What are pharmacy benefit managers

what are pharmacy benefit managers

By: Janet Brierton, Associate Legislative Attorney

You asked for background on Pharmacy Benefit Managers (PBMs). Information on PBMs’ purpose, history and current issues follows.

SUMMARY

Pharmacy Benefit Managers (PBMs) are fiscal intermediaries that specialize in the administration and management of prescription drug benefit programs. Their objective is to provide high-quality pharmaceutical care at the lowest possible cost. To do this, they employ a number of methods to reduce prescription drug costs, including: negotiated prices, generic substitution, manufacturer rebates, copayment and coinsurance cost sharing, formularies, disease management, mail order prescriptions, and utilization review.

PBMs first became a major force in the late 1980’s as health care and prescription costs were escalating. Today, PBMs manage prescription drug benefits for over 200 million people. Four major companies control the majority of the market: Medco Health Solutions, AdvancePCS, Express Scripts, and Caremark Rx.

After years of being relied upon to reduce prescription drug costs, PBMs have come under scrutiny by the federal government and consumers who question if PBMs are actually saving their clients money.

PURPOSE OF PHARMACY BENEFIT MANAGERS

Pharmacy Benefit Managers (PBMs) are fiscal intermediaries that specialize in the administration and management of prescription drug benefit programs. Their objective is to provide high-quality pharmaceutical care at the lowest possible cost. PBMs contract with employers, unions, Health Maintenance Organizations (HMOs) and other health plans to coordinate payment of prescriptions for employees and covered members.

PBMs use several methods to control prescription drug costs:

Negotiated Prices

PBMs use a restricted network of pharmacies. In return for directing covered members to the network, the participating pharmacies provide the PBM with volume pricing discounts. PBMs strive to achieve the best prescription discounts possible while allowing adequate pharmacy access to the covered members.

Generic Substitution

Generic drugs are less expensive versions of brand name drugs whose patents have expired. To encourage the use of generics, pharmacy benefit plans may provide covered members with a lower cost sharing arrangement for generic drugs than for brand name drugs. For example, the plan may charge a lower copayment or reimburse payment at a higher coinsurance rate for a generic, or it may require the covered member to pay the difference between the generic and the brand name drug if the generic drug is not accepted.

Manufacturer Rebates

Rebates are money paid by the seller to the buyer after the sale. Rebates can be considered a negotiated volume price discount. Manufacturers pay a rebate based upon the amount of their firm’s products that are dispensed by the PBMs’ participating pharmacies.

Cost Sharing – Copayment and Coinsurance

PBMs require covered members to share the costs of prescriptions in an attempt to shift responsibility to the consumer and raise awareness of the utilization costs. Cost sharing requires the covered member to pay a portion of the cost of each prescription he obtains. Cost sharing can be in the form of a copayment or a coinsurance. A copayment is a fixed dollar amount payable per prescription. Copayments can differ between brand name and generic, as well as formulary (preferred) to non-formulary drugs. A coinsurance is a fixed percentage of the cost of the prescription (e. g. 20%). As the cost of the prescription increases, the amount of the cost share increases.

Formularies

A formulary is a list of prescription drugs covered by the plan. An open formulary includes all drugs. A closed formulary restricts coverage to the specific drugs listed. A partially closed formulary specifies the drugs covered, but allows exceptions, usually with additional cost sharing (e. g. higher copayment) or administrative effort (e. g. prior authorization). Drugs included in a formulary are often subject to a rebate arrangement. However, proponents claim that the underlying intent of a formulary is to improve prescribing and drug use quality, as based on therapeutic outcomes.

Disease Management

Disease management is the practice of identifying patients with specific medical conditions and providing intensive care and monitoring of drug use and effects. Appropriate drug use is emphasized through patient education. The most common form of disease management used by PBMs is mailing educational materials to patients. In addition, PBMs

may monitor drug utilization to ensure the patients follow the desired drug regimen. The goal with disease management is to maximize drug effectiveness and outcomes, thus minimizing the total treatment cost of the disease.

Mail Order Prescriptions

PBMs encourage or require covered members to obtain prescriptions, particularly drugs for long-term, chronic conditions, from mail order pharmacies. Mail order pharmacies generally offer deep discounted pricing. Covered members often receive larger quantities of drugs at a lower total price. For example, a three-month supply can be obtained at the cost of two monthly copayments, instead of three.

Utilization Review

Utilization review (UR) is a process of systematically evaluating drug use to identify and then intervene to correct drug use problems. A goal of UR is to reduce costs associated with inappropriate prescribing and use of drugs. UR can be retrospective, reviewing past claims for inappropriate patterns, or concurrent with the prescription dispensing process. Concurrent UR involves the use of computerized alerts to the pharmacist (e. g. early refill, drug interactions, non-formulary notifications, prior authorization notices).

HISTORY OF PHARMACY BENEFIT MANAGERS

PBMs first became a major force in the late 1980’s as health care and prescription costs were escalating. In 1989, PBMs managed prescription drugs for approximately 60 million people. By 1995, that number rose to 100 million. Today, PBMs manage prescription drug benefits for over 200 million people.

Currently, there are over 60 PBMs. However, four major companies control over two-thirds of the market. These companies are:

• Medco Health Solutions, the largest with 2002 sales of $ 33 billion and managing prescriptions for 65 million covered members;

• AdvancePCS, $ 14 billion in sales, 75 million members;

• Express Scripts, $ 13 billion in sales, 50 million members; and

• Caremark Rx, $ 6. 8 billion in sales, 20 million members.

This industry has a long history of mergers. AdvancePCS is the result of a recent merger between Advanced Paradigm and PCS Health Systems. In the early 1990s there were many small and mid-size PBMs, but then the large drug manufacturing companies started acquiring and merging the PBMs. For example, in 1994, Merck & Co. acquired Medco Containment Services; SmithKline Beecham P. L. C. bought Diversified Pharmaceutical Services; and Eli Lilly acquired PCS Health Systems.

Merck spun-off its Medco unit earlier this year, perhaps in reaction to conflict-of-interest concerns. However, Medco remains under contract with Merck to maintain certain market-share levels for Merck’s patented products in Medco’s prescription drug plans.

CURRENT ISSUES

After years of being relied upon to reduce prescription drug costs, PBMs have come under scrutiny by the federal government and consumers who question if PBMs are actually saving their clients money.

PBMs are the subject of an on-going federal investigation by the federal Justice Department. Assistant U. S. Attorney James Sheehan has led the investigation over the past five years. Areas under investigation include the following:

• Antitrust issues regarding PBMs that are owned by drug manufacturers;

• Rebate arrangements, subsidies, and administrative fees paid by the manufacturer to the PBMs that are not fully disclosed to clients, thereby providing no way to assure that the savings are being passed on to the clients;

• Formulary development by PBMs that may favor a manufacturers’ more expensive drugs in light of the manufacturer’s financial leverage; and

• Drug-switching by the PBMs to either a generic or different brand name drug instead of the drug prescribed by the treating doctor.

In addition to the federal investigation, health plan representatives have filed numerous lawsuits over the past several years. The lawsuits generally allege that the PBMs:

• Force health plans and health care consumers to pay inflated prescription drug prices through patterns of illegal, secret dealings with drug companies;

• Reaped billions of dollars in profits by steering health insurers and health care consumers into reliance on more expensive prescription drugs;

• Negotiated rebates and discounts from drug manufacturers and discounts from retail pharmacies that were not passed onto health plans and consumers, but were used instead to increase their own profits; and

• Use anti-competitive practices against small independent pharmacies.

Source: www.cga.ct.gov

Category: Credit

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