writing a prescription

Pharmacy Benefits Managers: What You Don’t Know

The primary goal of a Pharmacy Benefits Manager (PBM) is to contain the escalating costs of prescription drugs and to ensure patients are on the correct or most efficient drugs, and not on those that are wasteful, abusive or dangerous. In a sense, they are a middleman to the middleman. Why are they necessary or advantageous?

To provide some perspective by picking just one disease, the annual cost of diagnosed diabetes in America is $327 Billion. A pharmacy benefits manager can deliver savings based on their scale, ability to negotiate with drug makers and the outstanding clinical programs that really benefit clients. If you are a firm that self-funds your health insurance, you typically have the option to pick your PBM. However, there are additional considerations to consider. These include integration with your TPA, access to clinical programs, formulary (broad or narrow), and financial transparency of your PBM partner.

PBMs have a strong profit motive

PBMs can generate profit in well over 30 different ways, many of which are not readily transparent. The most common methods they generate revenue are through spread pricing, rebate capture, and administrative fees. With spread pricing, the PBM makes margin off the difference between what the health plans pay the PBM for Rx drugs and what the PBM pays the pharmacy the dispenses the drugs. Rebates are manufacturer dollars given to the PBM post-sale. The third method is through direct, administrative fees.

In this basic setup, PBMs stand to gain – a lot – financially where they can dictate the terms. And that contract is the key! Everything is derived from it. The contract includes: definitions, performance guarantees, offsetting language, claims excluded from pricing guarantees, termination language and audit language. PBMs do not underwrite the risk, they underwrite the contract terms!

I could probably provide a glossary for these terms, but I won’t now. (When I do, I’ll link it to this item!)

Are they all the same? What are my options?

You can put PBMs into three buckets: Traditional, Transparent and Consortium. They fall on a continuum in terms of cost, service and visibility. I’ll give you a sense of each.


The traditional model usually contains the elements described above: spread pricing, rebates and administrative fees. The ‘carved-in’ option is easy and simple. It’s typically administered by one vendor. It has the disadvantages of hidden cash flows as well as lack of transparency and control. However, it is easy and simple. And with a strong contract, you can still generate great results.

The ‘carved-in’ option in a traditional setting usually includes one of the large prescription benefit plan providers like Express Scripts, Optum, Caremark or Ingenio. It allows for little to no control over formulary or mail-order provisions. Little to no control over contract terms and definitions. Performance guarantees can be added and are common.


It is exactly what it says it is. Hidden PBM cash flows are eliminated in this model. The PBM’s revenue is generated through administrative and dispensing fees with a full disclosure of each. There are full accounting and auditing provisions. These arrangements can typically offer better contract terms or ability to manage definitions, some flexibility in custom clinical programs, more detailed analytics and greater transparency. It’s the clearest cost.


This is a newer option. These companies, like Rx Solutions of NFP Benefits or Rx Benefits, will aggregate contracts with three of the big PBMs. With their scale/size, they are able to maximize rebates, slightly reduce spread and provide better service.

If you are a self-funded employer the good news is there are several options for you to consider assuming you are with a TPA that allows you to carve out the PBM as not all will allow this. If you’re in one of those two buckets, there’s a lot to consider. Employers, advisors contemplate the pros and the cons of each solution, what fits the culture of employment and which drives to the lowest net costs. Going forward, the nation and government will need to grapple with a future that continues include high price orphan drugs, specialty drugs and new gene therapy drugs. The newest of these are gene therapy meds which shift from a treatment to an outright cure of some conditions. These drugs are starting to hit the market and have a price tag of $500,000 to $2,100,000 per course of treatment.

A few well-publicized cases have highlighted the complexities brought on with some of these drugs. In the case of Orphan drugs, the drug originally known as “H.P. Acthar” is a good example. This was a drug that had moved to generic. A company bought the drug, found an off-label use for it treating a rare infantile spasm condition and it went from being an under $100/mo generic drug to a $65,000/yr Rx drug. That story is not intended to be a sensationalist aside, but rather a lookout to understand the landscape.

There’s not necessarily a right answer in choosing a PBM. There is plenty of information to consume and consider. It’s a matter of digging in, understanding the terms, negotiating, and finding a solution that you understand and meets your needs.

For more insights on benefits, well-being and other business strategies, tune in to RESOLVE Increments. Gain exclusive access to the full replay and resources we shared throughout the virtual series, including SHRM credits, at resolveindy.com.

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