Health and Safety

Understanding Prescription Benefit Managers (PBMs): Ways to Save Money on Rx Benefits

November 20, 2013
By Tom Downey

Twenty five years ago, pharmacy expenditures accounted for less than 5% of the total healthcare spending for most multi-employer funds.

Times have now changed.

Healthcare costs have skyrocketed and the cost of Rx Benefits has increased to more than 25% of the total cost of healthcare for a given fund.

Years ago if expenditures were reduced by 10%, the real impact would have been less than half of 1% and not really worth the effort or possible adverse member reaction. Today, that same 10% reduction would result in a savings of as much as 3% – 5% of a much larger bill.


This article is the first in a series that will explain and offer more insight as to how PBMs work, and the potential for substantial Rx savings that can be available.

There are some common misconceptions about how a Prescription Benefit Manager (PBM) is chosen, how they operate, and what type of Rx Benefit plans each has to offer that will be most advantageous for clients and members.

Typically, consultants make fund determinations based on what is known as “the grid”. The grid displays discounts for brand & generic medication, retail and mail order prescriptions, dispensing fees, guaranteed rebates and administrative charges. Then, after reviewing grid results, a PBM is chosen.

This is not necessarily the best way to develop the most therapeutic and cost effective Rx benefit plan. What should be considered of higher priority is the cost of the plan, as opposed to choosing a fund derived solely upon a standard list of elements on “the grid.” Some PBMs tend to hide revenue in “the grid” that should benefit members, rather than their stockholders.

Other PBMs focus more on full transparency of claim costs and administrative expenses, and are in a better position to offer unique clinical management and pricing programs that can reduce program costs by 8% to 15%.

There has been some debate among which PBM pricing methods are of most benefit to the fund and its members. 

‘Traditional Pricing’ — the amount the PBM pays the pharmacy may differ from the amount the plan pays the PBM. That difference is the source of PBM revenue known as spread. In a traditional arrangement, the plan typically has a very low or zero administrative fee, and the PBM earns revenue from the spread. ‘Spread Pricing’ – charging the client more than the PBM pays the pharmacy for filling a prescription. Or ‘Transparent Pricing’ – the PBM discloses all revenue streams, like how much they are paying the pharmacy, to the client. Subsequent articles will address this, as well as each item on “the grid.”

It’s beneficial to have as much information as possible in order to make an informed decision that benefits all stakeholders.

November 19, 2013

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