The Evolution of the PBM Business Model

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Pharmacy Benefit Managers (PBMs) play a crucial role in healthcare by managing prescription drug benefits for health plans, employers, and government programs. By leveraging scale and expertise, PBMs help to control surging drug costs, increase access to prescription drugs, and improve the quality of care for patients. Over the years, PBM business models have evolved to adapt to the changing healthcare landscape. Here’s what the environment looks like in 2023, and what we expect to see going forward.

Understanding PBM Business Models

PBMs are an essential component of the healthcare system, providing value to all stakeholders, from patients to providers to payers. These organizations were initially created in the 1960s to contain the rising cost of prescription drugs for health plans and employers. The PBMs could use their scale and expertise to negotiate discounts on drug prices with pharmaceutical manufacturers. As costs have continued to rise, PBMs have embraced new operating methods.

As of 2023, three main PBM business models exist: the traditional model, the pass-through transparency model, and a hybrid model.

1. Taking a Traditional Model Approach

PBM organizations following the traditional model focus on using their size and experience to agree higher drug discounts with pharmaceutical companies, and then sell these drugs to health plans and employer groups at a markup.

Traditional PBMs focus on the core elements of drug pricing negotiations, formulary management, rebate management, mail-order pharmacy services, clinical programs for improving patient outcomes, and pharmacy network management.

2. A Transparent, Pass-Through Process

The pass-through PBM business model passes through all discounts and rebates to the health plan or employer group. PBMs using this model don’t add a markup to the drugs themselves but charge a flat administrative fee instead.

The core elements that pass-through PBMs focus on include transparent pricing, rebate management and pass-through, network contracting, formulary management, mail-order pharmacy services, and clinical programs for improving patient outcomes.

Read: What is a PBM Platform?

3. The Hybrid PBM Business Model

The hybrid PBM business model combines aspects of both the traditional and pass-through transparent models. PBMs using this model negotiate discounts on drug prices and also pass through a portion of the discounts to the health plan or employer group.

The core elements that hybrid PBMs focus on include drug pricing negotiations, rebate management and pass-through, network contracting, formulary management, mail-order pharmacy services, clinical programs for improving patient outcomes, and specialty pharmacy services.

The Weight of Transparency in PBM Models

In 2023, the market is witnessing a surge in legislation aimed at reforming PBM practices. Over 100 new bills have been proposed, with a common thread being the need for increased transparency and accountability in the pharmaceutical industry. We believe the transparency factor is particularly vital for PBMs to address. Not only will transparency enable stakeholders to lower their costs, but they can differentiate themselves from their competition. At the same time, they can improve performance and support plan sponsors to increase utilization.

The proposed PBM Transparency Act of 2023 and the PBM Reform Act are significant steps towards eliminating opaque practices such as spread pricing and pharmacy clawbacks and ensuring full pass-through of rebates. However, the absence of language surrounding transparency and real-time automation in many of the bills is concerning and threatens to undermine the effectiveness of the proposed reforms. Additionally, skepticism exists about the ability of Congress to pass legislation that disrupts the traditional PBM rebate model in the near term.

Ringing the Changes to PBM Models

Despite the current power struggle around legislation, we expect PBMs to continue changing in response to market forces. Consolidation is an active current trend, with larger PBMs acquiring smaller ones such as the Cigna-Express Scripts deal in 2018. This trend is likely to continue as larger PBMs can better negotiate discounts with manufacturers and offer more comprehensive services to their clients.

We also expect to see continued changes to PBM business models, such as:

  • Growing demand for transparency across the healthcare industry. This factor is impacting PBM operations and resulting in the increased adoption of the pass-through transparent model. For example, CVS Caremark recently shifted to this model, and now passes through 100% of rebates to its clients.
  • Increased emphasis on value-based care. PBMs are starting to offer more value-based services, such as programs that help manage chronic conditions like diabetes or that offer medication adherence support to patients. For example, Express Scripts now offers a Diabetes Care Value Program that provides personalized support and resources to help patients manage their diabetes.
  • More use of technology and digital transformation. PBMs are increasingly using technology to improve their operations and offer better services to their clients. For example, OptumRx uses data analytics to identify potential drug interactions and improve patient outcomes.

Additionally, PBMs are expected to play an increasingly important role in managing the costs of specialty drugs and providing specialty pharmacy services to patients. PBMs will also continue emphasizing transparency and offering their clients more value-based services.

Talk to a Xevant Analytics Expert

Xevant’s Role in Driving Reforms

As we look to the future, Xevant remains at the forefront of driving transparency in PBM practices. Our platform provides PBMs and consumers with real-time, automated, and completely transparent data from the entire pharmacy benefits ecosystem. This up-to-date information enables users to compare prices, explore alternatives, and understand the specific cost components related to their medications.

Moreover, Xevant’s suite of Lowest Net Cost Solutions directly addresses the targets of reform. Our Bid Management and Contract Management tools tackle complex PBM contracts and spread pricing, while our Rebate Management, Optimization, Pricing, and Direct Access tools ensure rebate transparency. We also offer Clinical Optimization, Formulary & Copay Modeling for formulary optimization.

To continue answering the need for transparency around PBM business models, it’s vital to have the right tools. Whether you’re a PBM, TPA, or benefits manager, Xevant provides the data to make real-time informed decisions.

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