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Unwrapping a PBM

This post was written by the folks over at www.truthrx.org.


PBMs would have consumers, employers and taxpayers believe that transparency is bad for the market – that it will drive prescription up drug costs if certain "trade secrets" were revealed. They claim to save their clients money at the prescription counter, but in fact, they are one of the biggest reasons why prescription medication prices are escalating.


How is this possible?


What is a PBM?


Pharmacy Benefit Managers, or PBMs, are third-party administrators contracted by health plans, large employers, unions and government entities to manage prescription drug benefits programs.


Originally these companies were created simply to process claims on behalf of their clients. Over the past 40 years, however, they have morphed into major corporations that generate profits at every stage of the supply chain, from manufacturer to patient.


PBMs are often called “invisible middleman” because they are hidden between the patient’s insurance company, who the PBM works for, and the pharmacy, who the PBM reimburses for dispensing the prescription.


Currently, the three largest PBMs - CVS Caremark, Express Scripts and OptumRx (a division of United Healthcare) hold nearly 80% of the prescription benefits market in the U.S.


So how do they make money?


As the architects of the prescription benefits system, PBMs have designed a system that allows them to make money at nearly stage of the process between a drug’s manufacturing and its sale to the patient at the pharmacy counter.


PBMs use several tactics to do so:


Manufacturer Rebates


In order for most patients to purchase a drug, the drug must be covered on the patient’s drug plan formulary, or list of medications covered under the plan. PBMs negotiate a drug’s favorable placement on a formulary - sometimes giving a certain drug exclusive placement - by requiring manufacturers to provide a “rebate” to the PBM. Generally the more expensive the covered drug, the higher the rebate.


While the term “rebate” usually means the buyer receives some money back post-purchase, this is not the case for prescriptions. The patient buys the product, but the PBM receives the rebate. PBMs will often structure their contracts to allow themselves to collect and keep rebates as part of an “administrative fee” or “rebate sharing” arrangement with the health plan, rather than passing those savings on to the patient.


Pharmacy Reimbursement Abuses


PBM’s have also developed a system for determining the maximum amount they will reimburse a pharmacy for dispensing a drug, but keep the reference they use for determining a drug’s “maximum allowable cost” (MAC) proprietary, claiming “trade secret” when asked. Under the PBM’s reimbursement system, pharmacies are often paid below the acquisition cost of the drug and expected to absorb the loss as part of the cost of doing business.


Ironically, the Centers for Medicare and Medicaid publishes a list of the National Average Drug Acquisition Cost (NADAC) each month, and makes this list publicly available. Yet when called to reference their pharmacy reimbursements against NADAC, the PBM lobby fights tooth and nail to avoid NADAC-based reimbursements. The PBM lobby often wins this fight.


The MAC list is ostensibly used for generic medications, but PBM’s contractually reserve the right to put any medication on the list. One way they are able to reduce payments is by putting brand-name medications on the list.


Why does that reduce payments? Keep in mind, reimbursement to the pharmacy is the lowest of:

  • Contracted rate (usually AWP - X % + X dispensing fee)

  • MAC price

  • Cash price

By putting a branded medication on the MAC list, they can ensure MAC pricing is lower than contracted rate, leading to reimbursement by method #2.


Another way they are able to make money off the MAC list is by maintaining one (lower-priced) MAC list for the pharmacy, and another (higher-priced) MAC list for the health plan.


Check out this article for even more on the MAC list.


Copay Clawback


A copay clawback happens when the PBM charges the patient more for the prescription than it costs, reimburses the pharmacy nothing, and then takes the ‘extra amount’ back in the form of a chargeback to the pharmacy.


Let’s use an example to illustrate this. Mrs. Caremark comes to your pharmacy to purchase #10 promethazine 25mg, which her PBM has on its MAC list for $1.25. You run it through her insurance and it comes back with a copay of $5, which Mrs. Caremark happily pays (she’s sick and wants to get out of there!). According to her PBM, you should be reimbursed $1.25, but you received $5, so they charge the pharmacy $3.75 to collect the difference.


Wouldn’t you have just sold her the medicine for even $4? Why wouldn’t you just tell her that, and cut out the middleman? In the past, that was because a ‘gag clause,’ prohibiting you from doing so, was written into your contract. Thankfully, because of the Patient Right to Know

Drug Prices Act, it is now illegal for gag clauses to be written in your contract.


Spread Pricing


In the PBM world, the ‘spread’ is the difference between what they reimburse you for the prescription and what they charge the health plan for the prescription. ‘Spread pricing’ is the practice of charging the health plan payer or state government several times more than the actual cost of the drug. It is an enormous source of revenue for the PBM.


Adding a mark-up to a good or service is standard business practice and not illegal, but what makes this practice alarming is how PBMs have been shown to reimburse pharmacies at or often below (sometimes far below) the cost of the drug but then charge the health plan a price several times more than drug cost. The health plan administrators think they are paying the true cost of the drug while the local pharmacy hasn’t been paid enough to cover the cost of goods sold.


[PC]: Their dispensing fees are a joke too. I was recently checking my remittance statements (which detail prescription reimbursement), and I saw one PBM that has decided to reimburse a $0.05 dispensing fee for each prescription. Of course, I also need to pay $0.06 in transaction fees because I sent the claim to them! That’s assuming it goes through the first time, and keep in mind it doesn’t include my switch fee, which ranges from around $0.04-0.07 per transaction, depending on the company.


DIR Fees


DIR fees come in numerous forms, including penalties and other charges often that are unknown to the dispensing pharmacy. DIRs are assessed as a “clawback” -- the pharm