How Does a PBM Get Paid - Rachel Strauss - True Captive St. Louis Summit

This video provides an in-depth exploration of the complex and often opaque world of Pharmacy Benefit Managers (PBMs) and the prescription drug supply chain. Featuring Rachel Strauss, dubbed the "PBM Princess," the discussion, recorded at the True Captive Summit, delves into how PBMs are compensated and why prescription drug costs continue to escalate rapidly. The primary purpose of the conversation is to shed light on the intricate web of entities involved in drug distribution and pricing, advocating for greater transparency and alignment of incentives within the system.

The discussion begins by highlighting the evolving landscape of self-funded health plans, noting a significant increase in HR professionals seriously considering self-funding strategies. Strauss emphasizes that modern self-funding differs greatly from past iterations, offering new strategies for employers. A central theme is the "convoluted supply chain" of prescription drugs, which involves numerous stakeholders including payers, wholesalers, PBMs, marketing firms, and insurance companies, all taking a "piece of the pie." This complexity, she argues, makes it incredibly difficult to ascertain the true reasons behind rising drug costs and has led to intense scrutiny of PBMs, particularly regarding their payment structures.

The speaker draws a stark contrast between the simple supply chain of a consumer good, like a can of paint, and the labyrinthine nature of the PBM industry. She points out that consumers rarely question the profit margins of everyday purchases, yet PBMs are increasingly under fire due to "incredible exposure" revealing how consumers and plan sponsors have been exploited. A pivotal historical example cited is Walmart's introduction of the $4 generic drug program, which inadvertently exposed the practice of "spread pricing." This practice involved PBMs acquiring drugs for a low cost (e.g., $4) but then charging self-funded plans significantly higher amounts (e.g., $300-$400 per script), pocketing the substantial difference. The core message revolves around the critical need for properly aligned incentives, asserting that while PBMs deserve compensation for their services, their payment should not be tied to the expense of the drug or create perverse incentives that push members towards higher-cost medications. The conversation also touches on the lack of formulary standardization, often influenced by external entities rather than purely efficacy or cost-effectiveness.

Key Takeaways:

• Evolving Self-Funding Landscape: Self-funded health plans are gaining renewed interest from employers and HR professionals, with modern strategies offering more flexibility and options compared to past models. This shift indicates a growing demand for innovative solutions in benefits management.
• Convoluted PBM Supply Chain: The prescription drug supply chain is exceptionally complex, involving multiple intermediaries (payers, wholesalers, PBMs, marketing firms, insurers) that each extract value, making it challenging to identify the root causes of escalating drug costs.
• Scrutiny on PBM Payment Models: PBMs are facing increasing public and industry scrutiny regarding their compensation methods, particularly the question of "How does my PBM get paid?" This transparency issue is a major driver of reform efforts.
• Historical "Spread Pricing" Abuse: The practice of "spread pricing," where PBMs profit significantly by charging plan sponsors much more than they pay for medications, was historically widespread and exposed by initiatives like Walmart's $4 generic program. This highlights a fundamental flaw in traditional PBM models.
• Importance of Aligned Incentives: PBM compensation should be structured to align incentives with plan sponsors and patients, focusing on cost savings and value rather than profiting from expensive drugs or high utilization. Payment models should ideally be based on service fees or demonstrated savings.
• External Influence on Formularies: Drug formularies, which determine covered medications, are not always based purely on a drug's efficacy versus cost. External entities and financial arrangements can influence product placement, potentially leading to less optimal choices for patients and higher costs for plans.
• Power of Exposure and Awareness: Consistently exposing problems within the healthcare system, particularly regarding PBM practices, is crucial for motivating behavioral change among employers, plan sponsors, and consumers. Increased awareness can drive demand for more ethical and transparent solutions.
• Employer Open-Mindedness to Innovation: Employers are increasingly open-minded to new concepts in cost containment and value-based care, recognizing that innovative programs can lead to better value for patients (e.g., zero-cost medications, free direct primary care, no deductibles).
• Individual Responsibility in Healthcare: Patients and plan members are encouraged to understand their health plans and the value propositions of various programs to make informed decisions and identify opportunities for personal cost savings.

Key Concepts:

• PBM (Pharmacy Benefit Manager): A third-party administrator of prescription drug programs for commercial health plans, self-insured employer plans, Medicare Part D plans, the Federal Employees Health Benefits Program, and state government employee plans. They negotiate drug prices with manufacturers and pharmacies.
• Self-Funding: An arrangement where an employer directly assumes the financial risk for providing healthcare benefits to its employees, rather than purchasing a fully insured plan from an insurance company.
• Spread Pricing: A practice where a PBM charges a health plan or employer a higher price for a prescription drug than it reimburses the pharmacy for that drug, keeping the "spread" as profit.
• Formulary: A list of prescription drugs covered by a health plan, often categorized into tiers with different co-payment levels.

Examples/Case Studies:

• Walmart's $4 Generic Program: This initiative, while a marketing success for Walmart, inadvertently served as a significant case study exposing the widespread practice of "spread pricing" by PBMs, demonstrating that many generic drugs could be offered at a much lower price point than what PBMs were charging plan sponsors.