Pharmacy Benefit Manager Overview

What Is a Pharmacy Benefit Manager?

A pharmacy benefit manager (PBM) is a participant in the pharmaceutical supply chain that establishes and manages contractual relationships with employers, health plans, pharmacies, and pharmaceutical manufacturers to administer prescription drug benefit plans; manage a network of retail, mail, and specialty pharmacies; process prescription drug claims; develop formularies that clients may adopt; negotiate rebates from manufacturers; and offer additional services that its clients may adopt to reduce prescription drug costs or improve clinical outcomes.

Core PBM Services

• Benefit plan management
• Claim adjudication
• Pharmacy network management
• Formulary development
• Rebate negotiation

Utilization Management Tools

• Prior authorization
• Step therapy
• Quantity limits
• Drug utilization review

Over sixty PBMs operate nationally, each with its own areas of expertise within particular lines of business and service offerings. PBMs administer prescription drug benefits for more than 275 million Americans across a variety of plan sponsors including: commercial health plans, self-insured employers, unions, Medicare Part D, Federal Employee Health Benefits Program, and managed Medicaid. Plan sponsors rely on PBMs to help design systems to efficiently process pharmacy claims according to their plan designs and help lower net drug costs.

Consolidation in the PBM market over the last fifteen years has led to approximately 80 percent of prescription claims being processed by three PBMs: Express Scripts (Cigna), Caremark (CVS Health), and OptumRx (UnitedHealth). In addition to consolidation in the industry, some PBMs have vertically integrated with health plans, pharmacies, healthcare provider networks, and organizations that service providers.

PBMs provide many services to their plan sponsor clients.¹ Core PBM services include:

• Pharmacy network management: PBMs contract with pharmacies to establish and manage pharmacy networks through which benefit plan members fill prescriptions. When setting up benefit plans, clients will determine the most appropriate pharmacy networks for each plan based on pricing, geographic, and other considerations.
• Rebate negotiations: PBMs negotiate with pharmaceutical manufacturers for rebates that lower the net cost of prescription drugs to their clients. Rebate contracts typically include a menu of options that PBMs and their clients can select in connection with different formularies, with higher rebates typically applicable to formularies where the manufacturer’s drug is covered under preferred status.
• Prescription benefit plan design and management: PBMs work with employers and health plans to define and manage prescription benefit plans provided to those clients’ employees and members. PBMs provide a variety of other service offerings that vary by client and help clients manage prescription drug benefits, enhance clinical outcomes for members, and reduce overall costs. Clients are responsible for the final determination of the prescription benefit and instructing the PBM to implement the desired benefit plan.
• Formulary development: PBM formularies are designed by an independent committee, often referred to as the Pharmacy and Therapeutic (P&T) committee, which assesses the clinical attributes of a drug including the efficacy, safety, and substitutability relative to other available drugs in the same therapeutic category. Clients can choose to either adopt a PBM’s standard formularies or create their own custom formularies that the PBM will implement on their behalf as part of the benefit plan. Through formulary design, members are incentivized to choose lower-cost prescription drug options over more expensive ones by establishing lower member out-of-pocket (OOP) costs for drugs that are on a preferred formulary tier. For example, member OOP costs on a typical four-tier formulary will go from low to high across the following tiers: generics, preferred brands, non-preferred brands, and specialty products.
• Claims adjudication: Pharmacies submit prescription claims to PBMs for adjudication, a complex process that includes validation of prescription eligibility under the member’s benefit plan, confirmation that all drug utilization review and utilization management checks are passed, and determination of the payments due to the pharmacy from both the PBM and member.
• Rebate claims processing and administration: PBMs submit applicable claims data to manufacturers for rebate payment according to the terms of the PBM contract with the manufacturer.
• Utilization management: PBMs may offer additional services to clients to help improve clinical outcomes and control prescription costs—the most common being utilization management (UM). Each PBM client determines the appropriate UM techniques for its members as applied to specific prescription drugs. UM tools include:
  • Prior authorizations (PA): Prior authorization is a process by which a member must receive approval before obtaining a particular prescription drug.
  • Step therapy (ST): Step therapy is a process by which a member must try certain treatments first (i.e., “step” through other therapies) before receiving approval for an alternative drug product.
  • Quantity limits (QL): Quantity limits cap the amount of a particular drug that a member may receive at a given time (e.g., only eight tablets per month).
  • Drug utilization review (DUR): PBMs can also provide a variety of other services to clients to help manage member drug utilization. Concurrent (CDUR) and retrospective (RDUR) drug utilization review are common tools used to ensure the proper and effective use of medications and control costs.

PBM Interaction with Pharmacies

PBMs contract with a variety of pharmacies to develop cost-effective networks through which members can fill prescriptions, including:

• Retail chains: large nationwide retail chain and food stores (e.g., CVS, Walgreens, Rite Aid, Kroger, Walmart) typically contract directly with PBMs;
• Retail independent: individual locations or small chains with retail stores typically contract with PBMs through Pharmacy Services Administrative Organizations (PSAOs), which aggregate independent pharmacies to consolidate market power for negotiation with PBMs;
• Mail order: pharmacies that ship prescriptions directly to patients for lower OOP costs and convenience, often maintenance medications for 90 days supply;
• Specialty: pharmacies that specialize in high cost, high complexity and/or high touch prescription drugs (e.g., for rare diseases or complex health conditions) that may be provided in person or shipped directly to patients;
• Compound: pharmacies that specialize in combining multiple ingredients together into customized compound drugs for customers.

PBM contracts with pharmacies also include a variety of provisions, including:

• Negotiated pricing terms: contracts establish pricing terms that determine what the pharmacy will be paid for certain products, individually or in aggregate.
• Audits: PBMs audit pharmacies to ensure they are operating in accordance with the contract and/or provider manual (e.g., compliance audits, Fraud, Waste, and Abuse (FWA) monitoring).

PBM Interaction with Manufacturers

PBMs negotiate rebates from manufacturers that are applicable to prescription drug claims under different formulary tiers, utilization management, and competitor product coverage criteria, among other factors. The rebates collected from manufacturers are shared with PBM clients according to the parties’ contracts. PBM contracts with manufacturers also typically include terms related to fees paid to PBMs in exchange for administrative services provided under the contract. Some PBMs now negotiate for rebates with GPOs that conduct the rebate negotiations with manufacturers.

PBM Compensation

PBMs receive compensation from pharmacies, manufacturers, and clients through a variety of different contractual arrangements. Each contract is unique and highly customizable depending on the preferences of the parties. Common forms of PBM compensation include:

• Fees: PBMs can charge fees for various services, e.g., per transaction fee, fee per PA case, fee per member per month (PMPM), etc. Such fees may exist in contracts between the PBM and a pharmacy, manufacturer, or client.
• Spread pricing: Under a spread pricing arrangement, PBMs can generate revenue related to the difference between the pricing terms contracted with pharmacies (what the PBM pays out) and the pricing terms contracted with its clients (what the PBM is paid).
• Rebates: The value of rebates collected from manufacturers are shared with PBM clients according to the parties’ contracts, which sometimes allow the PBM to retain a portion of the rebates as compensation.