Everything You Need to Know About PBM Rebate Transparency

Looking Behind the PBM Curtain

If there’s one thing on which state and federal governments agree is skyrocketing prescription drug prices. Across the U.S., 109 PBM bills are pending in state legislatures, with 44 pending specifically on transparency, according to the National Academy for State Health Policy.

In the U.S. Congress, the Pharmacy Benefit Manager Accountability Study Act of 2021 was introduced by Senator Marsha Blackburn of Tennessee on February 2, 2021. And this is on the heels of two other bills introduced in 2019—The Public Disclosure of Drug Discounts and Real-Time Beneficiary Drug Cost Act and the Payment Commission Data Act—neither of which has yet to be signed into law. All of these bills address PBM rebate transparency.

Beyond these attempts at legislating transparency, the U.S. Departments of Health and Human Services, Labor, and Treasury issued the final Transparency in Coverage rule on October 29, 2020, increasing the necessary transparency on health care pricing, making these prices available to consumers.

More significantly, on December 27, 2020, the Consolidated Appropriations Act (CAA) of 2021 was signed into law, requiring the most sweeping changes for employee benefit plans since the Affordable Care Act (ACA). In addition, the CAA includes numerous provisions on health plan transparency around pricing and costs.

Transparency is clearly a hot topic of conversation legislatively. And, although most PBMs prioritize transparency in their business models, the complexity of the marketplace often makes achieving transparency an arduous process, almost impossible to truly achieve.

What is PBM Transparency?

But what does PBM transparency mean? And how does transparency relate to rates, negotiating power, and disclosures?

Read on to learn more about PBM rebate transparency in today’s market.

Everything You Thought You Knew About PBM Rebates

As a recap, entering the healthcare market in the 1960s, PBMs are now functioning “at the center of the pharmaceutical supply chain, acting as intermediaries between insurers, drug manufacturers, and pharmacies.” These integral entities are responsible for negotiating two-thirds of the six billion prescriptions filled annually in the U.S. alone for health plans.

As a service to health plans, PBMs negotiate prescription discounts and rebates on their behalf, creating savings at the plan level for employees and their families. Thus, PBMs are involved in determining how much employers and employees pay for their prescriptions at the pharmacy.

How do PBMs get compensated for their services?

Like many plan service providers, they generate revenue through service and administrative fees. However, they also generate revenue through drug manufacturer rebates.

According to the University of Southern California’s Leonard D. Schaeffer Center for Health Policy and Economics,

List prices are set by drug manufacturers and don’t reflect rebates paid and discounts given, which reduce the net price the manufacturer ultimately receives for the sale of its drugs. Rebates are money refunded to the PBM from the manufacturer, often in exchange for giving their drug preferred formulary placement. Understanding the relationships between list prices and rebates is important because it informs the degree to which policymaker efforts to lower drug prices should target manufacturers or other players in the system, specifically PBMs.

Because of these rebates, however, PBMs can pass along significant savings to their health plan clients. However, it’s these rebates that have become controversial.

According to the Common Wealth Fund, “manufacturing rebates to PBMs increased from $39.7 billion in 2012 to $89.5 billion in 2016, partially offsetting list price increases.” Many believe – and many PBMs state – that they’re passing these savings to their health plan clients. A recent study found that “the share of rebates PBMs passed through to insurers and payers increased from 78 percent in 2012 to 91 percent in 2016.”

Whether some or all savings are “passed-through” is part of the ongoing controversy. This also serves as one of the three primary rebate pricing models that PBMs adopt.

Let’s look at each one in-depth.

Common PBM Rebate Pricing Models

The government, employers, health plans, and patients demand more transparency in drug pricing and rebates. And it’s not just PBM rebate transparency with which these entities are concerned. It’s also achieving lower health plan costs, especially including pharmaceuticals.

For PBMs to continue positively contributing to these conversations, they’ll need to examine their rebate pricing models. Today, the three standard models include the traditional, pass-through, and hybrid models.

Traditional Model

The traditional pricing model occurs where the PBM charges the plan sponsor a set, contracted price for the drugs (with specific discounts) but pays the pharmacy a different rate. The difference between the two prices (often called the “spread”) is what the PBM retains as part of its compensation.

In this traditional model, PBMs negotiate both rebates and discounts, helping the plan sponsor achieve cost savings. However, as part of their compensation, they often retain a percentage of any available rebates and discounts. Unlike the pass-through model, discussed next, PBMs don’t pass all rebates and discounts to the plan sponsor.

Pass-Through Model

The pass-through model is essentially the opposite of the traditional model, often referred to as the most transparent (although those utilizing the traditional model may disagree). The PBM passes 100% of all rebates and discounts to the plan sponsor in this rebate model, retaining none. In this model, compensation is based on administrative fees per transaction or member, not rebates. Thus, the plan sponsor (and their employees) receive the full benefit of any negotiated rebates while the PBM’s business practices are visible.

Hybrid Model

The hybrid model – you guessed it – is a rebate model that combines traditional and pass-through models. To provide some insight into business practices, PBMs may share rebates fully with plan sponsors on specific prescriptions where, on others, they employ a spread compensation structure. In addition, hybrids may or may not charge administrative fees.

How Do PBMs Continue to Achieve Transparency?

Exploring and understanding a PBM’s approach to transparency is essential. It not only helps to align interests in pharmaceutical cost control, but it also encourages greater transparency across all supply chain channels, such as drug manufacturers and healthcare providers.

By Understanding the PBM Contract

Understanding the PBM’s business model is one way to get a glimpse of transparency, as well as knowing what’s in the PBM contract is equally important. According to the Pharmaceutical Care Management Association, PBMs can further demonstrate their active transparency by “[p]roving information to clients on all contract terms, including how PBMs are paid for their services and negotiated rebates.”

By Identifying the Right Tools

Another way to explore PBM rebate transparency is through the tools they use to identify prescription costs and drug utilization. With the right tools, such as real-time data analysis and automated reporting, PBMs can continue to showcase transparency, helping employers, providers, consumers and even governmental agencies to make more “informed decisions that lead to optimal health outcomes.”

Attaining Greater PBM Performance and Transparency

Once transparency is achieved with the appropriate tools, both PBMs and plan sponsors can achieve greater performance at a lower net cost. By aligning the PBM’s financial interests with those of the plan sponsor, employers can better manage their drug costs by basing coverage on the lowest net costs as opposed to higher rebates.

Clearly, transparency extends beyond just the PBM’s business model type. As transparency continues to dominate healthcare conversations, PBMs will need to continue to emphasize their approach to transparency, differentiating themselves from the competition while lining their services up against the plan sponsor’s desire for increased utilization and cost control.

To help curb healthcare costs and increase transparency, ensure you have detailed, actionable data to help your plan sponsor clients manage their pharmacy spend. Whether you’re a PBM, TPA, or benefits manager, Xevant provides the data you need before you need it.

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Laura Phillipson

Director, Client Success

Laura Phillipson is a client management expert with experience managing client services teams. Her past roles include Sr. Client Services Executive for Navitus and over a decade of experience as a Certified Pharmacy Technician. Laura’s career in client relations spans nearly two decades. An avid sports fan, Laura excels in helping clients create a strong strategy with a competitive edge. Laura’s extensive background in both customer service and the medical field provides an ideal blend to lead client management for Xevant.

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