Over the last year, state and federal policymakers have been vocal regarding the need to curb rising prescription costs for Americans, as well as the importance of increased transparency in the health care industry. Throughout this dialogue, pharmacy benefit managers (PBMs) have been highly criticized for their masked revenue streams, which impact costs for employers, patients, and the nation.

The current administration and the Department of Health and Human Services, have proposed changes to one such source of revenue, the current drug rebate system from which many PBMs derive some of their profits.

However, the root cause of rising costs is not confined to rebates. Today, the United States incurs $750 billion in health care waste, while medical errors, including inappropriate and dangerous care, are the third leading cause of death. A PBM industry focused on profits rather than patients compounds these problems. They must change and start focusing on better patient care.

Benefits professionals can take action on their own by familiarizing themselves with all PBM solutions available, and how clinical programs impact the bottom line.

The problem with the traditional PBM model

If rebates are not the only source of rising costs, why do they receive so much attention? In part, it’s because they are an attractive target that has a direct impact on costs. Rebates are paid to pharmacy benefit managers by drug makers in return for favorable placement of their products on the PBM’s formulary. Often, rebates cover as much as 40 percent of the drug’s list price. Some believe that this creates an incentive for drug manufacturers to raise list prices, which can hurt patients at the pharmacy counter in the form of higher out-of-pocket costs.

Although they are meant to make drugs more affordable, rebates do not typically reach the patient. Many PBMs retain some (or all) rebate dollars, which can end up costing patients and their employers (plan sponsors) money. Rebates can even incentivize PBMs to promote brand name drugs with a generous rebate over less costly generic alternatives.

Related: Despite regulatory intervention, PBMs are still gaming the system

Other hidden revenue streams help to illustrate additional issues in the PBM industry. Many PBMs engage in “spread pricing,” wherein they bill plan sponsors for a drug at one price, then pay a lower price to the dispensing pharmacy and retain the difference. The plan sponsor and benefits pro working on their behalf may never see the actual cost of the drug, making it difficult to determine if they are overpaying. In fact, spread pricing and resultant overpayment was a driving factor behind sweeping changes to how the state of Ohio intends to handle pharmacy benefits for its nearly 2 million Medicaid enrollees.

To say transparency is lacking in the PBM industry is an understatement. Rebates and spread pricing only scratch the surface of the pricing games that are played. Many pharmacy benefit managers’ interests are not aligned with those of patients and plan sponsors. Hidden revenue streams often lower incentives that ensure appropriate drug utilization and reduce waste, as PBMs typically profit from each prescription filled. While this can provide stellar returns for shareholders in the form of higher PBM stock price and dividends, patients and plan sponsors – the very people PBMs are meant to serve by lowering costs – are left behind.

Pay for performance

Not until PBMs are held accountable for their performance will patients and plan sponsors truly see a reduction in waste and inappropriate care that lead to savings. Pay-for-performance programs promise a way forward to better address client and member interests.

The success of a PBM should not be based on its ability to deliver large rebates. Instead, the true measure of an effective PBM is its ability to serve patients and plan sponsors and lower overall health care costs. Under a pay-for-performance program, the PBM guarantees the total plan pay amount (the plan sponsor’s bottom line for amount paid on covered prescriptions). The program also puts the PBM on the hook if it fails to perform and meet those guarantees.

In order to ensure PBM performance year after year, the PBM must practice true transparency, align its interests with plan sponsors, and put patients first. This requires a strong clinical focus that reduces inappropriate drug utilization while still ensuring patients have access to the medications they need.

PBMs should only be rewarded when they fulfill their commitments, not each time they process a claim. With pay-for-performance, a PBM’s financial success is directly tied to its ability to improve health outcomes and deliver plan savings while providing the highest quality service. This is the real change clients are seeking in an industry rightly seen as overly complex, confusing, and opaque.

More robust clinical programs

At its heart, pay-for-performance is about looking beyond the rebates and discounts offered by the PBM. Effective solutions to rising drug costs rely on comprehensive, robust clinical programs. These can dramatically reduce fraud, waste, and abuse (FWA) and improve health outcomes, which ultimately leads to increased savings for patients and plan sponsors, as well as improved employee productivity for clients. Following are a few examples of how strong clinical programs can help reduce overall health care spending:

  • Point-of-sale review: This tool is intended to promote safe drug utilization. All PBMs use some form of review at the point of sale, but not all of these programs are equally effective. Strong point-of-sale reviews increase patient safety by preventing inappropriate drug utilization instead of identifying it after the fact. This helps reduce on harmful complications and FWA.
  • Pharmacogenetics: A study of how genetic factors influence the way the body processes medication, pharmacogenetics can prevent the use of contraindicated or inappropriate medication. When PBM claim systems integrate pharmacogenetic test results into comprehensive health profiles for members, this information can be applied at the point of sale. It allows pharmacists to work with prescribers to find the most effective medication for a patient while minimizing side effects. This reduces costs for patients and plan sponsors by achieving more favorable health outcomes.
  • Coordination of care: Pharmacists at both the PBM and the pharmacy need access to tools that allow effective communication with all of a patient’s prescribers. This ensures that patients receive the care that’s best for them based on clinical considerations such as health and medication history. Pharmacists are one of the most underutilized resources in health care, and PBMs should help, not hinder them in their work. This ultimately lowers drug trend year after year by helping patients get and stay healthy, reducing dependence on medications.

Look beyond the spreadsheet

Spreadsheets often serve as the basis for PBM comparisons. However, there is more to consider than just these superficial financial figures. Standard spreadsheets generated by the proposal process present a range of rebates and discounts derived from differing definitions of transparency, pricing games, and hidden profit centers. They fail to account for the impact that improved member health outcomes and reduction of inappropriate or wasteful drug utilization have on the plan sponsor’s (and the patient’s) bottom line.

The pay-for-performance program we’ve described offers a much clearer comparison.

The PBM guarantees the total plan cost. It accounts for all moving parts that affect patient care and prescription drug spending. After all, what difference do individual drug discounts and rebates make if the number of claims continues to climb each year due to wasteful, fraudulent, and inappropriate drug utilization?

Knowing all the hidden and published PBM profit centers, as well as emerging practices in pharmacy benefit management and the best method for PBM comparison, can help benefits professionals make smarter decisions that will help their clients and their members in the long run.

Michael A. Perry is the President of BeneCard PBF. Michael and his team have engineered a purely transparent PBM model along with a pure pass-through offering and a pay-for-performance PBM product. BeneCard PBF’s “member first” approach centers on clinical programs that drive costs down while helping improve his member health outcomes. BeneCard has demonstrated consistently superior service with an average overall satisfaction rating of 9.52 out of 10 since 2014 in PBMI’s PBM Customer Satisfaction Survey, reflecting its passion for creating a better PBM experience.