The PBM Equation

As pharmacy benefits costs continue to rise, clients are trying, with increasing urgency, to curb spending without harming or inconveniencing their populations. But to curb spending requires understanding spending.

Two major black boxes are rebates and pharmacy purchase prices. Rebates are a hot topic, and we’ll look at them more in a future article. In this piece, we’ll focus on the PBM’s purchase price through pharmacy networks, or “ingredient cost.”

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Clients who want to know what their PBM pays to pharmacies can request a pass-through contract, with an admin fee replacing the traditional “spread.” This requires the PBM to charge the client the same amount the PBM pays the pharmacy.

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In theory, this should give the client full visibility into ingredient cost and enable them to assess whether the associated admin fee appears fair. Straightforward, right?

Wrong. In practice, the purchase prices that pass-through clients see are only a partial view of the real transaction price. Below we look behind the scenes to understand what price information traditional PBMs disclose, what they never disclose, and how you can learn more.

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1. Multiple fee schedules...

Many traditional PBMs have multiple fee schedules with the same pharmacy network, each with different purchase rates for the same products. This means that PBMs can use different fee schedules with different clients. In a pass-through contract, the rates charged by a PBM to the client are the real rates the PBM is paying the pharmacy, but not the only rates they are paying across all of their clients.

2. A quick word about aggregate annual price guarantees...

To understand how PBMs benefit from multiple fee schedules, you have to view the “aggregate annual price” guarantee between the PBM and the pharmacy as the only pricing contract of real importance – the overall deal between the PBM and the pharmacy.

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In this agreement, the PBM agrees to achieve, over the course of the year, a predetermined average price for every product purchased across all of the PBM’s clients. Because this average price is guaranteed, PBMs have the ability to purchase the same product from the same pharmacy at very different price points, knowing that this does not ultimately change either party’s annual economics. (Many pharmacies find this practice incredibly frustrating as transactions in which the PBM pays below the pharmacy’s purchase price hurt the pharmacy’s cash flow, even if the shortfall is corrected in the future.)

It also means that PBMs need to constantly balance their books, to make sure that if they purchase a drug below this agreed average price for one account, they purchase it above the price for another account.

3. Some accounts subsidize other accounts

This sets up a situation in which some accounts subsidize other accounts. For example, if the aggregate annual price guarantee for Generic X is $2, and the PBM purchases it for $5 through one fee schedule, they can then purchase it in greater volume for $1 through another fee schedule:

Fee Schedule 1: [$5 x 10 units = $50]

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Fee Schedule 2: [$1 x 30 units = $30]

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PBM’s aggregate annual price guarantee: [$80 for 40 units, or $2 / unit]

4. Back to multiple fee schedules...

Why are multiple fee schedules useful to PBMs?

Because PBMs do not traditionally disclose their margins, nor their aggregate annual price guarantees with pharmacies.

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But when a client asks for a pass-through contract, PBMs need to share their pharmacy purchase prices, and the PBM will also be reimbursed at these rates. With multiple fee schedules, PBMs can choose to share whichever schedule best enables them to achieve the client’s guarantees with the addition of an admin fee that appears reasonable.

5. This is where optics come in...

Let’s say the client, through a traditional spread-based contract, would have a price guarantee of $6 for Generic X. If, through a pass-through contract, the client requires the PBM to disclose pharmacy purchase prices, there is a strong incentive for the PBM to use a fee schedule with Generic X listed at $5 rather than one with Generic X listed at $2.

Because, after all, it is easier for the PBM to justify an ingredient cost of $5 and an admin fee of $1 (16% of the $6 rate) than to justify a cost of $2 with an admin fee of $4 (67% of the same rate). No one would consider the latter example an appropriate profit relative to the transaction’s administrative burden.

And, per the above example of some transactions subsidizing other transactions, paying $5 via one fee schedule enables the PBM to pay $1 at other times - for instance, in a transaction where the purchase price will not be disclosed to the sponsor - and profit on the entirety of the spread between this price and that at which the PBM is paid back by the client.

What you can do

Read the fine print: In pass-through contracts, PBMs will state that they are passing through their purchase rates, but not specify whether these are the best rates; they are rarely the only rates for the same products. Try to understand what fee schedule you are being shown and why.

The WithMe Health difference

At WithMe Health, we are a true admin fee-based, pass-through PBM without multiple fee schedules - what you pay is what we pay - because we believe that clients and PBMs should be on the same team, working towards the same objectives, with the same information in hand. We are focused on improving outcomes and experiences while lowering costs. If you’d like to learn more, we’d love to talk.