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Pharmacy Benefit Management (PBM) companies are third-party organizations that handle prescription drug plans. They work with insurance companies, employers, and pharmacies in order to establish deals for prescription drugs. PBMs aim to offer discounted rates on prescription drugs, while still retaining a high level of quality. PBMs have different pricing strategies to choose from when deciding how much to charge for prescription medication. A good pricing strategy is a combination of average wholesale price and administrative fees.
PBMs have several different ways of determining what they should charge for prescription medication. Some of the pricing strategies are straightforward and are based on the actual cost of medication from the manufacturers. On the other hand, some other pricing strategies may be more deceptive. The PBM may attempt to trick some companies into thinking that they can get away without paying things like administrative fees or dispensing fees, while the PBM simultaneously raises the actual prescription drug price above average in order to compensate for the lack of other fees (Sroka, 2000).
Another factor related to PBM pricing is the amount of prescription drugs that are covered under a particular plan. A PBM company could create a cheap plan that initially appears like a great deal. However, the other party may be disappointed if they realize that the number of drugs covered under the program are fewer than those offered in standard plans. PBM contracts must list the number and types of prescription drugs that are covered under their agreement (Sroka, 2000). For example, one contract could list 400 different prescription drugs that can be purchased at a discounted rate, while a different plan may list double that amount. It is the responsibility of the party working with the PBM to pay attention to things like the number of drugs covered and the rates that they are being sold for.
Average Wholesale Price (AWP) is one method that PBMs use to establish prices. AWP is based on the average price that wholesalers charge for a particular prescription drug (Gencarelli, 2002). Although average prices can be useful when measuring how one PBM is pricing a drug, there are also some issues with average wholesale prices. One is that it does not actually represent the price that other PBMs are paying. Most PBM companies have private contracts with prescription drug manufacturers (Gencarelli, 2002). The exact prices being offered on those contracts are not always publicly available. The average wholesale price is more of a measure of the prices that are offered to companies that have not made a special agreement with prescription drug manufacturers. It is not uncommon for PBMs to arrange deals with manufacturers in which they can purchase prescription drugs at prices as low as 20 percent below average wholesale price (Gencarelli, 2002).
PBMs can profit from average wholesale pricing strategies as a result of the difference between the average price for a particular medication, and the price that they are able to negotiate with the drug manufacturer. For example, a PBM could contact a drug manufacturer and offer to purchase several different medications in bulk. They could then receive an offer, such as 20 percent below the average wholesale price. The PBM could then go to the other parties and offer them a deal of 10 percent below wholesale price. When the other companies look it up, they would think that they are getting a good deal. In reality, the PBM made a large profit based on the fact that the other organizations were unaware of the actual offer that they were made by the drug manufacturer. The PBM could have helped their clients out more by giving them an even lower price for the medication. In many cases, average wholesale price is more advantageous to PBMs than it is to other parties in a contract.
Administrative fees represent another consideration for PBMs that are creating a pricing strategy. The fees are charged for processing claims and handling other administrative tasks (Atlas, 2004). Administrative fees vary by company. Some PBMs derive most of their profit from charging high administrative fees and offering low prices in other aspects of their contracts. On the other hand, some companies use low administrative fees as a way of attracting new clients. Even if they initially claim to offer no administrative fees, there may be other hidden costs that their clients are not initially aware of.
Dispensing fees are another important part of pricing. Dispensing fees are the fees paid to pharmacies for fulfilling a prescription (Atlas, 2004). PBM companies must account for dispensing fees when creating their strategy. If a pharmacy charges excessively high fees, then the PBM may have to also raise their own prices in order to cover the costs of fees charged by the pharmacy. In many cases, PBMs are able to negotiate lower dispensing fees if they have a good relationship with a pharmacy or chain of pharmacies. The more work and orders they bring the pharmacy, the more bargaining power they have in negotiating lower dispensing fees.
Maximum Allowable Cost (MAC) is a list that PBMs used in order to establish price limits for different medications. MACs can be useful in some situations where employers want to know the details regarding different aspects of a contract with a PBM. However, they can also be problematic as a result of the fact that they are not regulated. Instead, MAC lists are generated by PMB companies. The companies are free to create whatever lists they think are appropriate. One problem is that they will sometimes create different lists for pharmacies and clients, and then profit from the difference. For example, they will list much lower MACs when negotiating with a pharmacy, but then list much higher MACs when negotiating with clients and employers. Neither party has a reasonable way of knowing what MAC list is being shown to the other party, and they are thus at the mercy of the PBM.
While PBM companies can choose different strategies when deciding what prices to offer, there are some problematic issues related to the overall field. Some critics think that more governmental regulation should exist in the PBM industry (Gencarellie, 2002). A lack of governmental oversight and regulation results in market conditions where PBMs hold most of the power in negotiations. If they establish lucrative deals with pharmacies, they can then leverage those deals with other clients and make above average profits. The use of different MAC lists and tricky administrative fees are also things that some people think should be regulated. The healthcare industry is based on the idea of helping people who are in need, and should not be centered around using deceptive tactics in order to maximize profits. This is particularly problematic when it is done at the expense of the taxpayer.
An honest and transparent pricing strategy is likely to be a beneficial thing. As a result of some recent cases of fraud and deception in the PBM industry, a good strategy would be to provide direct information and to be honest about agreements. A company could list the average wholesale price for a product, and then disclose the actual purchasing price they are receiving from the manufacturer. Such a strategy would allow pharmacies and clients to have more bargaining power. The PBM could also directly state their administrative fees, and not change them later on or attach hidden fees.
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