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U.S. Department of Health and Human Services

Regulatory Information

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2.2 Pharmacy Benefit Management Companies (PBMs)

Prescription Drug Marketing Act Report to Congress (2001): Back to Table of Contents 

Previous Section: 2.1 Health Care Institutions and Integrated Delivery Networks

Pharmacy benefit management companies (PBMs) administer the prescription drug part of health insurance plans on behalf of plan sponsors such as self-insured employers, insurance companies, and health maintenance organizations (HMOs). The objective of these companies is to provide high-quality drug care at the lowest possible cost (GAO, 1995). The development of PBMs in the U.S. coincides with the emergence of prescription drug benefits in health care plans in the 1970s and 1980s. The precursors of PBMs include pharmacy claims processors and mail-order pharmacies. While PBMs continue to provide pharmacy claims processing and mail-order pharmacy services to their customers, many now provide additional services, including

  • Rebate negotiations with drug manufacturers,
  • Development of pharmacy networks,
  • Formulary management,
  • Prospective and retrospective drug utilization reviews (DURs),
  • Generic drug substitution, and
  • Disease management programs (Levy, 1999).

 Rebate Negotiations with Drug Manufacturers. PBMs represent health plans and their enrollees in dealing with drug manufacturers and pharmacies in the prescription drug market. For example, a PBM negotiates with drug manufacturers to obtain rebates for a plan sponsor in return for inclusion and low-cost designation of the manufacturers' drugs on the plan's formulary (GAO, 1997). These rebates usually take the form of a direct payment from the manufacturer to the PBM. For example, in a simple rebate arrangement, the PBM may periodically report to the drug manufacturer the number of prescriptions for a given drug filled by the PBM's enrollees; the manufacturer then pays the PBM an agreed-upon amount for each prescription. Alternatively, the PBM and the drug manufacturer may negotiate an agreement where the PBM is reimbursed for moving market share (i.e., significant increases in the number of prescriptions for the manufacturer's drug) (DHHS, 2000). Although there are no published data available on the magnitude of manufacturers' rebates, they are estimated to range from 2 to 21 percent of acquisition price and can be as high as 35 percent for selected drugs (DHHS, 2000).

PBMs generally pass on the rebates they negotiate with drug manufacturers to their customers. Consequently, the insurer or the self-employed insurer typically receives 70 to 90 percent of the rebates (DHHS, 2000).

Development of Pharmacy Networks. In addition to drug manufacturers, PBMs also negotiate with retail pharmacies to obtain various discounts on prescription drug prices. Additionally, PBMs try to assure adequate sites for patients enrolled in the various health plans to obtain their prescription drugs. Thus, PBMs try to optimize their position by obtaining the widest geographic pharmacy coverage while keeping costs at their lowest. Figure 2-1 shows a typical network in which a PBM operates.

As part of their management functions, PBMs provide pharmacists information on a variety of issues before drugs are dispensed to the patients. The type of information provided includes (1) data on applicable co-payments, co-insurance, or deductibles; (2) details relevant to any online claims adjudication; (3) concurrent drug utilization review (DUR) data on basic eligibility requirements, drug interactions, and adverse drug reactions; (4) details about any formulary restrictions; (5) data about any generic substitution requirements; and (6) information on brand-name and generic drug dispensing fees (Levy, 1999).

Formulary Management. Formulary management involves the development of a drug formulary, which is a list of drugs that an insurance plan uses to make reimbursement decisions. Formularies help control drug costs by (1) encouraging the use of formulary drugs through compliance programs that inform physicians and enrolles about which drugs are on the formularies; (2) limiting the number of drugs a plan will cover; or (3) developing financial incentives to encourage the use of formulary products. PBMs rely on pharmacy and therapeutic (P & T) committees, consisting of pharmacists and physicians, to determine the number of drugs to include on the formulary (GAO, 1995).

 Figure 2-1: Pharmacy Benefit Management Company (PBM) Network 

Formularies can be open, incentive-based, or closed. An open formulary usually implies that the plan will cover all drugs except those listed as exclusions to the drug reimbursement policy. An incentive-based formulary provides enrollees with financial benefits if their physicians prescribe formulary drugs. Under the arrangement, the health plan still reimburses enrollees for non-formulary drugs but requires them to make higher co-payments than for formulary drugs. A closed formulary details the specific drugs that meet the plan's reimbursement policy. Under a closed formulary, enrollees generally pay the full cost of non-formulary drugs prescribed (GAO, 1995 and DHHS, 2000).

Drug Utilization Reviews (DURs). PBMs conduct prospective DURs to control drug use before physicians write prescriptions. Under prospective DUR, PBMs use a computer link with network pharmacists to review each prescription before it is dispensed. Prospective DURs are designed to help PBMs to identify whether there is a generic or formulary alternative to the prescribed drug and whether the drug will duplicate an existing prescription or will adversely interact with other drugs the patient is using. For retrospective DURs, PBMs analyze the drug utilization statistics of a customer's enrollees to identify any instances in which physicians prescribed potentially inappropriate medications. If PBMs detect inappropriate patterns of prescribing or consumption, they then contact and educate physicians about more appropriate and potentially cost-effective treatments (GAO, 1995).

Generic Drug Substitution. Many PBMs offer incentives to their enrollees to select generic instead of brand-name drugs as these are less costly than their brand-name counterparts. PBMs facilitate these therapeutic substitution programs through the mail-order pharmacies they operate (Levy, 1999).

Disease State Management (DSM) Programs. PBMs also initiate disease state management (DSM) programs to contain spending for chronic conditions such as asthma, cystic fibrosis, hemophilia, and multiple sclerosis. In developing these programs, PBMs evaluate various treatment options, or therapies to identify those that are associated with better therapy management and low overall spending. PBMs then attempt to educate both health plan enrollees and their physicians about these more cost effective treatments and monitor the degree of their compliance with the related protocols over time (GAO, 1995).

There are an estimated 76 PBMs in the United States (SMG Marketing Group, Inc., 1999). The top five PBMs by number of covered lives include PCS Health Systems with 56.0 million, Merck-Medco Managed Care with 51.0 million, Diversified Pharmaceutical Services with 23.9 million, Express Scripts ValueR/X with 22.7 million, and WellPoint Pharmacy Management with 15.5 million (NWDA, 1999). SMG Marketing, Inc., reports that on average, 6.2 prescriptions are written per year for each covered life of which 55.7 percent are branded and 44.3 percent are generic drugs.

Some PBMs are privately owned companies whereas others are either owned by or affiliated with pharmaceutical manufacturers, health maintenance organizations, or pharmacy chains. Table 2-1 presents available data on selected PBMs in the United States as gathered from various sources.

The various purchasing methods (PBMs, IDNs, GPOs) affect the destination of drug products (i.e., they help determine eventual purchasers), but in general they do not affect the physical logistics of drug distribution. ERG did not investigate the extent to which purchasing organizations might indirectly affect the logistics of drug distribution by influencing purchasing patterns.

Prescription Drug Marketing Act Report to Congress (2001): Back to Table of Contents 

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