PBMs - Role and Common Practices

Pharmacy benefit managers (PBMs) are entities that serve as intermediaries in the prescription drug distribution chain. PBMs oversee prescription drug benefits on behalf of various organizations, including corporate employers, health insurers, and labor unions. The organizations hire them to interact with pharmaceutical manufacturers and pharmacies and negotiate to achieve the lowest possible drug costs.

PBMs’ purchasing and negotiating powers endow them with a significant hidden influence on the total drug costs for insurers, patients’ access to medication, and the amount paid to pharmacies. A common assumption is that health insurers are the direct providers of pharmacy benefits, while in fact, PBMs reportedly perform this function for over 80 percent of US employers. PBMs strive to reduce rising prescription costs, ensure the effective administering of drugs, and achieve optimal results for patients’ health and well-being.

As the middlemen between drug companies and patients, PBMs are in charge of assessing the affordability of a drug and adopting practices that will enable patients to access the most effective medications and treatments. They assist benefit plan administrators with ensuring a patient’s plan or clinical program includes the appropriate medication in the right quantity, is safe, and presents numerous savings opportunities. Some of the most common practices used by PBMs include drug formulary, rebates, prior authorization, and step therapy.

A drug formulary denotes a list of covered prescription medications developed and maintained by the PBMs for their clients. It could contain both branded and generic drugs, and PBMs compile it based on recommendations of physicians and other healthcare professionals. Being covered on the formulary increases a drug’s likelihood of being prescribed by a physician. Thus, pharmaceutical manufacturers should strive to have their drugs on the list so that they reach the patients that most need them.

PBMs receive the rebates for the different drugs agreed upon after direct negotiations with pharmaceutical manufacturers and wholesalers. They negotiate quantity discounts from wholesale acquisition cost (WAC). WAC denotes the estimate of the manufacturer's list price of a drug for wholesale or direct purchase, excluding discounts or rebates. In addition, PBMs draw on adherence programs to negotiate payments. Adherence programs aim to improve the patients’ medication compliance, or taking medications as prescribed by their physicians. Whether PBMs will transfer any amount of the rebates to an employer or a plan sponsor depends on the contract they have signed.

Prior authorization is an approval that PBMs require physicians to obtain from health insurers to verify that a patient needs a specific prescription drug. Its goal is to not only save costs but also minimize improper prescribing and use of certain drugs.

Applicable to both traditional and specialty drugs, step therapy or “fail first” is a type of prior authorization. It involves a patient first trying a less expensive drug and finding it ineffective before “stepping up” and receiving a more expensive one. Step therapy’s essential aim is to ensure the drug that patients take is the safest, most effective, and optimally priced one.

PBMs also sign direct contracts with individual pharmacies to handle reimbursements for drugs dispensed to beneficiaries. The vast network of pharmacies that PBMs negotiate with enables them to offer patients and employers greater choice of and access to medications at multiple locations and competitive prices.