Market changes may benefit smaller PBMs

According to Perry Cohen, Pharm.D., a principal with Pharmacy Group, a healthcare consulting company in Glastonbury, Conn., the big PBMs have a credibility problem in the marketplace and are losing customers to smaller PBMs that operate with an open-book policy. These smaller firms, called pharmacy benefit administrators (PBAs), have pass-through business policies-where all savings are passed along-and a transparent business model, Cohen explained.

PBMs say they will manage all aspects of pharmacy benefits for their clients and charge the client a fee, Cohen said. PBAs offer their clients an à la carte menu of services from which they can choose, and the PBA makes money on a healthy and realistic administration fee, along with the promise of transparency.

"The same goes for the PBAs," Cohen continued. Clients are now more educated about their needs than when PBMs started in the early 1990s. They can appreciate the options a PBA offers and make their own choices among those options.

Why PBAs? As Cohen explains it, the industry of offering employers and health insurers ways to reduce medication costs is changing. When PBMs were created, he said, employers contracted for their services because the PBMs served as middlemen who could arrange discounts from pharmacies and rebates from drug manufacturers. For the first few years, the system worked. Drug costs were lowered and everyone was happy. Then it was learned that some PBMs were using costlier brand-name drugs to generate larger rebates from the manufacturers. The rebates were good, but the bottom-line cost of the rebated drug was higher than that of other drugs that could have been used.

"Drug companies paid PBMs two types of money: Rebates on a per-pill basis, and other types of fees. But the other fees were not mentioned," Cohen said. For example, while the drug manufacturer normally pays a five-cent-per-pill rebate that the PBM client knows about, the manufacturer then offers the PBM seven cents per pill if the PBM helps boost the drug's market share. The PBM passes the five-cent rebate on to the client, pocketing the extra two cents.

At the same time, Cohen noted, audits showed clients that although they were getting rebates and costs were coming down, in some cases more money could have been saved if a drug that had not been rebated had been used. Unit-cost discounts are still important, but the bottom line takes precedence. "People get addicted to rebates and lose sight of the concept of total net drug cost."

It is not that PBMs did anything illegal, Cohen added. They provided their clients with what they promised: lower drug costs. But in not passing along all of the rebates they arranged, PBMs may have violated the spirit of their contracts, he said. Client companies are now demanding transparency and asking PBMs to document rebates and discounts at all levels.

The maturing of the PBM business is leading to greater amounts of transparency, Cohen went on to explain. Clients want to know what is happening and where the money is coming from and going to at all steps in the process. They also want more information on administrative fees, since there are so many transactions for which fees are charged.

"Now clients want the background, they want the transparency, and to see what is going on," commented Judith Cahill, CEBS, executive director of the Academy of Managed Care Pharmacy, Alexandria, Va. It is not only the PBMs that are maturing, it is their clients as well, she said. Clients are now looking for standards for PBMs, such as those by URAC, the utilization review accreditation commission. Clients are looking at their PBM contracts more carefully and negotiating the specifics on how much of any rebates to give back to the client, she said.