The Five Revenue Streams That Run Through Every PBM Contract - and Five Needed Reforms

HEALTH CARE un-covered

Author: Ginny Crisp

Imagine a tollbooth on a highway where the toll collector also owns the cars passing through, the gas stations along the road, the rest stops, and the road repair contracts. The same entity sets the toll, collects the toll, audits whether the right toll was charged, and reports the result to the highway commission. That is the modern Pharmacy Benefit Manager (PBM) business model. It is not a metaphor stretched. It is the contract.

Every PBM contract I audit has five revenue streams running through it. Most plan sponsors see one of them clearly named: the administrative fee, which is the smallest of the five. The other four live in definitions, exhibits, and pass-through math that the plan sponsor, usually an employer, has to know to ask about separately. The reform conversations so far, in both Washington and the states, have been a fight over whichever stream is most visible at the moment, while the margin quietly moves between them. The conversation that needs to happen is a structural one.

Here is the map.

Spread pricing

Spread pricing is the gap between what the plan sponsor pays the PBM for a prescription and what the PBM pays the pharmacy that fills it. The plan is billed off one price list, the pharmacy is paid off another, and the contract is written so that the two are impossible to line up from the documents the plan sponsor actually receives unless the plan sponsor owns the dispensing pharmacy. One of these lists is the Maximum Allowable Cost, or MAC schedule, which sounds like an objective benchmark but is really the PBM’s own list of ceiling prices that it sets and revises at will. Spread is the stream the Federal Trade Commission has documented in the greatest detail. It is also the stream that PBMs are most willing to convert to a “pass-through” guarantee because doing so moves the margin without ending it.

Rebate retention

Rebate retention is the money that comes back from drug manufacturers and does not get passed through to the plan sponsor. Even pharmacy contracts that promise “100% pass-through” of rebates have hidden revenue margins for the PBMs and these come in the form of rebate-aggregator administrative fees, manufacturer-direct payments, and formulary-placement compensation. The PBMs are able to get away with this through exclusionary language in the pharmacy contract that states these are not considered “rebates”. Simply put, they do not define the hidden revenue sources as a rebate. This is where Group Purchasing Organizations (GPOs) like Ascent, Emisar and Zinc (also commonly referred to as rebate aggregators) enter the situation and act like a buying club. They combine drug claims from many plan sponsors and use this economy of scale to get the best rebate deals from drug manufacturers. The problem is that the rebate passes through a lot of hands including the GPOs and PBMs before it reaches the plan sponsor. In each of these steps, the amount of rebates being withheld from the plan sponsor is not disclosed. Most if not all PBMs use a rebate aggregator. Every one of the big three PBMs, (Express Scripts, CVS Caremark and OptumRx) owns or is affiliated with a rebate aggregator.

Administrative fees

Administrative fees are the named line items on the monthly invoice, both the ones that are named and the ones in the same family that are not. They show up as per-claim, per employee per month, or per member per month charges, and fees for formulary management, clinical programs, and network access. The definitions behind them are all written by the PBM. In nearly every contract I review, at least one of these administrative line items has no agreed definition anywhere in the pharmacy contract itself, and it is enforced by invoice and inertia rather than anything the plan sponsor agreed to in the pharmacy contract.

Manufacturer-direct payments

Manufacturer-direct payments are the compensation that is paid to PBMs from drug manufacturers to PBMs and these fall outside the rebate arrangements described above and can include formulary placement and education, data licensing, price protection payments, and manufacturer service contracts. These never appear on the plan sponsor’s quarterly report, because they do not flow through the plan. Instead, they glow directly to the PBM. Though, the plan sponsor sees the downstream impact in things like preferred formulary placement of a drug.

Owned-pharmacy margin

Owned-pharmacy margin is the per-claim margin earned when the PBM-owned pharmacy fills the prescription. Specialty drug routing is the largest single source of this. CVS Caremark owns CVS Specialty. UnitedHealth’s OptumRx owns Optum Specialty and Cigna’s Express Scripts owns Accredo. The contract preserves the language of “member choice” in the network while the day-to-day workflow steers most specialty prescriptions to the PBM’s own pharmacy. The margin between what the plan sponsor pays for the drug and what it costs the pharmacy to dispense the drug never appears in the contract at all.

That is the structural picture: five revenue streams, one PBM vendor, and uneven disclosure on each of the revenue sources.

Fragmented reform fails because regulating one stream at a time simply pushes the margin into one of the other revenue streams that are still unregulated. For example, if spread pricing is banned, the margin will just move into rebate retention. Or if a requirement is made to pass-through all rebates, the revenue is rerouted to manufacturer-direct payments that are not classified as rebates. Each well intended reform risks moving the revenue margin around rather than reducing or eliminating it altogether.

The fix is structural. What is needed is five reforms, each of which is previewed below and will be described in detail in the weeks ahead... Continue Reading