The rising costs of prescription drugs continue to burden employer-sponsored health plans. A pharmacy benefits manager (PBM) is used to manage and optimize costs and improve efficiency. Your choice of a PBM impacts the efficiency of your health plans.
However, PBMs have been under scrutiny for high drug costs and opaque pricing practices, which require fiduciary oversight, as discussed later in this blog.
Our blog covers what a PBM is, its core services, how to find the right PBM, and how to work strategically with a PBM.
What is a Pharmacy Benefits Manager (PBM)?
A Pharmacy Benefit Manager (PBM) acts as an intermediary between insurers, pharmacies, and drug manufacturers to manage prescription drug costs for health plans.
They partner with you at every stage of the drug supply chain. We’ll see the main tasks they handle in the next section.
Core Services Offered by Top PBM Companies
The primary function of PBM companies includes:
1. Creating and Managing Drug Formularies
PBMs create and manage a comprehensive list of prescription drugs covered under a health plan. The formularies are developed by a Pharmacy and Therapeutics committee, based on several factors, including a drug’s effectiveness, cost, and safety.
Drugs are typically organized into tiers, with generics at the lowest and specialty drugs at the highest. This determines how much the patient pays for medications: the lower tier is the most affordable, while the highest tier is the most expensive.
2. Negotiate Rebates with Drug Manufacturers
By purchasing drugs in bulk, PBMs can negotiate better rebates and other discounts with drug manufacturers.
Think of rebates as discounts manufacturers offer PBMs for favourable formulary coverage. This helps generate significant revenue, which PBMs pass on to their clients through lower drug costs.
3. Building and Managing Pharmacy Networks
PBMs establish connections with a wide range of retail pharmacies and negotiate contracts with them.
A key requirement is that these pharmacies must offer cost-effective options and the standard drug formularies managed by the PBMs. They do this to ensure plan members have convenient access to medication and a wide range of cost-effective options.
4. Processing Drug Prescription Claims
As intermediaries in the drug supply chain, PBMs help reduce administrative burdens for pharmacies, insurers, and drug manufacturers by processing prescription claims.
Once the pharmacist receives a prescription from the patient (the insured) or their health provider, they submit the claim to the PBM for review and approval. The PBM checks whether the prescribed drug is on the formulary and confirms whether it’s placed in the correct cost-sharing tier.
If approved, the pharmacist issues the medication to the patient and waits for reimbursement from the PBM.
Factors to Consider When Evaluating PBM Companies
Choosing a PBM company goes beyond establishing its ability to manage cost and guide the use of more effective drugs.
It’s about finding the right partner who aligns with your values, meets your expectations, and offers the best available solutions to your beneficiaries.
Consider the following points when evaluating the PBMs:
- Pricing Model and Transparency: As an employer, you need clarity on the PBM’s pricing model. This is more than understanding what you’ll pay. It’s also about how they restructure rebates and set drug costs. A transparent PBM will provide a clear breakdown of these costs, helping you make decisions that ensure you’re getting the best possible value from the partnership.
- Technology Capabilities: Leveraging modern technology helps PBMs identify cost-saving opportunities and wasteful spending and forecast future drug costs. It also ensures they manage drug utilization and process claims more efficiently.
- Flexibility in Formulary Designing: Can you influence PBM’s formulary decisions? Having a say in which drugs are included in your prescription benefit plan can help steer your employees towards cost-saving, clinically approved alternatives, such as generics. That way, you keep premiums in check and avoid unnecessary financial pressures that often result from high-priced medications.
- Customization: Evaluate a company’s ability to tailor prescription drug benefit solutions to your company’s structure. Do you want to implement strategies to address anticipated future challenges? Or do you have a specific network of pharmacies you’d like to include in your plan? Choose a PBM that offers a tailored approach to its plan sponsors.
- Regulatory Compliance: Ensure you select a PBM that complies with HIPAA, ERISA, and other applicable federal and state regulations. It ensures you’re in the hands of a stable, secure, and legally binding partner, protecting you from costly lawsuits that can harm your bottom line and reputation.
How Fiduciary Oversight Changes PBM Outcomes
Did you know your PBMs may be costing you more than you think?
With fiduciary oversight, your PBM partnership will align with your company’s interests and serve your employees’ health needs.
Here’s how the fiduciary approach helps:
- Adherence to Regulatory Standards: A fiduciary expert reviews your employee plans to ensure they meet ERISA obligations and are compliant.
- No Conflict of Interest: A fiduciary consultant is expected to act in your employees’ best interests. Therefore, they can review plan claims and ensure decisions are based on rebate potential or clinical value.
- Risk Reduction: A fiduciary expert conducts employee plan audits to identify financial discrepancies, protecting the plan and helping avoid lawsuits, such as the J&J lawsuit.
- Transparency and Accountability: A fiduciary expert provides detailed insights and data on the health plan. They scrutinize PBM contracts for hidden charges, monitor drug spending, and plan performance to help you make informed decisions.
- Design an Employee Plan Strategy: Advisors work alongside PBMs to develop a strategy that reduces costs and aligns with your long-term company goals.
As a fiduciary-driven advisor, Ethos Benefits delivers on all these fronts, ensuring your pharmacy benefits plan aligns with your broader business goals. We partner with PBMs and insurers to ensure your plan is in your best interest and helps you reduce costs.
Schedule a consultation, and get fiduciary-aligned support to evaluate your PBM strategy and maximize your pharmacy benefits.
Frequently Asked Questions (FAQs)
Here is what most employers ask when choosing a PBM:
What Are the Risks of Choosing the Wrong PBM?
Choosing the wrong PBM has its fair share of risks stemming from a lack of transparency, which often leads to:
- High Drug Costs: This happens due to hidden fees charged to your plan, unfavourable contract terms and formularies, or failure to pass through rebates.
- Challenges Accessing Medication: Wrong PBMs tend to have weak support systems, making it harder for people to access medication, especially specialty drugs.
- Compliance Risks: A PBM that lacks transparency tends to have weak controls and inadequate documentation, which can trigger audits and lead to serious compliance issues.
What is the Difference Between PBMs and TPAs?
PBMs manage prescription drug benefit plans, while third-party administrators (TPAs) manage all the administrative functions of your self-insured medical plans and level-funded arrangements.
TPAs process claims, enroll employees, report on claim costs, and coordinate with provider networks.
How Can Businesses Audit Their Current PBM Effectively?
To effectively audit your existing PBM:
- Review their contract to determine whether they are performing as they should.
- Evaluate their claim data to confirm compliance with the contract terms.
- Analyze the rebate reports to determine whether the partner is transparent.
- Review their pharmacy network and reimbursements done. You want to ensure the amount reflected in the reimbursement records matches the MAC prices.
- Review the formulary list for proper alignment.
- Benchmark their performance.
- Use the findings to make improvements where necessary.
What KPIs Should Be Used to Measure PBM Success?
When evaluating PBMs’ performance, track:
- Spending Patterns: Check on PBM’s ability to control and reduce spending
- Pricing and Transparency: Analyze the PBM’s ability to ensure fair and honest pricing
- Drug Utilization and Quality of Care: Check on PBM’s ability to promote safe and effective drug use
- Operations and Compliance: Establish the PBM’s reliability and ability to reduce risks
Conclusion
PBMs play a critical role in the prescription drug supply chain and are a key player in employer-sponsored health plans.
However, you must apply fiduciary oversight when working with PBMs to ensure proper management of your plan.
As fiduciary employee benefits advisors, Ethos Benefits can guide you on the best way to navigate the challenges of PBM selection. We can ensure that the terms, reimbursements, and renewal structures are in your best interest. Additionally, we operate on a transparent, flat-fee basis with no hidden costs.
Reach out today and learn how to get a transparent PBM model that lowers your costs and delivers value to your employees.
