Demystifying Formularies and PBM’s for Physicians

eNavvi Business of Healthcare, Introduction Series

You may have heard the terms formularies and pharmacy benefit managers (PBMs) being thrown around when discussing medication prescriptions and prices. It's essential to understand the role that PBMs play in drug pricing and how they make money. In this article, we'll discuss formularies, PBMs, their role in drug prices, the controversy over PBM rebates, and how PBMs generate revenue.

What are Formularies?

A formulary is a list of prescription drugs that a health plan covers. Typically, formularies are organized into tiers, with lower-tiered drugs costing less than higher-tiered drugs. Insurance companies use formularies to control costs, incentivize the use of lower-cost medications, and negotiate lower prices with drug manufacturers.

What are PBMs?

PBMs are companies that manage prescription drug benefits on behalf of health plans, employers, and government programs. They negotiate drug prices with pharmaceutical manufacturers and create formularies for the health plans they serve. PBMs also work with pharmacies to process prescription claims and manage drug utilization. PBMs are responsible for controlling costs for health plans by encouraging the use of lower-cost medications and negotiating lower drug prices with manufacturers.

The role of PBMs in drug prices

PBMs play a significant role in determining drug prices. They negotiate prices with drug manufacturers on behalf of health plans and employers. PBMs use their leverage to negotiate lower prices for drugs, which can save health plans and employers money. PBMs also encourage the use of lower-cost medications by placing them in lower tiers on formularies. This incentivizes patients to choose lower-cost drugs, which can reduce overall healthcare costs.

Controversy over PBM rebates

PBMs generate revenue through rebates they receive from drug manufacturers. Drug manufacturers offer rebates to PBMs as an incentive to place their drugs on the PBM's formulary. PBMs then negotiate with pharmacies to dispense these drugs and receive a rebate from the drug manufacturer for each prescription filled.

Critics argue that these rebates create a conflict of interest for PBMs. PBMs may be incentivized to choose higher-priced drugs for their formularies if the drug manufacturer is offering a larger rebate. A study published in the Journal of Managed Care & Specialty Pharmacy found that the average list price of a drug increased by 2.3% for every 1% increase in rebates offered to PBMs.

In 2020, PBMs received $153 billion in rebates from drug manufacturers, according to a report from the Department of Health and Human Services. This is a significant amount of revenue generated through rebates, and it has led to increased scrutiny of the PBM industry.

How PBMs make money

In addition to rebates, PBMs generate revenue through various fees and services. PBMs charge health plans and employers a fee for managing their prescription drug benefits. PBMs also receive fees from pharmacies for processing prescription claims and managing drug utilization.

According to a report from the National Academy for State Health Policy, PBMs generate an average of $58 per prescription in revenue. This includes $14 in rebates and $44 in fees and services.

Conclusion

PBMs play a critical role in managing prescription drug benefits for health plans and employers. They negotiate drug prices with manufacturers, create formularies, and encourage the use of lower-cost medications. However, the controversy over PBM rebates has led to increased scrutiny of the industry. PBMs generate significant revenue through rebates, fees, and services, and understanding how they make money is essential when discussing drug pricing and prescription drug benefits.

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Sincerely,

eNavvi Team