Pharmacy Benefit Managers (PBMs)
How pbms lower costs
Pharmacy Benefit Managers (PBMs) negotiate directly with drug manufacturers and pharmacies to reduce drug costs and improve convenience and safety for consumers, health plans, and employers. This is accomplished through formulary development, contracting tools, and bargaining power.
Formulary Development
Formulary development is a critical function of PBMs that benefits union members by ensuring the availability of effective medications at the most reasonable cost. By developing and managing formularies, PBMs ensure that union members have access to necessary medications while also keeping costs manageable for their health plan.
Pharmacy and Therapeutics Committee
This committee, usually composed of pharmacists and physicians, reviews medications to determine which should be included in the formulary based on their efficacy, safety, and cost-effectiveness.
Tiered Formulary System
Many PBMs use a tiered formulary where drugs are categorized based on their cost, with incentives for patients to use lower-tier, more cost-effective medications.
Preferred Placement
Medications that are therapeutically similar will compete for placement on the formulary. Manufacturers may offer better prices or rebates for preferred placement, which can lead to lower costs for the health plan and its members.
Exclusion of High-Cost Drugs
When cheaper, therapeutically equivalent drugs are available, PBMs may exclude more expensive options, which pressures manufacturers to lower prices to gain formulary inclusion.
Bargaining Power
The bargaining power of PBMs stems from their ability to represent a large collective of consumers, which includes union members, when negotiating with drug manufacturers. By using their collective bargaining power, PBMs can obtain drugs at lower prices than would be possible if individuals or smaller groups were negotiating independently.
Here's how they leverage this power:
Economies of Scale
By representing millions of individuals, PBMs can negotiate more aggressively, as drug manufacturers are motivated to offer better deals to access the large customer base that PBMs control.
Competition
PBMs can play manufacturers against one another to secure the best price, especially for drugs where there are several similar options available.
Exclusive Agreements
PBMs sometimes secure exclusive agreements with manufacturers for certain drugs, which guarantees a large market share for the manufacturer in exchange for lower prices.
Contracting Tools
Pharmacy Benefit Managers (PBMs) employ a variety of contracting tools, which allow them to exert significant influence on drug prices, ultimately benefiting consumers by lowering the cost of their medications.
Discounts and Rebates
PBMs negotiate discounts on drug prices and rebates from drug manufacturers. The rebates are often tied to the placement of products on the formulary or based on the volume of sales.
Pharmacy Networks
PBMs create networks by contracting with a range of pharmacies. These networks agree to certain pricing structures, which can lead to lower costs for the health plans and their members.
Spread Pricing
This involves PBMs charging a health plan a certain price for a drug while paying the pharmacy a different price, then keeping the difference as part of their compensation.
Risk Mitigation
PBMs may also engage in risk-sharing arrangements with payers, where the financial risk associated with drug spending is shared or transferred, which can stabilize costs for health plans.
Learn more about PBMs
What are PBMs?
PBMs are companies that manage prescription drug benefits by negotiating directly with drug manufacturers and pharmacies. Their goals are to reduce drug costs and improve convenience and safety for consumers, health plans, and employers.
Demystifying PBMs
The operations of Pharmacy Benefit Managers (PBMs) are often perceived as opaque. In shedding light on common myths about PBMs, we aim to provide a clearer picture of their role in healthcare.
Expert Insights
Research from experts such as Dr. Lawton Robert Burns shows that PBMs play an integral role in the healthcare system by managing costs and preserving the sustainability of health benefits.