PBMs came into being as a convenience service that originated when third party prescription benefits began to emerge. Pharmacies were required to send paper claims to insurance for reimbursement. This was a time-consuming process, both in the preparation of the submissions and the time to receive payment. The fledgeling PBM industry enabled pharmacies to submit claims electronically, get instant approval and get paid faster. A win-win-win.
That was then, and now things are a lot different. Today, pharmacy has been flipped upside-down. Literally. Instead of servicing pharmacies for convenience, PBMs sell pharmacies in aggregate as a network and extract money for the pharmacies work. PBMs, as an industry, are far more profitable than the pharmacies they depend on and pharmacies are at the mercy of the PBM for their customers and future. So how can a pharmacy remove the PBM from having this undue influence on pharmacy? The answer is simple: turn back the clock to the days before middlemen. To do this, we need to influence a change in perspective at the employer (the payer) level with respect to healthcare benefits.
For the employer, health insurance creates an illusion of risk mitigation. If an employee ends up with a very costly medical condition, the insurance is at risk, and not the employee or the employer. But this thought process if flawed. Insurance premiums will always adjust to ensure that the insurance company is not at significant risk. Insurance companies are not altruistic; They strive to turn a profit. The amount of money paid in premiums, both the employer and employee contributions, closely follows the actual health expenditures. This is key, because even though an insurance company is involved, you are self-funding, or pre-funding the benefit.
If an employer is essentially self-funding the health insurance by pre-funding the insurance, you may be able to save significant money by opting to self-fund. This sounds scary but it is not all that different from using an insurance company, though having a more than a few dozen employees makes this easier. Self-funded companies hire a third party administrator to manage the medical benefit. The hospital and physician network is attached to that administrator just like with insurance.
The difference is that premiums for insurance, both the employee and employer contributions, are banked by the employer to pay medical bills as they come are received from the administrator. These bills would be paid from the money collected from the employer and employee contributions to the health insurance premium. The premiums can be adjusted yearly to match the actual spend just like the insurance company did before.
Note that with fewer employees, it is possible to re-insure the company to prevent a catastrophic event from putting undue strain on the employer. This additional security measure has a cost and will decrease the potential savings an employer can see.
The prescription benefit is similarly streamlined and self-funded. This is where the direct contracting with the pharmacy comes into play. An employer would first contract with a transparent PBM to manage the national prescription benefit. Just like with the medical administrator, he employer would receive a bill from the PBM for the cost of the medications plus an administrative fee minus the amount collected as a copay. The employer would pay these from the banked premiums.
The PBM is necessary here: it creates national prescription benefit coverage for cases where employees are traveling. But the PBM would not be the preferred mechanism for the drug benefit. Instead, the employer partners with a with a local pharmacy. A direct contract that benefits both the pharmacy and the employer. Doing this, the pharmacy makes significantly more than they would if using even a transparent PBM and the employer will pay significantly less. The employer can set up the copay and deductible system to incentivize employees to use the local direct contract by reducing employee copays to incentivize savings for the employer.
This whole process is both simple and complicated. And it is not necessarily an easy sell to an employer because it takes them out of their comfort zone. But once successfully implemented it can both decrease costs to both the employer and its employees.
For the pharmacy doing the direct contract, however, things are just getting started. Next week we will talk about what it takes to manage a direct contract on the pharmacy side. Until, then, make your next encounter with local business owners count: talk to them about their insurance.
