The rising cost of medicines is a global concern. To cushion the impact of health expenditures, governments and private sectors worldwide offer medical insurance coverage to their citizens.

Health insurance coverage is offered to individuals either at will or automatically. As a healthy workforce must be maintained, health plans are mandatory for employees. Premiums are deducted from their salaries in specific terms.

However, despite health programs, most individuals worldwide continue to bear the brunt of increasing drug costs. Thus, the pharmacy benefit manager (PBM) industry was born in the United States.

These organizations are third parties hired by companies to supervise and administer drug benefits programs to ensure the best services at the lowest prices. Reducing drug costs and improving healthcare access is what a top-rated PBM should be doing continually.

If you’re wondering how these companies lower drug spending and help millions of insured Americans, continue reading below.

Pharmacy Benefit Managers Explained

Pharmacy Benefit Managers

As mentioned, pharmacy benefit managers or PBMs oversee and ensure the proper implementation of prescription drug benefits. While they may have slight variations in their services, pharmacy benefit managers have core administrative and lobbying duties. These include negotiating with drug manufacturers and pharmacies for rebates and discounts and developing, maintaining, and updating the drug formulary—or the list of medications offered by the insurance.

PBMs are also tasked to process claims, expand generic medicine consumption, and encourage beneficiaries to use affordable yet effective medications instead of the most expensive prescription drugs.

How PBMs Help Lower Drug Costs

Drug Costs

PBMs have different contracts with private and public employers, hence the personalized services they offer from one insured individual to the next. However, as a general approach, these organizations tend to work in the same way to pull down prescription drug prices. The Pharmaceutical Care and Management Association or PCMA has reported that patients who have pharmacy benefit managers can save up to 50% in drug spending as compared to those without.

These are the core responsibilities of PBMs in lowering drug costs.

  • Negotiate Manufacturer Rebates And Pharmacy Reimbursement Rates

They say that there’s power in numbers. Indeed, this is one of the guiding principles that pharmacy benefit managers adhere to. By ensuring drug stores and pharmaceutical companies of volume purchases and payments, PBM companies can lobby on behalf of the members.

The collective efforts of PBMs hold enough ability to influence healthcare companies to reduce drug costs and other related medical charges. In most cases, an initiative done by a prominent drug maker will create a domino effect, where other companies will lower the market prices for their products, too. These discounts and rebates are passed on to the general public through lower prescription drug prices.

  • Increase Acceptance And Use Of Generics And Preferred Brands Through Substitution And Step Program

PBMs also help lower the cost of prescription drugs by promoting generic medications. These drugs are more affordable than brand-name medicines despite containing the same active ingredients and strength as their signature counterparts. It can be challenging to understand why patients aren’t as open as they should be to using generic drugs, being that they’re cheaper and accessible in online pharmacies.

Estimates suggest that generic products cost 30% less than their brand-name competitors. For example, a well-known anti-depressant brand typically costs USD$185 per month while its generic equivalent’s monthly subscription is only USD$24. This translates to USD$1,932 in yearly savings for the patient. According to the Congressional Budget Office in a recent report, consumers can save up to USD$ 10 billion in drug expenditures yearly just by switching to generic medications.

PBM’s step program helps boost the generic medicines market by encouraging patients to take these affordable alternatives for treatment. The insured will only be allowed to switch to a more expensive brand name drug if the generic meds fail to alleviate their conditions or don’t work according to expectations.

  • Limit Drug Spending Costs And Reduce Inappropriate Drugs Use

Apart from promoting access to generic medications, PBMs often have other specific programs to reduce workers’ spending on drugs.

  • Prior authorization: Some medications may require prior approval from PBMs before purchase. Apart from preventing drug misuse, this policy shields insurers from spending more if their repayment claim is rejected.
  • Quantity restrictions: Limiting purchase quantity isn’t only a regulatory move. It can also help reduce patient costs by reducing wastage if the patient shall be asked to switch to another medication.
  • Step therapy: As mentioned, “step therapy” pushes for generic drug use in patients. If their health issues don’t improve, they may “step up” and request brand-name medications.

The PBM system has also encouraged other stakeholders to further lower drug spending. For instance, consumers are less likely to spend on unnecessary medication compliance programs. And as benefits managers also work with pharmacies, doctors, and patients, they can help increase both parties’ awareness of lower-cost alternatives to brand-name medications.

Factors Contributing To High Drug Prices

High Drug Prices

A study found that per capita spending on prescription drugs reached 25% from 2010 to 2019. There are several reasons why medication costs continue to rise. According to research, below are some of the primary ones:

  • Drug manufacturers are said to be naturally imposing high prices on novel drugs, while the costs of drugs that have been on the market continue to rise.
  • Patients are content with copay coupons and don’t bother seeking cheaper alternatives.
  • Prescribers or doctors aren’t conscious of drug prices and affordability
  • Some PBMs are allegedly seeking hidden profits and more rebates and keeping the savings themselves instead of passing them on to consumers.

How PBMs Earn Money

Like other businesses, PBMs earn money by offering their services to health plan sponsors, most notably government and commercial sector employers. They charge fees to their clients for managing and administering the prescription benefits program and processing claims.

Depending on the business approach, some PBMs keep a portion of the rebates and discounts instead of passing on these total savings to their clients. A few benefits managers are also known to practice price spreading. This practice involves negotiating a lower price but still charging insurance companies the actual cost while keeping the price difference. If done in a pharmacy setting, this traditional PBM practice of keeping the extra amount is called a “clawback.”

Note that these practices don’t apply to all PBM companies, as most are, in fact, transparent in how they charge their clients and their other revenue-generating methods.

The Bottom Line

PBMs act as intermediaries between the insured and the health plan sponsor and liaise with all the other players in the healthcare sector. Their core duties include helping reduce drug spending by negotiating for lower prices and pushing for broader use of affordable medication.

Quoting reports, workers can slash half of their drug spending with the help of PBMs. This is good news for employees who already have enough to think about. However, as several reasons contribute to high drug prices, PBMs must continue to work with other stakeholders who have the same objective.

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