Can you follow the money?

Joe Chamberlin | March 17, 2017

How do PBMs get paid? 

Yes, it’s complicated. Each of the main PBM stakeholders has their own supply chain and business model. Money flows through pharmacy benefit managers (PBMs) for a variety of reasons because of the position the PBM plays in those supply chains.  A PBM works to lower pharmacy costs for plan sponsors (health plans and employers) by using market size, strength, and expertise to negotiate pharmacy network discounts and drug manufacturer rebates. 

Contracts with a PBM use one of these pricing approaches: spread pricing (a.k.a. traditional) or pass-through pricing. Which one of these the plan sponsor selects then has a ripple effect on the various costs and fees throughout the business model. 

Spread pricing and pass through pricing

Spread pricing: Payments for drugs go through the PBM from plan sponsors to pharmacies that dispense the prescriptions. The difference between what goes in and what goes out is the spread. Spread pricing is a calculation on that difference. 

Pass-through pricing: With a pass-through contract, the PBM passes through the exact same discounts and dispensing fees charged by the pharmacy to the plan sponsor. Since no spread is collected, PBMs will typically earn its income by charging administrative fees. 

Contracts can also include both spread pricing and pass-through pricing. Here is a list of the most common types of cash flow through a PBM:

Key components of PBM Income1

Service Description
Network spread The difference between:
  • Drug cost reimbursement received by a PBM from a payer; and
  • Drug cost reimbursement paid by a PBM to a pharmacy.
Retained rebates* Percentage of rebates from drug manufacturers held by PBM instead of being passed back to plan sponsor.
Retained price protection* Percentage of price protection payment received from drug manufacturers that is held by the PBM instead of being passed back to plan sponsor.  (Price protection is relatively new: it caps how much a manufacturer can raise the price of a drug during a rebate contract. The contracts of about one quarter of employer-sponsored plans included price protection in 2016.3)
Administrative fees A processing fee that is typically on a per claim, per member per month (PMPM), or per employee per month (PEPM) basis.
Service revenues
  • For-fee services provided to pharmaceutical manufacturers
  • Performance-based payments received from drug manufacturers

Spread pricing contracts typically rely more on network spread. Pass-through models typically rely more on administrative fees and service revenues. Either type of contract may also rely on rebate retention. A spread pricing approach covered only 22% of PBM compensation in 2014; that has risen to 54% in 2016.2 

Both kinds of contracts -- spread pricing and pass-through pricing – have their advocates. The pros and cons are different for each and each type can be best for a particular plan sponsor depending on their specific needs and situation.  In a competitive bid situation a spread pricing contract cannot easily be compared to a pass-through pricing contract. But that’s another article! 

Hope this helped. Please reach out if you have questions.

  • Joseph C Chamberlin
  • Consultant Engagement Director
  • * While retained rebates and retained price protection are revenue streams for some PBMs, Prime does not retain any of these fees. 
  • 1. Pharmacy Benefit Management,” Chapter 5, February 2017. From 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. By Adam Fein.  © Pembroke Consulting, Inc., and Drug Channels Institute. 
  • 2. Exhibit 85: 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. By Adam Fein. February 2017. © Pembroke Consulting, Inc., and Drug Channels Institute. 
  • 3. 2016 Drug Benefit Report, PBMI, 2016, page 42.