This post discusses how prescription drug coverage works and how Pharmacy Benefits Managers (PBMs) make money. It explains formularies, medication tiers, and the roles of PBMs within the healthcare system, including their relationships with insurance companies and pharmaceutical manufacturers. The post also describes the two primary ways PBMs generate revenue: rebates on brand-name drugs and spread pricing on generic drugs, detailing how these practices can incentivize higher drug costs and more prescriptions.
Formularies and Medication Tiers
A formulary is a list of covered medications, and not all medications are covered by insurance. Non-formulary medications typically include over-the-counter drugs, cosmetic medications, and certain reproductive or lifestyle medications. The formulary is divided into tiers that determine the copay amount:
- Tier 1: Generic medications with the lowest copay (e.g., $5-$10).
- Tier 2: Preferred brand-name medications with a mid-level copay (e.g., $30). These are brands for which the insurance PBM has negotiated better deals.
- Tier 3: Non-preferred brand-name medications with a higher copay (e.g., $60) because the PBM has not secured favorable pricing.
- Tier 4: Specialty pharmacy items, which are very expensive medications, often requiring a 20% coinsurance.
Pharmacy Benefits Managers (PBMs)
PBMs are divisions within insurance companies that manage prescription drug benefits. They negotiate drug prices with pharmaceutical companies, determine formulary tiers, and process payments to pharmacies. The four major PBMs in the U.S. are Express Scripts (now Evernorth, owned by Cigna), Caremark (owned by CVS), OptumRx (part of UnitedHealth Group), and Prime Therapeutics (owned by multiple Blue Cross plans). Self-funded plans have the option to select a PBM different from their insurance company’s PBM.
How PBMs Make Money
PBMs profit through two main methods:
- Rebates: PBMs negotiate rebates with pharmaceutical companies for brand-name drugs. They keep a portion of the rebate and pass the remainder to the employer, incentivizing the PBM to favor higher-cost drugs.
- Spread Pricing: For generic drugs, PBMs charge the plan a higher price than what they reimburse the pharmacy, keeping the difference. This is facilitated by the Average Wholesale Price (AWP), which is often a fictitious price that allows PBMs to claim large discounts while still profiting significantly.