PBMs design, implement and manage outpatient drug benefit programs for employers, managed care organizations, and other third-party payers. Independently from other health care services, PBMs work or “carve-out” prescription drug benefits (such as physician and hospital services). Pharmaceutical benefit managers serve as intermediaries between pharmaceutical manufacturers and third-party payers. Due to rising drug costs for private and public-sector payers, pharmacy benefit managers (PBMs), one of the most recent entrants into today’s managed health care system, are an important area of research. In addition, the acquisition of PBMs by some of the world’s largest multinational pharmaceutical corporations in recent years has raised legal and ethical concerns.
The history of PBMs is complex, due in part to the variety of their origins. According to Taniguchi, the sources of existing PBMs range from pharmacy claims processors to mail-order pharmacies to health maintenance organizations (HMOs). He emphasized the connection between the origins of pharmacy benefit management firms and their current functions and market niche. For instance, prescription drug claim processing is a fundamental PBM activity.
This function has historically been associated with third-party administrators; therefore, it is common for PBMs to have evolved from these origins. Grabowski and Mullins emphasized the importance of retail pharmacies installing online electronic data interchange systems in the late 1980s. These computer systems dramatically increased the efficiency of claims processing, which was a significant factor in the expansion of PBMs. Two major PBMs, Merck-Medco Managed Care and PCS Health Systems originated in the 1970s as third-party prescription programs, PAID Prescriptions and Pharmaceutical Card Systems, Inc., respectively. In addition, Merck-Medco has its origins in mail-order pharmacy (Medco Containment Services) and continues to be the market leader in this sector.
Many other PBMs began as pharmacy departments within managed care organizations and insurers. These departments were transformed into subsidiary firms to enter commercial marketplaces independently. Diversified Pharmaceutical Services (which grew out of United HealthCare), Pharmacy Gold and Advanced Para-digM (Blue Cross and Blue Shield of Minnesota and Maryland, respectively), Wellpoint (Blue Cross of California), and Prescription Solutions (PacifiCare Health Systems) are included in this group of pharmacy benefit managers. Due partly to the Blues’ limitation against its plans to conduct business outside their region or state, for-profit PBMs with origins in Blue Cross and Blue Shield emerged. As for-profit organizations or subsidiaries of for-profit holding firms, new PBMs were exempt from this limitation.
A brief overview of the PBM
As pharmaceutical benefit plans flourished, according to a well-researched history provided by Risk & Insurance magazine, things changed rapidly:
In the late 1980s, pharmacy benefit managers (PBMs) formed in response to the demand for a method to control rapidly rising prescription prices.
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Without an intermediary to hold the pharmaceutical business responsible for common pricing standards, there was little that could be done to prevent manufacturers from grossly overpricing their products or to ensure prices were consistent from region to region. By combining extensive networks of pharmacies, PBMs offered market stability and predictability and facilitated the billing process for payers.
Move to clinical management.
It wasn’t long before PBMs began to play a more significant, more crucial role for their clients, broadening their horizons and transitioning into the clinical aspect of pharmacy cost management.
These clinical management services consist of utilization review performed by a physician or pharmacist and recommendations for interventions on high-risk claims, such as sending educational materials to the claimant, communicating directly with a prescribing physician, assigning a nurse case manager, or ordering urine drug monitoring.
According to the National Association of Insurance Commissioners, more than 270 million Americans are currently served by 66 PBM businesses.
PBMs, such as SpectrumPS, collaborate with medication manufacturers, wholesalers, pharmacies, and health insurance providers, but they have no responsibility for the physical delivery of prescription drugs; they solely handle discussions and payments throughout the supply chain.
When a new drug becomes available, the producer negotiates with wholesalers and Pharmacy Services Administrative Organizations (PSAOs), who sell and distribute the medication to pharmacies. On behalf of insurers, Pharmacy Benefit Managers negotiate arrangements with drug manufacturers and receive rebates from drug manufacturers.
On behalf of pharmacies, PSAOs and wholesalers negotiate reimbursements with PBMs. The PBMs then reimburse pharmacists via health insurance companies for the drugs provided to patients. PSAOs and PBMs are third-party companies that deal with rebates and reimbursements. With PSAOs representing independent pharmacies and delivering services and PBMs representing health insurance.
How do PBMs generate revenue?
Historically, PBMs generated most of their revenue from administrative or service fees within their contracts with commercial health insurance. However, in recent years businesses have attempted various revenue diversification strategies.
One method is government contracts, particularly with Medicare Part D plan sponsors and Medicaid-managed care systems. In 2016, 74% of Medicare Part D medication benefit management services were administered by PBMs. PBMs issued pharmacy benefits for 38 million Medicaid managed care enrollees in 2017.
One of the most problematic sources of money for PBMs is rebates from manufacturers. Manufacturers give rebates to acquire a “preferred” formulary position or other benefits from the PBM and promote drug usage. Manufacturers often provide more significant rebates for brand items in therapeutic classes with competing medicines, such as diabetic drugs.
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