We have discussed the tactics of Pharmacy Benefit Managers on this blog many, many times. A recurrent theme is the middleman nature of this industry, making money by paying pharmacies less than they charge the payer–the “spread.” Making money this way is not evil, of course. Every business makes money in this manner. The issue that pharmacists have with the lack of transparency in the PBM “spread.” But if we cannot see the spread, we are just guessing.
But recently we have seen the spread in the PBM industry come to light, and it has been significant. These glimpses into the profitability of the PBM industry while pharmacies are struggling to keep their doors open strikes a dissonant chord for those working in the pharmacy profession.
But these glimpses into the PBM spread are still few and far between, and many of the recent insights have been centered on state-run Medicaid programs. We rarely hear about commercial plans.
Over the years, I have been privy to actual payer data on a few separate occasions. Each time I have been floored by the amount the PBM is making compared to what the pharmacy makes on the same transaction.
Recently, I was asked to review a smaller employer’s prescription drug plan, and I was presented with this company’s detailed and itemized bill from their PBM. This is a great opportunity to take a small glimpse into the PBM Spread.
The Data
The employer has fewer than 50 employees, and not all of them are enrolled in their health plan. Over the course of 6 months, the employees filled just over 400 prescriptions at roughly 12 different pharmacies around the area. Let’s look at some summary data.
These pie charts demonstrate the importance of maximizing the use of generics, something that the PBM industry uses as a key selling point. Despite having an effectively 85% generic compliance rate, the payer spends almost 60% of its dollars on the brand name medications. In this case, most of the brand name medications being used are fully justified, with insulin and other diabetic medications making up a large part of the brand name spend.
If we break out the dollars spent, we see that the company’s liability for prescriptions is over $52,000 yearly. This is after the employee cost share is subtracted. The average cost for each prescription was about $74 with $20,000 being spent on generic medications and the balance, almost $32,000 on brand medications.
The data to this point are not all that interesting unless you are paying the bill. What the employer wanted to know was were they getting a good value? The answer to this requires knowing what the PBM paid the pharmacy and what they reserved for themselves.
This is a much more difficult attribute to estimate. The individual pharmacies technically cannot tell the employer what they were reimbursed without violating their contracts. Instead, we have to resort to estimations.
For each of the 400 plus prescriptions, two pieces of data were collected.
- the current acquisition cost (invoice price) per tablet or capsule for each item
- The average reimbursement to the pharmacy for that item over the time period represented by the data.
This data was pulled from an independent pharmacy used as a reference pharmacy. This pharmacy has a moderate to high prescription volume with a competitive cost of goods sold. Likewise, reimbursement to independent pharmacies has been reported to be at or slightly higher than certain chain store (see Drug Topics). Both estimates should give us a reasonable estimate.
With the claims data and acquisition cost, it is possible to estimate both the price paid to the pharmacy by the PBM for each product as well as a rough idea of the profit or loss that a pharmacy made for that transaction. Subtracting the estimated pharmacy reimbursement from the amount the employer paid gives us an estimation of the “spread” or profit the PBM made. It also allows us to compare the PBM’s estimated profit to the pharmacy’s estimated profit.
There are some assumptions challenges. First, we are assuming the reference pharmacy is representative. Second, brand name comparisons are confounded by price increases that typically happen at the beginning of the year. The current prices were used in the analysis, which decreased profits on drugs that had price increases. On top of this, the reference pharmacy did not have sufficient claims data on a few items, and these were omitted from the analysis.
So how much did the pharmacy make and how much did the PBM make? Let’s take a look:
On average, the pharmacy is estimated to make just under $10 for each prescription sold to this plan’s members. This is generally considered to be a sustainable profit as it is very close to the NCPA Digest reported average cost to dispense. What stands out, though, is that this estimate also shows that the PBM averages twice the profit the pharmacy sees! Remember, the PBM’s don’t actually sell any product or work with an individual patient. They provide a service but hold no inventory or provide no direct care. I won’t go so far as to state what I think the PBM should make. The PBM does not, however, have more impact than the pharmacy and, therefore, their reimbursement would appear to be an outlier with respect to the value they provide to healthcare.
