Rousmaniere: How Much Do PBMs Overcharge?

Claims payers are spending less on drugs. But some pharmacy benefit managers are still raking it in, by charging their customers in workers’ comp far more than would be the case were PBMs more forthright in how their cash moves around.

Back in 2017, workersCompensation.com published two columns (here and here) in which I described how PBMs hide key financial information from their customers, a key practice to enable them to boost the final drug costs to the workers' comp claims payer by about 30%.

Now I have an actual case study to show what goes on in a more transparent arrangement. It involves Staffmark, the staffing company, and its PBM arranged through Medical Service Quotes.

Every claims executive who demands accountability from their vendors should demand that their PBM disclose what it pays to the pharmacist and what it receives in rebates from drug companies. They should demand to see the detail. Without the detail, the claims payer cannot seriously negotiate its cost of drugs. PBMs will not change their practices until the claims payer decides to do something.  They will not change in part because their investors have been valuing their investment on the basis of outsized profits.

Staffmark asked for transparency. And it changed its PBM. Let’s see what Staffmark did, then place its decision into the context of the conventional math of PBMs in the workers’ comp industry.

For every script filled, Staffmark can look up the price that its PBM paid the pharmacy plus a standard $8 per script administration fee.  This is the amount which Staffmark pays. This administrative fee is charged for generic drugs, but not for brand drugs. 

A review of Staffmark’s drug expenses under the prior PBM arrangement show that Staffmark was paying on average about $55 per generic drug script.  Under the new PBM arrangement, payments to pharmacies average about $40 a script. With the $8 administrative fee, the cost to Staffmark has been averaging about $48. 

Medical Service Quotes told me that about 94% of brand drug scripts filled trigger a rebate from the drug manufacturer. It splits 50-50 with Staffmark its rebate income.

Based on the comparison of the two PBM practices prior to the switch-over, Medical Service Quotes told me that the claims payer’s final total cost difference was consistent with its other analyses, which is about 22% less. A 22% reduction from conventional PBM prices is equivalent to a 28% increase over the transparency model arrangement. That’s close to the 30% estimate which I used in the 2017 columns.

Now let’s review the math of the conventional PBM business model.

The PBM never actually owns any drugs. Rather, it negotiates and coordinates use of a formulary and key aspects of the cash flow. The pharmacy itself obtains its stock of drugs from the drug companies, via a wholesaler, for let’s say $V. The PBM, representing the claims payer, pays the pharmacy let’s say $W at the point when the pharmacy gives a covered injured worker the approved drug.  Then, the PBM turns around and charges its client, the claims payer, $X.  For this act of coordination, the PBM nets the difference (the “spread”) between what it pays the pharmacy and what it charges the claims payer, or $X minus $W. Got it?

There is additional income coming to the PBM. Drug companies typically pay PBMs what is called a rebate on their sold brand drugs.  Under a PBM arrangement, this goes to the PBM, in exchange for placing the drug within its formulary. Although brand drugs are about 10% of the drugs distributed in the workers’ comp system, they account for about half of total drug costs. The rebate income to the PBM can therefore be large. The PBM may pass on some or all of the rebate to its claims payer client. Let’s call the PBM rebate gross income as $Y and its pass through to its client as $Z.

In sum, the PBM’s net income is the spread plus its net income from rebates. (The PBM will make additional income from service fees, for instance for drug reviews, but this is relatively minor.)

The opportunities of whopper-sized profits for the PBM arise fundamentally from its refusal to disclose some of these prices. It refuses to disclose what it pays the pharmacy and it refuses to disclose its rebate income. The PBM, to be sure, may state in its contract that there is a spread and there are rebates, but that’s in order to avoid being accused of deceptive trade practices.

This has been standard PBM practice in workers’ comp. this leaves the client in the dark, unable to seriously negotiate. We see in the Staffmark case that the conventional spread is very roughly double what it might earn from a simple processing fee. As for the rebate, we see that the client in a conventional arrangement receives no share of rebates. What is called $Z above is zero.

The conventional PBM might defend its higher prices by saying that its scope of services (such as analysis) is larger. The scope might (or might not) be greater. The argument is akin to American Airlines saying, “Fly us instead of Southwest because we have more non-stop long distance flights.” That will appeal to some customers, but not all.  Many conventional PBMs want it all, still in 2019. They don’t give their clients the option to chose.

Even if the drug spend is declining, price inflation (such as for the commonly prescribed Lyrica) and entrepreneurial medicine (office dispensing and compounds) demand constant vigilance. If I were a claims payer, I would want my PBM to sit itself completely on my side of the table.

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