PBMs, or Pharmacy benefit managers (PBMs) are intermediaries between pharmacies, health insurers, and drug manufacturers. PBMs play a significant role in the retail pharmacy industry by managing prescription drug benefits for health plans, employers, and government programs. PBMs have been around since the 1960s and have a strong foothold in the healthcare sector. The relationship between PBMs and pharmacies has evolved over the years, and at times has been described as strained. In this article, we will explore how PBMs affect the retail pharmacy business, both positively and negatively.
What is the Retail Pharmacy Industry?
The retail pharmacy industry consists of establishments such as pharmacies and drug stores that engage in retailing prescription or over-the-counter drugs and medicines. Stores include neighborhood pharmacies, large drug store chains, and supermarkets or general retailers with drug store departments.
Due to the high number of retail drug stores found all over the nation, competition within the industry is intense as retailers vie with each other to attract and retain customers. Statistics from IBISWorld show the U.S. Pharmacies and Drug Stores industry is worth $349.1bn in 2023.
The Role of PBMs in Drug Spend
PBMs have a crucial role in managing drug spend and implementing different methods to lower costs for health plans. PBMs negotiate drug prices with drug manufacturers and pharmacies and create formularies, which are lists of drugs that are covered by a particular health plan. Formularies limit the medications that are covered by a plan and often deter the use of low-value, high-cost medications. PBMs also negotiate contracts with retail pharmacies to set reimbursement rates for drugs dispensed to patients.
Moreover, PBMs often use a system of reimbursement for pharmacies called “maximum allowable cost” (MAC), which is the maximum amount that the PBM will reimburse the pharmacy for a particular drug. PBMs may set MAC prices that are lower than the actual cost of the drug, which can create financial difficulties for pharmacies.
Additionally, PBM organizations use their buying power to reach agreements on rebates and discounts from drug manufacturers. PBMs often get rebates based on a percentage of the manufacturer’s price, which means they may get a larger rebate for expensive drugs. This sometimes discourages them from covering more cost-effective drugs, resulting in patients with high-deductible plans incurring higher out-of-pocket costs.
PBMs’ Strained Relationship with Pharmacies
PBMs affect the retail pharmacy industry in both positive and negative ways. On the positive side, PBMs can help reduce costs by negotiating lower drug prices and ensuring patients receive the most cost-effective medications. PBMs can also help improve patient access to medications by working with pharmacies to ensure that medications are available and delivered promptly. They also often offer disease management programs to ensure that patients with chronic diseases have optimal care and education.
On the other hand, PBMs can create challenges for retail pharmacies. PBMs can require pharmacies to meet certain requirements in order to be included in their network, such as offering lower prices and providing additional services. These requirements can create financial strain on retail pharmacies, especially independent ones, and may limit patient choice.
Pharmacies, which incur the cost of stocking the drugs, have little to no control over sales. The PBM determines whether a drug makes it onto the formulary, determines the copay amount, and establishes how much it will reimburse the pharmacy for each drug. Sometimes, reimbursement is lower than the drug cost, resulting in a loss for the pharmacy.
PBMs have the power to pre-determine pharmaceutical drug costs, patient copays, and pharmacy reimbursements. They are entitled to rule on these topics without providing justification, and affected parties have little recourse against their decisions. Since PBMs lack pricing regulation, pharmacies are unaware of how costs are determined, and the situation creates a challenging relationship between the two.
In summary, while PBMs can have both positive and negative effects on the retail pharmacy industry, their influence on the industry remains significant due to their role in managing prescription drug benefits for millions of Americans.
PBMs’ Impact on Market Trends
It is an unusual cloud that doesn’t have a silver lining, though. The pharmacy market has undergone major changes over the past two decades, many of which were driven by PBMs. Research by the federal Centers for Medicare and Medicaid Services shows the ability of PBMs to negotiate larger rebates from drug manufacturers helped reduce drug prices between 2015 and 2019. Moreover, PBM oversight managed to slow the growth of drug spending over the same period.
In addition, retail pharmacy services have seen many changes, such as the introduction of 24-hour availability and direct-to-home delivery. Many retail stores have increased the services they offer to include disease management, vaccinations, and point-of-care testing and in some states, pharmacist prescribing. The range of pharmacy types has also expanded and includes independent pharmacy retailers, chain retailers, and mail-order pharmacies, as well as internet pharmacies like Truepill and Amazon Pharmacy.
Reforms to Regulate PBM Activities
Ideally, the pharmaceutical industry needs reforms to help regulate PBM activities. Some initiatives currently under consideration include:
- More transparency around the rebates PBMs get. This will inform a deeper understanding of pharmaceutical spending and how reforms can be implemented.
- A ban on spread pricing. This occurs when PBMs charge health plans and payers more for a prescription drug than they reimburse the pharmacy and then keep the difference. Banning this practice would help prevent payers and employers from overpaying PBMs for drugs.
- Pass-through legislation. This would require PBMs to pass a percentage of their rebates on to payers and patients. The percentage retained would continue to motivate PBMs to negotiate price reductions with drug manufacturers, while other parties would also benefit.
PBMs and health plans could also shift their focus from the financial aspect (securing rebates) to a value-added aspect (helping doctors prescribe drugs on the formularies that have the most benefits for patients). Moreover, by basing formulary selections and pricing on a combination of drug benefits and their effect on total patient care costs, PBMs could manage healthcare outcomes more efficiently and generate higher value from pharmaceutical spending.
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