Pharmaceuticals Public Policy

Techniques pharmacy benefit managers use to lower cost

How do pharmacy benefit managers (PBM) claim they can reduce cost? A Health Affairs Forefront article by Brennan and Shrank (2023) identify 6 key pathways:

  1. Mail order. Mail order alternative is often cheaper than dispensing at the retail pharmaciesdue to greater scale and automation
  2. Negotiating power. PBMs leverage purchasing power to lower dispensing fees. PBMs threaten “…to exclude the retail pharmacy if it did not offer lower prices for its services (primarily, filling prescriptions to get a dispensing fee).”
  3. Utilization management. PBMs developed in-house medical expertise and use prior authorization and step edit requirements to restrict access to medications.
  4. Purchasing power for generic medications. PBMs use their size to purchase generic medications more cheaply. Often PBMs leverage generic producers oversees in these negotiations.
  5. Formulary tiers to incentivize generic use. Prescriptions filled on lower tiers have zero or little copayment; those on higher tiers have higher copayment. The authors claim that the goal of this formulary design was to encourage generic use (authors note that almost 90 percent of the medications taken in the US are generic).
  6. Formulary tiers to get discounts on branded medications. In cases where there are multiple branded products, a PBM may place only one of them on their formulary or only one of them on a preferred tier. “The PBM can then develop a reverse bidding war with manufacturers to get a discounted price. This discount is delivered as a rebate to the PBM from the manufacturer, causing a gross to net difference in pricing for the pharmaceutical manufacturer..”

The authors note that the PBM market is highly consolidated. Three firms control >80% of the market and more than 50 other PBMs sharing the remainder PBMs also play a major role in the Medicaid market; as “…nearly three-quarters of Medicaid beneficiaries are in managed care plans operated by private insurers…[and] nearly all these plans use PBMs to manage the drug costs for their clients.”

The authors also discuss five main themes in PBM legislation which include:

  • Transparency initiatives requiring PBMs to report on costs and rebate amounts to clients, 
  • Prohibition of spread pricing (which occurs where PBMs guarantee a specific pharmaceutical spend and get to keep any cost saving or are at risk for excess cost)
  • Some legislation requires PBMS to pass-through 100% of rebates to payers and only charge an administrative fee.
  • Set out-of-pocket cost based on net (i..e, discounted) price rather than list price.
  • Other legislation would outlaw copay accumulators programs, in which coupons received for out-of-pocket cost do not count towards one’s annual deductible.

The full commentary is here.