For the past 10 years, retirement consultants have been leading the charge to drive more transparency (and lower fees) for employees participating in 401(k) plans. This article will give you a brief overview of the prescription benefits arena and will draw parallels to the retirement industry.
Here are two simple questions you should ask as a plan administrator/fiduciary:
1) How much does your prescription benefits manager (PBM) make?
2) How much does your advisor make?
When I started working in the PBM market as a consultant in the 1990s, PBMs processed prescriptions for an administrative fee of $1 per prescription. Since the average employee uses 10 prescriptions per year and another 15 for employees with family coverage, that was about $10 to $25 per employee per year. All PBMs at that time were “pass-through.” In other words, they were limited to that $1 per prescription for their total compensation. PBMs had contracts with pharmacies; there was little or no mail order, and there were no pharmaceutical manufacturer rebates. When there was a mail order facility, it was owned by a third party, and the PBM treated them as just another pharmacy. Whatever the PBM paid the pharmacy was billed back to the self-funded employer, plus $1 per prescription.
As PBMs developed their own mail-order facilities, they waived the $1 per prescription fee and would agree to a deeper “discount” than the retail pharmacies. So what if the PBM is contracting with itself? In the pension world, it would be difficult for a “closely held” transaction like this to happen. Generally employers were OK with this, since the discounts in mail order were significantly larger than they were in a retail setting….. Or were they?
As PBMs got more entrenched in the pharmaceutical supply chain, they were able to extract greater discounts and rebates from the market as well as drive more efficiency in mail order versus the retail pharmacy setting. They also built in a margin for themselves. This margin allowed the PBM to waive the $1 administrative fee. PBM explicit fees were driven to zero. Did that mean the PBM was working for free? No. They moved to what is called “spread pricing.” The PBM does not pass all of its discounts and rebates to the customer and does not disclose the amount they make.
The PBM story should have been the “Amazon of the 1980s”. Amazon got more entrenched in the retail supply chain and, like the PBMs, they were able to get greater discounts out of their suppliers. Amazon drove prices down for consumers and, based on publicly available information, makes a very small margin for its efforts.
PBMs may or may not have driven down prices for the consumer. The average cost per prescription (brands, generics, specialty) after discounts rebates and coupons is around $100 per prescription. That’s up from around $30 per prescription 10 years ago. We don’t really have a “cash market” in pharmacy like we do in the Amazon example so we don’t know what costs “would have been.” To determine Amazon’s value to the consumer, we can readily compare the company’s prices to other retailers’ prices. It’s not like Amazon controls 90% of the market (Like the PBM’s do). We can, however, use some publicly available internet sites and mobile apps to get a sense of some prices.
For example, a 30-day supply of Januvia (a diabetes drug) has an average wholesale price (AWP) of $457.20. After a PBM discount and a rebate from the manufacturer, the net price to the consumer with insurance coverage would be about $250 before any copays, deductibles or coinsurance. That same drug through various online sources is around $435 with a coupon. In this example, the PBM is extremely effective at driving savings.
Conversely, a 30-day supply of Humalog (another diabetes drug) has an AWP of $1,528. After discounts and rebates, the net price to the consumer is between $500 and $1,000 depending on the size of the rebate. Again, this is before any copays, deductibles or coinsurance. That same drug through various online sources is $177.87.
I could go on and on, as there are thousands of drugs on the market. Let’s just leave it as it is very hard to know what drug costs would have been if the PBM never existed.
So, let’s focus for a moment on how much PBMs make from themselves...
PBMs definitely make money for themselves. Based on publicly available information, PBMs gross between $15 and $20 per prescription – not bad for setting up an electronic claims adjudication platform. I would have thought that the original $1 per prescription cost would be even less today because of improvements in technology. PBMs do provide other services such as account management, sales and marketing, clinical support, member services, analytics, and IT. After all of that, PBMs net between $5 and $6 in profit per prescription.
Since we don’t have an open market to compare to, employers select a PBM vendor through a competitive bidding process hoping to drive out more costs. Employers accomplish this by hiring a pharmacy benefits consultant to manage the bidding process. The PBM consultant either charges a fee that is paid directly by the employer, or what is happening more frequently is the winning PBM is required to pay the consulant’s fee, and those fees are built into the pricing. In other words, the employer still pays, but the fees are buried into the quote.
If I haven’t put you to sleep yet, this current situation is not unlike how the 401(k) industry was years ago. Plan administrators and their advisors asked some tough questions, and, as a result, the fees have dropped substantially.
As a plan administrator/fiduciary, you should be asking your PBM and your advisor to disclose how much their fees are, regardless of who pays for it. You may not like the answer!