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  • January 2020
  • 5 minutes

Part I: A How-To Guide for Clients Navigating the Maze of Pharmacy Benefit Managers

  • ​​Barbara Tomlin
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In Brief
In the war against high prescription drug costs, the pharmacy benefit manager might be your most powerful ally. Barbara Tomlin explains why in Employee Benefit AdvisorFirst in a two-part series on the complexities of pharmacy benefit management.

PBMs play a pivotal role in administering and managing prescription drug programs for many health insurance plans.

PBMs bridge the gap between insurers and pharmaceutical companies by developing, administering and managing formularies; negotiating drug pricing; and offering discounts in the form of rebates. PBMs also provide several other core management services, including verification of plan member eligibility, and data collection and reporting. The largest PBMs also own mail-order, specialty and retail pharmacies. Currently, the PBM market is highly consolidated — CVS Health (formerly CVS Caremark), Express Scripts and UnitedHealth Group’s OptumRx account for more than 75% of the market.

Industry experts believe this level of consolidation and integration could create efficiencies and reduce employer health plan spend, but others believe savings may be more likely to go to shareholders. Because PBMs are unregulated, they are often vague and opaque about their highly complex fees and pricing.

When a PBM is looking out for the best interests of a plan and its members, it utilizes several measures to reduce cost to insurers, including:

Plan exclusion: Removing drugs with low clinical value from coverage when other, higher clinical value alternatives are available.

Formulary: A multitier list of brand and generic drugs to be covered on a health plan. Formularies work with a health plan’s (or hospital’s) pharmacy and therapeutics committee, and operate on copayment tiers. The lowest copay tier is for generics; higher tiers are for brand-name and specialty drugs.

Pharmacy and therapeutics committees: Comprised of physicians, pharmacies and other healthcare providers, P&T committees advise PBMs, hospitals or managed care organizations on safe and effective use of medications. They often act as the organizational line of communication between a health plan’s medical and pharmacy components.

Prior authorization: A process where a physician must secure approval from a patient’s health insurer before a prescription can be filled. Prior authorization is generally for medications that are very expensive or prescribed for an off-label or non-FDA approved use.

Quantity limits: The plan places a limit on the number of doses that will be covered, whether in a particular time period or in total.

Step Therapy: Treatment guidelines require the least expensive or safest drug with demonstrated efficacy be recommended first before “stepping up” to more costly higher-tier alternatives if the initial recommendation was not effective, or after a prior authorization.

Specialty pharmacy benefit: For specialty drugs, different utilization management techniques are often used to provide prior authorization and different cost-sharing amounts.

Split fill programs: To reduce drug waste, some plans have a 30-day initial dispensing program that observes patients for medication side effects tolerance, and compliance before setting them up for 90 days refills.

Mail order refills: The mail order firm sends 90 days of refill doses to members who may not have finished their prior fills.

Drug manufacturers generally pay rebates to PBMs for higher-cost drugs. But contract terms for rebates are heavily guarded by PBMs, making it difficult for others in the supply chain to learn the real cost of competing brand-name drugs. In addition, rebate values may be referred to as administrative service fees or inflation payments.

Rebates are a highly profitable piece of a PBM’s financial picture. A recent study from Pew Charitable Trusts found fees and spread pricing (what PBMs retain from health plans payments for prescription drugs for their members) rose from $6.6 billion in 2013 to to $16.6 billion in 2016.

Since rebates generally apply only to name-brand drugs. The Department of Health and Human Services and other U.S. government agencies are currently targeting rebates in an effort to improve drug pricing transparency and allow rebates to be passed on to members for generic drugs.

Curious? Contact us to discuss pharmacy and medical claims cost management. 

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Meet the Authors & Experts

Barb Tomlin
​​Barbara Tomlin
Director (Ret.), ROSE Consulting Group, Quota Share

Additional Resources

Reprinted with permission of Employee Benefit Advisor,