Pharmacy benefit managers, commonly known as PBMs, handle one of the most important and continually debated aspects of Americans’ lives: access to prescription drugs. Because PBMs operate behind the scenes in the pharmaceutical supply chain, most people don’t know they exist, and those that do can still be perplexed by how they operate. So, what are PBMs and why are they so important?
What is a Pharmacy Benefit Manager (PBM)?
A PBM processes prescription drug claims on behalf of plan sponsors such as employers, government entities, or unions. To provide this service, PBMs contract and negotiate with retail pharmacies and pharmaceutical manufacturers to provide the right balance of drug access and cost-effectiveness. For example, an employer will be mostly familiar with PBMs because they administer plan design, eligibility, and create and maintain the plan’s formulary, which is the list of prescription drugs available to the employees.
Who Are PBM Clients/Customers?
- Third Party Administrators (TPAs)
- Federal and State Governments/Municipalities
- Insurance Plans
- Healthcare Organizations
- Managed Care Organizations
- State Medicaid
- Managed Medicaid
Responsibilities of a Pharmacy Benefit Manager
PBMs are allotted several responsibilities, but there are two main categories: devising fair pharmacy prescription benefits plans, and offering patients unfettered access to a list of suitable medications so that their health is maintained. To achieve these two goals, PBMs work and contract with different entities, including pharmaceutical companies, wholesalers, pharmacies, and health plan providers.
PBMs are responsible for handling more than 80% of all pharmacy benefits negotiations and matters in the United States, which is why they are integral to the system, and they also have a major influence on rebates and reimbursements (more on this below). Here is some more detail on key responsibilities and programs that a PBM must undertake or manage:
Contracting & Controlling Cost/Spending:
PBMs contract with everyone from drug manufacturers to mail order and retail pharmacies, and they negotiate pricing in order to provide patients and employers better access to medication. This job also includes ensuring that pharmacies can offer competitive pricing to patients, while also keeping prices within a predetermined range.
PBMs achieve this goal by a series of methods, which includes setting up clinical programs. For example, keeping an eye on quantity checks and authorizations allows plan administrators to adequately determine medication usage and calculate savings. PBMs may also offer discount programs.
Providing Better Access to Medication:
A PBM should ensure that patients and employers have great access to medication, and they achieve this through constant communication with the drug manufacturers and wholesalers that are largely responsible for ensuring that medicines are produced and made available (at fair prices).
Formulary Design & Management:
A formulary refers to a set of drugs covered within a healthcare plan, and this may include both branded and generic drugs. Formularies are devised by PBMs themselves, and PBMs seek the help of physicians and pharmacists to ensure that the most effective and affordable drugs to the list. Based on this formulary, physicians are more likely to prescribe the drugs mentioned on them to their patients, and drug companies may also hire PBMs to ensure that their drugs are prescribed to patients.
Driving Patient Engagement & Tracking Health Outcomes:
As PBMs evolve into a clinical management role, they become more valuable. PBMs must be agile and offer flexible, personalized plan designs based on clients’ needs. Because PBMs are managing prescription drug claims and overseeing drug utilization, with the right resources and technology they can handle proactive clinical oversight and create personalized analytics and reports. Next-generation PBMs can work with employers to strategically balance drug spending and introduce programs that allow employers to offer better choices to improve outcomes, rather than push paper and process claims.
Rebates are decided by the PBMs and pharmaceutical companies for individual drugs, and they are paid directly to PBMs. According to the agreement that PBMs have with their employer, plan sponsor, or other stakeholders, they are required to redirect some or all of the rebate back to them. In some cases, PBMs aren’t contractually obligated to return any of the rebates back to their employers (i.e., the PBM can keep the rebates). At Capital Rx, rebates are passed through to the plan sponsor.
Full Service PBM Services
- Claims Processing Administration
- Benefit Design and Management
- Customer Service
- Data Integration and Management
- Pharmacy Network Management
- Formulary Management
- Rebates and Discounts
- Drug Utilization Review
- Mail Order Service Delivery
- Specialty Medication Delivery
- Prior Authorization
- Clinical Consultation and Program Mgmt.
- Disease Management
- Medicare Part D Management
How Do PBMs Work with Pharma Companies?
As noted above, PBMs have a direct relationship with the pharmaceutical companies that manufacture drugs of all kinds. However, this relationship isn’t without its hurdles and bumps, mainly due to the financial constraints and challenges that arise during negotiations between PBMs and drug manufacturers.
Since PBMs act as a bridge between drug manufacturers and patients, they are tasked with deciding how affordable a certain drug is for patients. While a simpler pricing model can help, PBMs must design and implement programs that ensure patients have access to the most effective and suitable medication for them in the most cost-effective manner.
How do PBMs work with Employers?
Similar to the relationship with pharmaceutical companies, PBMs contract with their employer clients, and they are required to design a prescription benefits plan. Once this plan is designed, the employer requires the PBM to administer the prescription benefits and make employees aware of the benefits they can receive. Types of pricing models
- Traditional Pricing: A percentage discount from the Average Wholesale Price (AWP) is negotiated with manufacturers and passed to pharmacies (Retail, Mail, Specialty).
- Pass-Through Pricing: Negotiated pricing that includes passing formulary rebates to patients at point-of-sale or to the insurer; rebates can be retained by the PBM based on contractual arrangements with the insurer.
- National Average Drug Acquisition Cost (NADAC) Pricing: Pricing is based on the approximate invoice price retail pharmacies pay for medications in the United States. NADAC pricing aligns drug prices with average actual pharmacy drug costs rather than manufacturer lists, so it's not subject to the inflationary tendencies of AWP.
Capital Rx is Reimagining the Pharmacy Benefits Industry
This brings us to the end of our overview of PBMs and their importance in the pharmacy benefits paradigm. At Capital Rx, we strive every day to change the way prescription drugs are priced and patients are serviced. We see ourselves as a health technology company first, daring to reimagine the pharmacy benefits industry via our Clearinghouse Model® - the first ethical framework for drug pricing.
In 2021, we launched the first Enterprise Pharmacy Platform, JUDI™, which connects every aspect of the pharmacy ecosystem in one platform, enabling patient engagement, and increasing efficiency to achieve the highest standards of clinical care; as well as Capital Rx Advantage Savings, a free savings card with no hidden fees.