Choosing the Right PBM: Cost Savings vs Discounts

On February 5th, 2024, the benefits world was rocked by a lawsuit filed against Johnson & Johnson (J&J), its pension and benefits committee, and several of its employees. The complaint alleges that J&J mismanaged its prescription drug benefits by severely overpaying for drugs under its plan. How did this happen?

PBM Selection: Discount Based vs. Cost Based Evaluation

Let’s start with a simple analogy: Imagine shopping for a gallon of milk and basing your decision on the biggest discount rather than the best price. If the biggest discount is 50%, and the sticker price of that milk is $12, then you’d pay $6 for the gallon. That would be fine if it were the only milk available; however, imagine if a gallon from a different brand, one that offered no discounts at all, cost only $5.00. Even though you purchased the milk with the biggest discount, you’d still be paying $1 more than the lowest-cost milk available. This is an (oversimplified) example of discount-based versus cost-based methods of Pharmacy Benefit Manager (PBM) evaluation. 

Discount-Based Evaluation‍

This method compares the discounts and rebates a PBM gets from pharmacies and drug makers. It focuses on getting the biggest discounts (i.e., the highest percentage off the sticker price), but misses out on other ways to save money.

‍Cost-Based Evaluation‍

This approach looks at the real costs employers face with PBMs, checking what they spend for each member every month over a year. It gives a full picture of the costs, helping make decisions that consider all expenses.

In the context of J&J's situation, the company may have focused on attractive discounts offered by their PBM without assessing whether these deals resulted in the lowest overall cost for their health plan's prescription drugs. Just like choosing milk based on the biggest discount may not always lead to the best price, selecting a PBM based on discounts alone can lead to higher expenses if not carefully evaluated against overall savings and value.

The Limitations of Traditional, Discount-Based PBMs

The problem with PBMs that prioritize discounts, which are often also referred to as traditional PBMs, is that they don’t aim to reduce plan costs. While optimizing for “AWP discounts” and “rebate guarantees” may sound financially beneficial, our milk analogy demonstrates how they’re not the same as finding the lowest-cost drug.

Traditional PBMs also often tout their long-standing industry experience and the promise of predictable costs as key advantages to their services. These claims are designed to reassure employers that they are in capable hands, with a clear roadmap of their pharmacy benefit expenses. 

However, beneath the surface lies a more complicated reality. The systems and pricing structures employed by traditional PBMs are intentionally intricate, creating an environment where the true financial implications of their services remain obscured. In the end, it’s the exact opposite of the predictability they claim. 

Under the traditional model, PBMs typically generate revenue through “spread pricing” –that is, the PBM charges a health plan a higher amount for a prescription drug than the amount the PBM reimburses the dispensing pharmacy for that drug, and then the PBM pockets the difference. Pharmacy consultants attempt to minimize this “spread” by having the PBMs guarantee overall percentage discounts across the various drug categories. This method of evaluation, which was intended to hold PBMs accountable, has led to higher drug costs: a traditional PBM is incentivized to increase drug costs for its clients, capturing revenue through spread, or to favor expensive drugs with high manufacturer rebates over more affordable alternatives, fulfilling contractual rebate guarantees. Often, it may employ both strategies. 

As the healthcare sector evolves, the challenge for employers to deliver both comprehensive and affordable benefits grows. Traditional PBMs, deeply rooted in long histories of opaque practices, will find it difficult to adapt to these changing demands. And without adopting evaluation methods that prioritize transparency and focus on actual costs over discounts, businesses will face difficulties similar to those experienced by J&J. The case should serve as a cautionary example, underscoring the importance of a more thorough approach to selecting and overseeing PBMs.

A Proactive, Client-Aligned Approach to Pharmacy Benefits 

The good news for SmithRx clients is that by choosing SmithRx, a cost-based PBM solution, you’re safe from the types of allegations raised in the J&J lawsuit. In fact, the lawsuit cites a SmithRx case study in Paragraph 169 of the complaint as a savings success story and an example of what J&J should have done.

Curious to know how much switching to a cost-based PBM could save you? Request a repricing analysis. Or, if you’re interested in learning more about SmithRx, email us at sales@smithrx.com.