Pharmacy Benefits Glossary
A guide to general pharmacy benefits terminology.
Pricing Variance
Benefits packages don’t necessarily have set prices for goods and services, meaning behind-the-scenes negotiations drive pricing. This leads to pricing variances—differences between the actual cost of a product or service and the price that the patient or insurance company pays.
Keep reading to understand why pricing variance can become so complicated.
5 Factors That Affect Pricing Variance
1. Location
Location contributes significantly to how much benefits packages can cost due to personal and market conditions. For example, someone in a rural area may experience higher costs due to a lack of options compared to someone in a city.
Population and the number of people using the pharmacy benefits or healthcare system consistently can affect pricing variance. When insurance companies have more people under their umbrella, they have more negotiating power with hospitals and individual providers because they can send more patients to specific institutions.
2. Market Competition
Closely tied to location is market competition—the greater the need, the more prices can vary. For example, if there were only one manufacturer for a specific drug formula, the drug price would reflect it. Due to being the only choice, the price will be higher to ensure manufacturing is continuous to meet demand.
Compare this to generic drugs, which often have multiple manufacturers offering competitive pricing, providing patients with multiple options.
3. Insurance/Payment
How bills are paid also contributes to pricing variance. Many hospitals and healthcare providers offer either lower prices or extended payment plans for those paying out of pocket.
Why? All institutions want to get paid, and patients without insurance may struggle to pay a larger bill in a timely manner.
When patients have insurance, an agreement is made between the insurance company and benefits provider regarding the cost of goods and services. The negotiated price can change depending on the insurance company and the number of patients it sends to the institution.
4. Rebates
Drug manufacturers will offer rebates to pharmacy benefit managers (PBMs) to influence their market size. In turn, PBMs can pass these savings forward to hospitals and insurance companies.
Rebates serve as a powerful means of negotiation between manufacturers and payers, with the PBM leveraging the savings that can be passed forward to patients.
5. Service/Product
Pricing variance is also impacted by context. For a service, it’s generally a lot more affordable to consult a doctor in a regularly scheduled office visit than by going to the emergency room. For a product, a generic prescription is less expensive than a name-brand version, just as generic groceries are cheaper than brand names.
How Pricing Variance Affects the Benefits Industry
Does pricing variance help or harm the pharmacy benefits and healthcare industry? It depends on who you ask. Patients may not be able to afford the services they need if prices are too high, while providers may struggle to pay their bills if their compensation is too low.
