What Is the Role of a Pharmacy Benefits Manager (PBM)?

Capital Rx

Capital Rx

Pharmacy benefit managers - commonly abbreviated 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 are often perplexed by how they operate. So, what are PBMs, and why are they so important?

What is a Pharmacy Benefit Manager (PBM)?

A PBM is an administrator that processes prescription drug claims on behalf of "payers" such as employers, municipalities, labor unions, health plans (commercial, Medicaid, and Medicare through Part D plans), and other entities that provide prescription drug coverage to beneficiaries. To provide this service, PBMs contract and negotiate with pharmaceutical manufacturers and retail pharmacies to provide the right balance of drug access and cost-effectiveness.

PBMs also handle plan design, eligibility, the printing of cards, the creation and maintenance of formularies (the list of prescription drugs available to members), and a hundred other tasks/processes behind the scenes for an employer, for example, so that its employees have access to prescription medications.

What are the 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 related matters in the United States for a variety of clients, which is why they are integral to the system. PBMs also have a major influence on drug rebates and reimbursements (more on this below).

An infographic showing PBM clients including health plans (Medicare & Medicaid included) and PBMs' responsibilities (claims processing, customer service, etc.).

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 to provide patients and employers with 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 through 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 – or list – of drugs covered within a healthcare plan, and this may include both branded and generic drugs (specialty drugs are a whole separate topic). Formularies are devised by PBMs themselves, and PBMs seek the help of physicians and pharmacists to ensure that the most effective and affordable drugs are on the list. Based on the formulary, physicians can prescribe the drugs included in them to their patients.

Drug manufacturers may also hire or compensate PBMs to ensure that their drugs are available to be prescribed to patients.

Driving Patient Engagement & Tracking Health Outcomes

As PBMs evolve into clinical management roles, 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 just push paper and process claims).

Handling Drug Rebates

Rebates are a source of contention, as they 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 many cases, PBMs aren’t contractually obligated to return any of the rebates back to their employers (i.e., the PBM can keep some or all the rebate dollars). At Capital Rx, rebates are passed through to the plan sponsor.

How Do PBMs Work with Pharma Companies?

As noted above, PBMs have direct relationships with and earn revenue from 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 and potential conflicts of interest.

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 balance cost and efficacy to ensure patients have access to the most effective and suitable medications for them.

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.

There are several different types of pricing models and drug price indexes, each with its own issues and limitations. Three common buckets pricing models fall into include:

  • 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 PBMs as an essential stakeholder in the pharmaceutical supply chain and ourselves as a health technology company first, daring to reimagine the pharmacy benefits industry via our Single-Ledger Model - the first ethical framework for drug pricing – and preference for NADAC-based pricing over AWP.

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 prescription drug savings card with no hidden fees.

If you’d like to learn more about our full-service PBM solution, please contact us today! We’d love to hear from you.