Understanding PBMs: Why a Pass-Through Model Matters
Category: Insurance Tips
Introduction:
If you’ve ever scratched your head at how prescription drugs are priced or why your company’s pharmacy costs keep climbing, you’re not alone. The world of PBMs – Pharmacy Benefit Managers – is notoriously complex and often shrouded in secrecy. These entities play a huge role in managing (and sometimes inflating) the cost of medications in your health plan. Today, we’re pulling back the curtain on PBMs and explaining the difference between traditional and pass-through PBM models. Most importantly, we’ll cover why it matters for employers and plan sponsors to push for transparency and a pass-through approach in pharmacy benefits.
What is a PBM and Why Should Employers Care?
A Pharmacy Benefit Manager (PBM) is a third-party company that administers prescription drug programs for health plans. They’re the middleman between insurers (or self-funded employers), pharmacies, and drug manufacturers. Key functions of a PBM include negotiating prices and rebates with drug makers, deciding which drugs are covered (formulary management), setting copay tiers, and processing pharmacy claims. Employers should care because PBMs significantly influence the pharmacy costs within their health plan – often one of the fastest-growing pieces of healthcare spend. In many cases, PBMs can either help you save money or, if their interests aren’t aligned with yours, cause you to spend more than necessary on drugs. Traditionally, some PBMs have operated in ways that are not fully transparent, making it hard for an employer to know if they’re getting a good deal or if the PBM is profiting at their expense.
Traditional PBM Model – The “Spread” and Rebate Game:
Under a traditional PBM contract, the PBM typically makes money through spreads and retained rebates. Here’s how it works: the PBM negotiates a discount off a drug’s list price with pharmacies and also separately negotiates rebates from drug manufacturers for preferred placement of their drugs on the formulary. But instead of passing all those savings to the health plan, the PBM keeps a portion. For example, a drug might have a list price of $100. The PBM gets it for $80 from the pharmacy (so $20 discount), but charges the health plan $90 – keeping a $10 “spread” profit. Similarly, a manufacturer might give a $30 rebate for each prescription of a brand-name drug to encourage its use; the PBM might pass $20 of that to the plan and keep $10. These hidden markups and partially withheld rebates mean employers pay more than the actual net cost of the drug. The traditional model has been criticized for lack of transparency – employers often don’t know the actual pharmacy costs or rebate amounts, only what the PBM bills them. This opacity has led to skyrocketing drug costs and frustration among plan sponsors who feel they don’t have control or visibility into one of their largest cost drivers.
Pass-Through PBM Model – Transparency and Alignment:
Enter the pass-through (or transparent) PBM model, which is designed to eliminate those conflicts of interest. In a pure pass-through model, the PBM passes 100% of all rebates and discounts directly to the employer or health plan. The PBM does not make money on the price of the drugs themselves. Instead, they typically charge an administrative fee (per prescription or per member per month) for their services. This way, the PBM’s revenue is transparent and not tied to which drugs you use or how much they can mark them up. For example, if a PBM can negotiate that same $100 drug down to $80, they will bill the plan $80. If there’s a $30 rebate from the manufacturer, that full $30 is credited back to the plan. The PBM’s earnings might be a flat $1 or $2 admin fee per claim, or a fixed annual fee, clearly delineated. Because of this structure, pass-through PBMs are fully aligned with the client’s interests – their goal is simply to manage the pharmacy benefit efficiently, since they don’t profit from higher drug prices. Employers and plan sponsors gain full visibility: regular reports show exactly what was paid to pharmacies and received from manufacturers. This model removes the guesswork and ensures you’re truly getting the savings your plan is due.
Why Pass-Through Matters – Real Impact on Costs:
The difference in cost outcomes between traditional and pass-through can be significant. Studies have shown that many employers do not receive the full value of manufacturer rebates under traditional arrangements – only about 60% of employers reported that their PBM passed through all rebates on drugs (Drug Channels: Surprising Data on Employer-PBM Rebate Pass-Through Arrangements in 2023 ). That means 40% suspect (or know) the PBM is keeping a cut. Over a year, especially for a larger employer, that could amount to hundreds of thousands of dollars of missed savings. Spread pricing has also been in the spotlight; for instance, some state Medicaid programs discovered PBMs were charging them far more than they reimbursed pharmacies, profiting greatly on taxpayer funds. When those programs moved to pass-through, they saved millions. For a private employer, the stakes are also high – if your PBM is adding even a small spread on each prescription, it inflates your claims cost, which in turn could inflate your premiums or stop-loss rates. A pass-through model ensures every dollar spent on Rx is accountable. You can see exactly what your employees’ medications cost and benefit fully from negotiated discounts. This transparency also allows for better decision-making. For example, if you see Drug A costs the plan $500 and Drug B (a similar therapeutic alternative) costs $300, and outcomes are the same, you might work with your PBM and medical advisors to encourage use of B – perhaps through formulary preference or physician education. In a traditional model, you might not even know there was a $200 difference or where it was going.
The Member Experience and Clinical Benefits:
Beyond cost, a pass-through approach often comes hand-in-hand with a more clinically oriented, member-friendly PBM service. Because the PBM isn’t trying to drive utilization to drugs that make them more money (since they make none on the drugs), they can focus on optimal health outcomes. For example, an ethical, transparent PBM will prioritize lowest net cost drugs – which often means generics or certain preferred brands that have the best negotiated rates after rebates. They may implement programs like step therapy or prior authorization based on clinical evidence and cost-effectiveness, not just because a pharma company paid them. Additionally, pass-through PBMs are typically more open about their formularies and criteria, making it easier for doctors and patients to understand why certain drugs are covered or not. This can reduce confusion at the pharmacy counter – fewer surprises of “this medication needs a prior auth” or “that one isn’t covered” because the PBM actively works to make the formulary sensible and fair. Over time, these practices contribute to better adherence and satisfaction: when costs are managed, copays often stay lower, so employees can afford their meds and stick to therapy, improving health outcomes.
Market Movement and Legislative Pressure:
The good news is that the market is slowly moving in the direction of transparency. Many newer PBMs (and even some of the big ones in response to client demand) now advertise transparent or pass-through models. Employers, coalitions, and brokers are asking tougher questions during PBM selection – and swapping out PBMs that won’t play ball. There’s also legislative pressure: lawmakers have noticed the problems, and some states have enacted laws requiring PBMs to disclose rebate info or outlaw certain spread pricing practices. Federally, there’s been talk of requiring more PBM transparency too (although not fully mandated yet) (Drug Channels: Surprising Data on Employer-PBM Rebate Pass-Through Arrangements in 2023). This momentum means that employers have more leverage than ever to insist on a pass-through deal. If you’re renewing your health plan or considering a switch, it’s wise to explore PBM arrangements. At Balanced Insurance, for instance, we partner with PBMs who commit to 100% pass-through of rebates and transparent pricing because we believe our clients deserve to reap all the savings their plan generates. We’d rather the money go back into your business or your employees’ pockets than into a middleman’s coffers.
Action Steps for Employers:
How can you ensure you’re getting the benefits of a pass-through model? Here are a few tips:
Ask for Transparency in Contracts: When reviewing PBM or carrier contracts, look for language that explicitly says rebates are passed to the plan and that the PBM will not practice spread pricing. If the language is fuzzy, negotiate clarity. You might even seek an audit right to verify rebates.
Examine Reports: If you’re currently insured, ask your carrier or PBM for a report of pharmacy rebates for your group. If they say “we can’t disclose that,” it’s a red flag. A pass-through arrangement will readily show you the figures.
Consult an Expert: Pharmacy pricing can be convoluted. Consultants or transparent PBMs themselves can often provide a benchmark analysis, estimating what you should be paying vs. what you are. This can identify if there’s unnecessary cost.
Educate Employees: Regardless of model, make sure employees know to use in-network pharmacies and consider generic drugs. One thing a PBM can do (and we ensure our partners do) is provide comparison tools – for example, showing employees if a drug has a cheaper alternative or if one pharmacy offers it at a lower price. Pass-through PBMs often have these great tech tools, because again, their goal is to help save money for everyone.
Stay Updated: The pharmaceutical and PBM landscape changes frequently. New high-cost drugs come to market, patents expire (leading to cheaper generics), etc. A transparent PBM will proactively adjust your plan for these changes, but it’s good as an employer to stay aware through newsletters or industry publications. Our blog’s Regulatory Updates and Healthcare Trends categories, for instance, often touch on prescription drug cost topics – like the impact of biosimilar drugs entering the market as alternatives to expensive biologics.
Conclusion:
Pharmacy benefits might seem like the most complicated part of your health plan, but focusing on a pass-through PBM model simplifies a lot of it. It ensures that you, as the employer, and your employees are getting medications at the fairest possible cost, with no hidden agendas. Transparency builds trust: you know where the money is going, and you can make informed decisions to manage your health plan. At Balanced Insurance, we champion the pass-through approach because we’ve seen first-hand how it can reduce costs and improve satisfaction. When you strip away the secretive pricing, you can address pharmacy spend with clear eyes – whether that’s promoting generics, adjusting formulary choices, or implementing clinical programs – all with the confidence that any savings generated flow directly to your plan’s bottom line. In a time of prescription prices often making headlines for the wrong reasons, choosing a pass-through PBM is a powerful way to take control and do right by your employees and your budget.
