Negotiate Better: Know How PBMs Make Money

Med RxPharmacy benefit managers (PBMs) offer a valuable service by reducing the cost of prescription drugs. They accomplish this through managing drug utilization, contracting with pharmacies, automating administrative services, and negotiating discounts of medication ingredients. They work with self-insured companies to maintain or lower pharmacy expenditures by offering programs that provide flexibility and value.

While the benefits of hiring a PBM are clear, people do not understand how pharmacy benefit managers make money. Crystal Clear Rx says it is important to know how PBMs generate profit to pave the way for more effective negotiation. Here are a few details on PBM revenue elements:

Retail Pricing Elements

PBMs generate money from retail pricing elements. They charge administrative fees for electronic transactions to process a claim, which may range from $0.00 to $0.35. Benefit managers may work with a retail pharmacy chain and offer a contract discount to clients and keep a minimal differential pricing or pharmacy withhold.

PBMs also make money from the cost of generic ingredients by charging extra expenses per prescription through Average Wholesale Price (AWP) or Maximum Allowable Cost (MAC). There is usually a gap in these pricing elements. Clients can ask a PBM to give a list price of the generic drugs used in the previous year to determine if pricing is cost-effective.

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Other Revenue Sources

Other than retail pricing elements, PBMs also generate revenue on mail order pricing elements, with profits derived from prompt payment discounts and manufacturer administrative fees. They also receive specialty pharmacy rebates on mail order prescriptions. The value-added programs they offer such as medication therapy management, physician intervention, disease state management, and others also generate income.

The pricing arrangements of PBMs differ based on the model used. The difference between these models involves a change in basic financial mechanics of the agreement between the manager and the plan sponsor, and the way a PBM manages operations.

Understanding how benefit managers gain money is essential to success in negotiating contract prices. Industry experts also suggest working with a pharmacy benefit consulting company to better understand and manage pharmacy benefit costs.

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