The Employer's Guide Blog for Overseeing PBMs

The Definition of Oversee: to watch over and direct (an undertaking, a group of workers, etc.) in order to ensure a satisfactory outcome or performance.

What is a spread? Certainly not a Topping for Toast.

Plan sponsors, while getting smarter about managing prescription drug benefits, continue to be plagued by drug spreads.  A drug spread is the difference between the amount paid to a PBM and the amount that should’ve been paid, by the plan sponsor, for the prescription drug ingredient portion of a transaction in the pharmacy benefit manager’s retail pharmacy network.  This definition is very simplistic, but the strategies a PBM employs to maintain these spreads are often complicated and inconspicuous.

The larger spreads generally take place with generic medications.  This is due in part to much smaller COG (cost of goods) and larger profit margins attained from generic compared to brand medications. Think about it for a second.  A generic medication may have fifteen different manufacturers (multi-source) all competing for the same purchaser while a brand product will have in most instances only one manufacturer (single-source).  This, ultimately, leads to lower costs for generic medications and much higher costs for brand medications.

Supply-side economics tell you that much more money is too be had from the sell of generic medications vs. brand medications.  Don’t be upset with your local pharmacist due to the high price of brand medications.  He or she has very little control, to the downside, on the price of these products.

Small to medium-sized businesses are most often the victims of spreads.  Larger companies often maintain a staff (which may include a seasoned pharmacist or two) dedicated to thwarting the efforts of any PBM attempting to hide cash flows.  Make no mistake about it; spreads are an opportunity cost and hidden cash flow.  I urge you to read the pilot study conducted by American Pharmacists Association.  Here is the abstract from this study.

Objective: To document the difference between what pharmacy benefits management companies (PBMs) charge employers and what they pay dispensing pharmacies for the drug ingredient portion of prescription transactions (the “spread”).

Design: Descriptive, cross-sectional study.

Participants: Two large employer groups, each of which used a different PBM, and six independent community pharmacies participating in these plans during 2002.

Interventions: Two sets of financial records issued by each of two PBMs were reviewed retrospectively, including 129 line-item prescription transactions billed to the employer and the line-item transaction information that accompanies the PBM payment to the dispensing pharmacy.

Main Outcome Measure: Spread between drug ingredient cost billed to the employer by the PBM and drug ingredient cost paid to the dispensing pharmacy by the PBM for brand name versus generic drug products.

Results: For both PBMs, the mean (± SD) spread was $12.29 ± 27.93 per prescription, with a range of –$1.67 to $201.65. Considering all 129 transactions, the mean spreads for brand name and generic medications were significantly different from one another, with mean (± SD) spreads of $4.65 ± 10.47 and $23.45 ± 39.47 per prescription, respectively. The two PBMs differed significantly in their spreads for brand name drugs ($3.20 ± 2.85 and $5.93 ± 14.12), but the spreads for generic products did not achieve statistical significance in absolute dollars ($10.83 ± 13.58 and $31.74 ± 48.11) because of their greater variation (as reflected in the larger standard deviations). However, the percentages difference for generic products differed significantly.

Conclusion: This pilot study indicates the possibility of substantial and widely varying differences in the spread and spread percentage between PBMs for brand name and generic medications. A more transparent business model for the PBM industry could produce better relations with PBM clients and business partners, including community pharmacies.

I know what you’re thinking, “there is no way this is happening to my organization.”  Guess what yes it is unless your PBM has agreed, contractually, to a fiducuary role.  And if you’re a fully-insured company with more than 300 employees forget about it!  You may as well send your insurer or TPA a blank check and ask them [nicely] to fill it in with any amount they believe suitable for the drug portion of your health benefit.

Tyrone Squires, MBA, CPBS

I am the proud founder and managing director of TransparentRx, a fiduciary-model PBM based in Las Vegas, Nevada. We help health plan sponsors reduce pharmacy spend, by as much as 50%, without cutting benefits or shifting costs to employees.

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