Bloomberg published an article last week that exposes pharmacy benefit manager (PBM) spread pricing. Great article, although interestingly Adam Okun blogged on this topic a year ago. With spread pricing, PBMs guarantee that discounts given on drugs over the year will meet a minimum level; however, individual drugs may be priced above or below that general discount percentage. The pricing variations are far greater with generic than with brand name drugs because the discounts for generics are based off ingredient costs while brand names are based off average wholesale cost.
These cost variances can be significant and while there can be negative spreads for some drugs, on balance, the PBMs with spread pricing contracts do okay… In fact, Bloomberg reported that based upon an analysis of 90 drugs in 2017, Medicaid paid pharmacy benefit managers $1.3 billion in excess costs out of the $4.2 billion total spend. Pharmacy costs are the fastest-growing component of healthcare costs and there is no doubt that this 31% profit margin paid to PBMs and pharmacies is not helping.
These high margins explain why there are so many new PBMs entering the market. Even though lower-volume PBMs won’t likely rival prices paid by behemoth PBMs like Optum, Caremark or Express Scripts, they can easily compete in the market just by accepting a more reasonable profit margin. Many of these new PBMs offer pass-through pricing arrangements in which the PBM negotiates discounts from pharmacy manufacturers and makes its profits off pre-established dispensing fees rather than pricing spreads.
These pricing techniques are getting the attention of Bloomberg and others mainly because of high deductible health plans. With these plans the cost of the drug is borne fully by the patient. Many can’t understand why the cash price would be so much less than the cost using their health insurance card… Well, this explains it – it’s done by cutting out the spread pricing profit. And that excess profit in spread pricing does not end up with the retail pharmacy; instead it is retained by the PBM and perhaps sometimes shared with other intermediaries.
Slowly, light is making its way into the darkness of opaque pharmacy pricing and that is going to be helpful to employees and to patients.