Decoding the Complexity of Drug Pricing and role of PBMs

Decoding the Complexity of Drug Pricing and role of PBMs

The process of determining how much you pay for something is often straightforward, but not in the case of drug pricing. Rather, it’s more complex than that, and understanding the role of pharmacy benefit managers (PBMs) is crucial in that regard.

For example, the supply chain for any regular beverage like Pepsi involves its company manufacturing the soda, which is then sent to a retailer who sells it to a customer. However, the pricing process for prescription drugs is far more complex, and this complexity plays a major role in why drug prices are so high for customers.

The Supply Chain for Prescription Drugs

The Role of Pharmaceutical Companies

Pharmaceutical companies are responsible for developing drugs and determining the list price. However, the process of setting this price is more complex than it appears. While the initial price is determined by the pharmaceutical companies, there are various other factors that ultimately impact the final cost borne by the consumer.

Wholesalers and Pharmacies

Wholesalers are responsible for transporting drugs from pharmaceutical companies and selling them to pharmacies. Subsequently, patients visit the pharmacy and pay a copay, with the pharmacy later billing the insurance company. While this aspect of the process may appear straightforward, there exists a crucial component that introduces notable complexity: the Pharmacy Benefit Managers (PBMs).

Who Are Pharmacy Benefit Managers (PBMs)?

The Role and Influence of PBMs

PBMs serve insurance companies, large employers, and government agencies. Their main responsibility is to lower the cost of medications for these entities by engaging in rebate negotiations with pharmaceutical companies. The issue lies in the fact that these rebates contribute to the complexity surrounding drug pricing, thus leading to controversy.

Rebates and Formularies

Pharmaceutical companies provide rebates to PBMs, who subsequently distribute a portion of these rebates to insurance companies or employers. In exchange, PBMs prioritize these drugs on a formulary, which is a categorized list of drugs covered by an insurance company. Each tier on the formulary corresponds to the percentage of the drug’s list price that the patient and insurance company are responsible for paying. Consequently, drugs listed higher on the formulary are associated with lower copayments for patients.

The Impact of Rebates on Drug Pricing

When pharmaceutical companies provide higher rebates, their drugs are given priority on the formulary. This makes the drugs more affordable for patients and has the potential to increase sales for the companies. On the other hand, if a drug is ranked lower or not included on the formulary, patients will have to pay higher copays or the full list price.

Let’s take a hypothetical drug that is priced at $100 as an example. In this case, a Pharmacy Benefit Manager (PBM) negotiates a rebate of $50. Out of this rebate, the PBM keeps $10 and passes $40 to the insurance company. In exchange for this rebate, the drug is positioned in a more favorable spot on the formulary, ultimately resulting in a lower cost for the patient. Pharmaceutical companies argue that they increase list prices to safeguard their sales and profits against the pressure of these higher rebates.

The Controversy Over Drug Pricing

Pharmaceutical Companies’ Perspective

Pharmaceutical companies argue that they face financial penalties when they introduce a product with a low list price to the market, as the entire supply chain benefits from higher prices. They claim that these higher prices are essential to counterbalance the rebates they are required to pay.

PBMs’ Perspective

PBMs argue that rebates effectively decrease the actual cost of prescription drugs by reducing the price paid by insurance companies. As a result, this enables insurers to lower the premiums that patients must pay for their plans. The counterargument is that drug companies do not need to increase prices in order to improve their profits.

The Patient’s Experience at the Pharmacy Counter

Patients often have to pay based on the list price rather than the price after rebates. This is especially true for patients without insurance or with high deductibles, who may end up paying the full list price. The lack of public disclosure regarding rebates further adds to the complexity and variability of drug pricing.

Wrapping up

Understanding the drug pricing system is crucial for comprehending why drug costs are high and how they can vary widely. The interplay between pharmaceutical companies, PBMs, and insurance companies creates a complex system that ultimately impacts what patients pay at the pharmacy counter.