The legacy PBM model

According to a 2020 report, three legacy PBMs control at least 80% of the market, also known as the "Big Three." Understanding how these legacy PBMs make their money highlights why transparency is key to realigning incentives and to improving the member experience in all aspects of the health care industry.

The Big Three and many others using the same business model operate through an opaque "spread pricing" framework, meaning they charge payers more than they reimburse the pharmacy for a specific drug and retain the difference.

Practices around specialty drugs highlight the problems baked into the entire health care ecosystem. These drugs are the lifeline for people suffering with severe, chronic, and sometimes life-threatening conditions, yet specialty drug costs have gone unchecked for decades.

Manufacturers, PBMs, and dispensing pharmacies — the largest of which are owned by the Big Three PBMs and had  approximately $110B in revenue in 2020 — have not done much to lower soaring drug costs. The problem, of course, is that these entities' profits are tied to the ongoing use of high-cost drugs rather than positive health outcomes of those using them. Currently, PBMs make money from administrative fees that are calculated as a percentage of the list price. The higher the list price, the more money they make. Health insurers, including employers, generally get to keep most of the rebates offered by manufacturers, which are also higher when the list price is higher.

The health care industry has long lacked choices for consumers, but pharmacy benefits offer even fewer, stunting the sector's ability to improve the member experience. While many industries have relied on consumerism to shape their offerings and push them to excellence, pharmacy remains unchallenged and stagnant.

Misaligned incentives, spread pricing, opaque rebates, and specialty distribution models perpetuate extensive customer mistrust in PBMs, and for good reason. The only way the industry will change is if new players are able to disrupt the market by providing alternatives — and competition — to traditional PBMs.

The need for emerging health care innovators

Given their history as expert negotiators with drug manufacturers and pharmacies to control spending, PBMs are in a unique position to help stabilize pharmaceutical costs. However, their financial interests have made them untrustworthy advocates.

More transparency is needed in PBM negotiations. A proposal in the $1.85 trillion omnibus bill would require PBMs to report rebates to employers and health plans, which is a step in the right direction. Although some states have tried to force more clarity around drug pricing, the results have been inadequate. In the aggregate, intermediaries such as PBMs are grabbing a bigger share of expenditures for drugs like insulin, yet trade secrets and other protections imposed by those same intermediaries hide profits on drugs including — but not limited to — insulin products.

Fortunately, several cutting-edge PBMs have identified the need in the market and have zeroed in on the reality that everyone wins when the member wins. These nontraditional PBMs have made the basis of their new model contingent on realigning incentives with employer goals and consumer outcomes. They are reimagining their role within the pharmaceutical landscape and revolutionizing pharmacy benefits through transparent drug prices and a simple, predictable and affordable consumer experience. Instead of taking rebates and spread pricing, they are charging a flat per member per month fee, removing the backwards incentives endemic to legacy PBMs.

Competitive players are upgrading the passive, transactional and suboptimal process to one based on a technology-enabled member experience. Through data and analytics, near real-time capabilities, and predictive nudges, their technology allows members to get what they need in a matter of a few clicks. Visionary PBMs are not only helping consumers better navigate their prescription medications, but also engaging as a mediator in behind-the-scenes pricing negotiations, resulting in lower costs for users and their employers.

For example, in the legacy PBM model, a member might drive all the way to the pharmacy before finding out that their medication wasn't approved and be given very little information as to why. The superior model, by contrast, utilizes pharmacy navigation that prompts clinical experts to proactively engage the member and alerts them with available solutions, ensuring approval for the medication and even steering them to lower-cost options.

A framework for lower drug costs

This novel approach of realigning financial models and keeping them transparent can help curb drug costs. Greater transparency keeps PBMs accountable, and one way to improve transparency is to replace an inscrutable system of rebates and spread pricing with a straightforward model, charging a per member per month fee rather than unpredictable drug prices. By creating efficiencies through a clear PBM framework with pharmacy navigation, members are directed to the highest-quality care and medication at the lowest cost.

Minimizing complications and lowering out-of-pocket costs for consumers leads to higher rates of medication adherence and, thus, an improvement in overall well-being. This means that decreased drug prices are critical for everyone operating within the health system. Cognizant of this fact, an increased number of modern PBMs are building business models that do away with outdated frameworks, calling all PBMs to a higher — and more affordable — standard.

Scott Musial is the Chief Pharmacy Officer at Rightway.