Don’t Let Hidden Revenue Drive Your Prescription Drug Spending

JUNE 7, 2022

Pharmacy expense is the fastest growing line item for most employer health plans. Pharmacy costs are also unique in that the insurance company and/or pharmacy benefits manager (PBM) typically earns a profit from prescription drug claims costs, in addition to premium or administration fees.

As revenue flows from prescription drug usage, PBMs remain incentivized to keep costs high. In many cases, employers are not even aware of the insurer or PBM profit sources embedded within their plans:

  • Rebates — Paid to the PBM from the drug manufacturer, rebates account for roughly 33% of total pharmacy costs for employers. Manufacturer rebates also often incentivize PBMs to include higher-cost drugs in their formularies (the lists of covered medications the PBMs set and maintain), even when less expensive options may be as effective.
  • Spread pricing — The insurer or PBM charges the employer more than the pharmacy is reimbursed, and profits on the difference. While this accounts for 3% of the total cost of healthcare for employers, PBM profits can add up quick.
  • Broker coalitions — Under these arrangements, smaller employers can leverage the buying power of a much larger organization. However, there is typically little transparency into the contract between the broker and the PBM, and additional sources of revenue are often not disclosed to participating employers.

As insurance companies and PBMs continue to profit from the rising cost of prescriptions, there remains no real incentive to help employers keep costs low.

Congress has taken steps to increase transparency with the hope of reducing costs. The Consolidated Appropriations Act (CAA) was a sweeping piece of legislation signed into law on December 27, 2020, and it included, among many other things, provisions designed to increase healthcare pricing transparency:

  • Prescription drug reporting requirements
  • Broker commissions

But will these measures have any impact on reducing prescription drug spending — or will PBMs find a way to retain these sources of profit at employers’ expense?

The complexity of the required reporting will make it incredibly difficult for employers to gain insights into any hidden profit sources within their plans. An employer that elects to have the plan administrator report on its behalf should be aware that the administrator will report aggregate data for multiple employers, as opposed to specific to each employer plan. As a result, employers are highly unlikely to see instances where they could reduce costs specific to their plans from rebates or lowering spread pricing.

Ultimately, understanding what’s in your carrier or PBM contract — and what you can negotiate — provides real transparency into what you’re paying for and opportunities to reduce costs.

To learn more about this and other solutions designed to lower the cost of your health plan benefits and improve health outcomes for your plan members, contact your local USI benefits consultant or email