According to Statista, prescription drug expenditure in the United States totaled $358 billion in 2020, up 50% since 2011. Pharmacy Benefit Managers (PBM) work as middlemen for many stakeholders as funds exchange hands within the drug supply chain. However, their pricing methods lack complete transparency and end up costing health insurers, and subsequently, employers, much more than it needs to. In this blog, we’ll cover spread pricing and why it’s detrimental to your client’s bottom line.
Spread Pricing Explained
Consider this analogy:
During the holiday season, traditional discount retailers, such as Ross, TJ Maxx, and Marshall’s, introduce a new loyalty program for customers. However, instead of offering a varying discount on the suggested retail price (depending on the item), these brands offer fixed percentage discounts of an arbitrary and overly inflated list price of their choosing. Additionally, as a member, you must also agree to purchase all of your items from this single retailer for the entirety of the year (or even longer, in some cases) . They then add up the list of everything purchased, apply the fixed percentage discount, and that will be the price you pay.
While this system sounds ridiculous in the context of today’s ultra transparent retail environment, this is exactly how pharmacy benefit managers operate with the pharmacies and health insurers they partner with. PBM’s offer health plans a negotiated ‘discount’ off of the Average Wholesale Price (AWP) of all the drugs they provide beneficiaries, but the AWP is rarely the price that is actually paid for these products – not even close. In the spread pricing model, the PBM charges health insurers more than they reimburse pharmacies and retain the difference.
As you can see, health plans and employers get the short end of the stick in this arrangement, as the actual price of the drugs they require is rarely known which allows PBMs to make a tremendous amount of revenue on the spread. It’s a complicated pricing system and difficult to gauge whether or not you’re getting the best possible deal. Additionally, a high level of trust must be placed in the PBM to look out for your client’s best interest. To ultimately take control of pharmaceutical drug spend, it is vital to increase transparency between PBMs, health insurers, and employers through alternative contracts.