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PBM 101: All You Need To Know

Blog Post
January 17, 2022
By: Capital Rx Communications
Topics: PBM

Pharmacy benefit managers. Maybe you’ve heard of them before, but it’s likely that you haven’t. These companies handle one of the most important and continually debated aspects of American’s lives: prescription drug costs. Yet most people don’t know they exist, and those that do can still be perplexed by how they operate. So, why are PBMs so important?

What is a Pharmacy Benefit Manager (PBM)?

A pharmacy benefit manager (PBM) processes prescription drug claims on behalf of a plan sponsor, like an employer, government entity or union. To provide this service, PBMs contract and negotiate with retail pharmacies and pharmaceutical manufacturers to provide the right balance of drug access and cost-effectiveness. Employers are mostly familiar with PBMs for their responsibility to administer plan design, eligibility and create and maintain the plan’s formulary, the list of prescription drugs available to employees.

PBMs are responsible for handling more than 80% of all pharmacy benefits negotiations and matters in the United States, which is why they are integral to the process, and they also have a major influence on rebates and reimbursements. Basically, their job is to ensure the most suitable health outcomes and results, while also keeping cost-effectiveness at the helm of affairs.

Who Are PBM Clients/Customers?

  • Third Party Administrators (TPA’s)
  • Employers
  • Federal and State Governments/Municipalities
  • Unions
  • Insurance Plans
  • Healthcare Organizations
  • Managed Care Organizations
  • State Medicaid
  • Managed Medicaid

Responsibilities of a Pharmacy Benefit Manager

PBMs are allotted several responsibilities, but their roles are divided into two main categories: devising fair pharmacy prescription benefits plans, and offering patients unfettered access to suitable medications so that their health is maintained. To achieve these two goals, PBMs have to work with different entities, including pharmaceutical companies, pharmacies, wholesalers, and health plan providers.

Here are some of the key responsibilities that a PBM has to undertake:

Reducing Spending

Pharmacy benefit managers are in direct contact with several mail-order and retail pharmacies, and they negotiate pricing in order to provide patients and employers better access to required medication at various pharmacy chains. Moreover, their job also includes ensuring that pharmacies are able to offer competitive pricing to patients, while also keeping their prices within a predetermined range.

PBMs achieve this goal by a series of methods, which includes setting up clinical programs to keep an eye on quantity checks and authorizations, so that the plan administrators are able to adequately determine medication usage and also calculate savings.

Better Access to Medication
Another key responsibility that a PBM has is to ensure that patients and employers have better access to medication, and they achieve this through constant communication with drug manufacturers and wholesalers, who are largely responsible for ensuring that medicines are made available and the pricing is also kept fair.

A good PBM will be able to negotiate suitable discounts on behalf of their employers so that the plan administrators can facilitate their customers in return.

Patient Engagement & Health Outcomes
A PBMs evolution into a clinical management role makes them more valuable than ever before. Today a PBM must be focused on asking what the needs of employers are and agile enough to offer flexible, personalized plan designs based on those needs. Because PBMs are managing prescription drug claims and overseeing drug utilization, with the right resources and technology they can be the most fit to handle proactive clinical oversight and create personalized analytics and reports.  Next century PBMs can work with employers to strategically balance drug spend, introduce programs that allow employers to offer better choices to improve outcomes, rather than push paper and process claims.

Full Service PBM Services

  • Claims Processing Administration
  • Benefit Design and Management
  • Customer Service
  • Data Integration and Management
  • Pharmacy Network Management
  • Formulary Management
  • Rebates and Discounts
  • Drug Utilization Review
  • Mail Order Service Delivery
  • Specialty Medication Delivery
  • Prior Authorization
  • Clinical Consultation and Program Mgmt.
  • Disease Management
  • Medicare Part D Management

How Do PBMs Work with Pharma Companies?

PBMs have a direct relationship with pharmaceutical companies, which are responsible for manufacturing medication required by hundreds of thousands of people. However, this relationship isn’t without its hurdles and bumps, mainly due to the financial constraints and challenges that arise during negotiations between PBMs and drug manufacturers.

Since PBMs act as the bridge between drug manufacturers and patients, they are tasked with deciding how affordable a certain drug is for patients. Moreover, they have to design programs and implement them to ensure that patients get access to the most effective and suitable medication for them, that too in the most cost-effective manner.

Some of the programs designed by PBMs include:

Rebates
Rebates are decided by the PBMs and pharmaceutical companies for individual drugs, and they are paid directly to PBMs. According to the agreement that PBMs have with their employer, plan sponsor, or any other stakeholder, they are required to redirect all or some of the rebate back to them. In some cases, PBMs aren’t required by contract to return any of the rebates back to their employers, and they can keep them. At Capital Rx, we pass-through all rebates to the plan sponsor.

Formulary
A formulary refers to a set of drugs covered within a healthcare plan, and this may include both branded and generic drugs. Formularies are devised by PBMs themselves, and they seek the help of physicians and pharmacists to ensure that they add the most effective and affordable drugs to the list. Based on this formulary, physicians are more likely to prescribe the drugs mentioned on them to their patients, and drug companies may also hire PBMs to ensure that their drugs are prescribed to patients.

How do PBMs work with Employers?

Similar to their relationship with pharmaceutical companies, PBMs have a contract with their employers, and they are required to design a prescription benefits plan. Once this plan is designed, the employer requires the PBM to administer the prescription benefits and make their employees aware of the benefits they can receive.

Types of pricing models

PBMs negotiate the purchase price of medications with manufacturers which leads to how they price services for clients:

  • Traditional Pricing A percentage discount from Average Wholesale Price (AWP) is negotiated with manufacturers and passed to pharmacies (Retail, Mail, Specialty).
  • Pass-Through Pricing – Negotiated pricing that includes passing formulary rebates to patients at point-of-sale, to the insurer, or retained by the PBM based on contractual arrangements with the insurer
  • National Average Drug Acquisition Cost (NADAC) Pricing -  Pricing based on the approximate invoice price retail pharmacies pay for medications in the United States. This approach aligns drug prices with average actual pharmacy drug costs rather than manufacturer lists, so it's not subject to inflationary tendencies of AWP.

How Capital Rx is reimagining the pharmacy benefits industry.

This brings us to the end of our guide on PBMs and their importance in the pharmacy benefits paradigm. At Capital Rx, we strive every day to change the way prescription drugs are priced and patients are serviced. We see ourselves as a health technology company first, daring to reimagine the pharmacy benefits industry. We're executing on that mission through the Clearinghouse Model® - the first ethical framework for drug pricing. In 2021 we launched the first Enterprise Pharmacy Platform, JUDI™, which connects every aspect of the pharmacy ecosystem in one platform, enabling patient engagement, and increasing efficiency to achieve the highest standards of clinical care.

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