Reducing Pharmacy Benefits Costs with a PBM

According to a survey of 150 large U.S. employers, the median percentage of healthcare dollars spent on pharmacy increased from 21% in 2021 to 24% in 2022, and is the fastest rising component of healthcare. 

With about a quarter of healthcare benefits  costs attributed to pharmacy benefits, it’s not surprising that 92% of survey respondents said they’re concerned about high-cost drugs in the pipeline, and 91% are concerned about the pharmacy cost trend overall.

How do you balance giving employees the pharmacy coverage they need for medications while trying to keep costs under control?

A Pharmacy Benefits Manager (PBM) may be a viable solution.

What Is a PBM? 

A PBM is a third party that is separate from a medical benefits carrier. Companies hire a PBM to manage prescription drug benefits on their behalf.

A PBM works directly with drug manufacturers and uses their buying power to negotiate better prices on prescription drugs. Because of this, PBMs can offer pharmacy benefits programs at a lower cost while making sure employees are covered for the medications they need.

How do PBMs Work?

Two kinds of PBMs exist, each of which offers a different cost structure:

  • Traditional: A traditional PBM makes money by purchasing drugs from manufacturers, then selling them to employers at a higher rate and keeping the difference (called “spread pricing”) . They may also retain money from manufacturer rebates. While traditional PBMs do not charge employers an administration fee, the way their cost structure operates makes it difficult to know how much profit they are making and how much value they pass on to your company.
  • Pass-through: A pass-through PBM charges an administration fee instead of earning a profit based on the cost of prescriptions. In doing so, they pass all the savings on to the employer. The pass-through model offers employers more transparency about the price at which the PBM purchases prescription drugs. 

Who Should Consider a PBM?

An employer must be self-funded to hire a PBM.

When a company is fully insured, it purchases one plan that covers all aspects of healthcare benefits . A self-insured company can buy each part separately, allowing them to choose providers for each component, including a PBM for pharmacy benefits.  

One of the benefits of self-funding is access to data analytics, which companies can use to determine if they have high prescription drug use and/or costs. Understanding cost and usage trends can help companies choose a PBM. That said, even if your company doesn’t have high prescription drug use or costs, a PBM can still offer value by helping you find the best prices in the marketplace. 

What Are the Advantages of a PBM?

The chief advantage of a PBM is cost savings. If you’re allowing a carrier to handle your pharmacy benefits, you could be leaving a lot of money on the table.

PBMs use their purchasing power to get the best prices from manufacturers and pass a portion or all of those savings on to your company.

Another cost savings opportunity is taking advantage of manufacturer rebates. In a fully insured environment, oftentimes carriers will keep the money they receive from rebates. A self-funded company that uses a PBM will receive a portion or all the rebate money, further driving down prescription drug benefit costs.

A PBM also provides more in-depth access to data about your company’s pharmacy use, providing insights into cost drivers. For instance, data analytics can tell you whether a high number of people are taking medications or if employees are using high-cost medications, like biologics, biosimilars, and GLP-1s that are rapidly becoming more popular.  

How to Select a PBM 

An insurance consultant with expertise in understanding the intricacies of how PBMs work can help you select the right PBM. What to look for in a benefits consultant when selecting a PBM:

  • Understands contract wording. This is vital because one vague sentence about cost structure or how rebates are handled can cost you tens of thousands of dollars. For example, not having clear language about which drugs are deemed "specialty" (where rebates are much higher) can have a large effect on how much rebates are passed on to the employer. A consultant can help protect your company by making sure a PBM contract includes specific language about how costs are handled.   
  • Helps you navigate compliance issues related to PBMs. 
  • Stays up to date on how PBMs operate. The PBM world has changed a lot over the last five years. There are also many new PBM’s entering the market, all with different value propositions – your consultant should have the ability to understand and evaluate each vendor. 
  • Uses analytics to evaluate PBM contracts.   

Pharmacy cost increases aren’t likely to slow down, but a PBM can help keep costs in check. For more information about PBMs, contact a Woodruff Sawyer benefits consultant. 

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