Pharmacy Benefit Managers (PBMs) play a crucial role in the prescription drug supply chain, acting as intermediaries between drug manufacturers, pharmacies, and insurance companies. They help manage prescription drug benefits, negotiate prices, and determine which drugs are included in health plan formularies. But how do they come up with the prices for medications, and what are contracted rates?

What Are Contracted Rates?

Contracted rates are the prices that PBMs negotiate with pharmacies and drug manufacturers. These rates determine how much pharmacies are reimbursed for dispensing medications and how much insurers pay for the drugs1. Contracted rates are typically lower than the retail prices, allowing PBMs to control costs and pass savings on to insurance plans and patients.

How PBMs Determine Medication Prices

1. Negotiation with Manufacturers: PBMs negotiate rebates and discounts with drug manufacturers. These rebates are often kept by the PBMs as profit, but some of the savings are passed on to the insurance plans1.
2. Spread Pricing: This is a common pricing model where PBMs negotiate lower prices with pharmacies and then charge insurers higher prices, profiting from the difference. While this can help control costs, it can also lead to higher prices for consumers if not managed properly2.
3. Formulary Management: PBMs create and manage formularies, which are lists of preferred drugs covered by insurance plans. They decide which drugs are included based on factors like efficacy, cost, and clinical guidelines1. Drugs that are more cost-effective and clinically effective are often given preferred status, which can influence their prices.
4. Reimbursement Rates: PBMs set reimbursement rates for pharmacies, which determine how much pharmacies are paid for dispensing medications. These rates are typically lower than the contracted rates, allowing PBMs to control costs and manage their profit margins1.
5. Transparency and Auditing: Effective contracting with PBMs involves understanding the terms of the contract, auditing their performance, and ensuring transparency in pricing and reimbursement practices. This helps plan sponsors evaluate the value they are getting from their PBM and make informed decisions about their pharmacy benefit programs3.

Challenges and Considerations

While PBMs play a vital role in managing drug costs, there are challenges and considerations to keep in mind:

• Transparency: The lack of transparency in how PBMs negotiate prices and manage rebates can make it difficult for plan sponsors and consumers to understand how drug prices are determined.
• Cost Control: While PBMs can help control costs, their pricing models and practices can sometimes lead to higher prices for consumers if not managed properly.
• Regulatory Environment: Changes in regulations and policies can impact how PBMs operate and negotiate prices, making it important for plan sponsors to stay informed and adapt their strategies accordingly.

Conclusion

Understanding how PBMs determine medication prices and the role of contracted rates is essential for plan sponsors and consumers. By negotiating rebates, managing formularies, and setting reimbursement rates, PBMs help control drug costs and ensure access to necessary medications. However, transparency and effective contracting are key to ensuring that these practices benefit both insurers and patients.