can be reported to our clients:

And here’s how we arrive at the PMPM for a client:

When benefits directors, sticking with that example, can see normalized data for their population, they can break down and analyze the PMPM trends and decide where to spend prudently. Amber notes a great thing about pharmacy data: "it's current, whereas medical claims can lag by 3-6 months." So, the prescription itself is a timely indicator of a medical issue for a member, and “if the account team is watching and helping to manage the plan, the benefits director most likely understands what’s going on in the data in a way that can be reported to the C-suite confidently,” she added. 

What are some issues with PMPM?

Many PBMs and vendors that use PMPM may be using it to describe arbitrarily calculated savings of a clinical program, not true costs. But if a vendor is willing to look at a group’s actual pharmacy spend, size the problem(s), and offer a PMPM guarantee via a simple structure without a laundry list of exclusions, it shows a commitment to an aligned contract with customers (i.e., costs will be managed in the client’s best interest).

From a value-based perspective, spreading aggregated costs across the population isn’t specific enough. Outliers such as extremely high-cost claimants that skew PMPM numbers up or down must be accounted for.

If administrative fees are excluded, the contract could have a gaping loophole. Administrative fees can be included in the PMPM, but all vendors should be required to do this to create parity.

What do alignment and “true cost accountability” look like?

If a contract is aligned with a payer's financial objectives, it is not overly complicated, includes a firm dollar target, and the pharmacy benefit manager's (PBM's) profit should be at risk. PMPM should represent the true total cost per member per month paid by the plan associated with the benefit and formulary elected by the client.

A “good” PMPM is transparent, with claim-level accountability, has a single, unified target for all claims, and should also have targets for member satisfaction (e.g., a member NPS). If the methodology is opaque, there are separate PMPM targets by bucket or category (re. claims), or a PBM is not accountable for member satisfaction, you could be looking at a “bad” PMPM.

Net, Net, PMPM is Helpful, and It Can Decline

Understanding a client’s goals is essential. Some plans want to know how much each employee costs, which will dictate how you talk to them or frame all the dollars spent across their benefits. PMPM should be calculated in a practical, consistent manner that an audience can understand and reflects the “M” - for management - in PBM.

The combination of our Clearinghouse Model®, JUDI® (our all-in-one enterprise pharmacy platform), and our clinical programs can drive anywhere from 10% - 30% savings on a PMPM basis* in the first year following switching to Capital Rx from a traditional PBM. Better yet, where data are available, the year 2 PMPM cost trend is, on average, a mid-to-high-single-digit percentage decline.

CLICK HERE to get in touch and learn more about how Capital Rx structures PMPM guarantees.

*Based on 2021 plan year vs. 2020 where reliable prior plan cost data are available; calculated using a member weighted average PMPM, net of rebates and administrative fees.