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The Tale of Two PBM Pricing Models

As a pharmacy consultant for more years than I would like to admit, I am always surprised by the continued debate between the pure transparent pass-through PBM pricing model and the traditional PBM pricing model.

The pass-through pricing model is where the PBM passes through the same pricing discounts and dispensing fees paid to the pharmacy to the plan sponsor for prescriptions drugs. PBMs typically generate revenue through a per prescription claim administration fee.

The traditional (spread) pricing model is where the PBM charges a plan sponsor a contracted price with specified discounts and dispensing fees for prescription claims, while paying the pharmacy a different price. The difference between the amount billed to the plan sponsor and paid to the pharmacy is known as “spread” and is retained by the PBM as revenue in lieu of charging the plan sponsor a claim administration fee.

If the pass-through and traditional pricing models were people, the pass-through person would look at the traditional person as being less than transparent. The traditional person would think of themselves as just creative.

Think of the pass-through model as a straight road. The contracts are short and relativity easy to read. However, the pass-through model does not offer financial pricing, dispensing fee, and rebate guarantees, just minimum expected performance levels. The belief is that by eliminating the “spread” the plan sponsor will lower their drug costs. However, this is not always the case.  We see administration fees up to $8.00 per paid prescription that can impact a plan sponsor’s monthly cash flow.  

The pass-through pricing approach to lowering drug spend is based on lowering unit costs by promoting lower cost drug alternatives versus higher cost drugs that drive higher rebates. For this reason, discounts and rebates under a pass-through plan typically are not as aggressive as the traditional pricing model but theoretically offers a lower net net cost to the plan sponsor because the initial lower cost drugs may more than offset the difference.

In contrast, the traditional model is like a bumpy curvy mountain road. The contract includes a lot of financial pricing, dispensing fee, and rebate guarantees with language to allow the PBM to be in the best position to meet the guarantees. Their approach is to lower drug spend by negotiating more aggressive discounts and dispensing fees with the pharmacy network and larger rebates from manufacturers. The theory here is that this will result in a lower unit cost after the rebates are subtracted in lieu of focusing on lower cost drug alternatives.

This traditional model strategy of savings coming from larger rebates is not without controversy. By their negotiating higher rebates, it forces drug manufacturers to raise list pricing for their products.  However, PBMs will counter that they have been passing along a larger share of the rebates to insurers.

Both the pass-through and traditional pricing model help manage rising pharmacy plan costs, just in very different ways. We have found that the details in the contract determine the true financial value to the plan sponsor. Overall, we find in the pass-through model, PBMs offer less aggressive discounts and rebates yet are more flexible and allow for plan customization and outside programs to integrate with theirs to offer additional pharmacy plan management. We find that the traditional model does drive more aggressive discounts and higher rebates. However, unlike the pass-through model, they allow very little plan customization or outside programs that conflict with their formulary and use of drugs that drive higher rebate dollars. Traditional plan contracts may also have language that excludes many claims from discount guarantees and from qualifying for rebates.

Reality is that a plan sponsor cannot simply rely on theory. Plans should embrace an audit of their contract to assure that what is intended in practice is delivered. For our clients that move to the pass-through model we do a savings analysis to answer the question for the plan sponsor as to whether the unit cost did decrease in each therapy class from lower cost alternatives without increasing the length of time the member is on a medication. The answer of interest is whether the savings will be equal to or greater than the difference in the discount and rebate offerings between the two-pricing models.

In closing we recommend using a pharmacy consulting firm to do an annual financial audit. An audit can help a plan sponsor fully understand their PBM contract and areas where the contract can be strengthened to favor them versus the PBM.  For more information, please visit our website at www.cobaltrx.com or call us at 225-927-1940.