Defining Modern PBM Fees: A New Era of Transparency and Value

For years, the Pharmacy Benefit Management (PBM) industry has been a maze of complexity. Drug costs, hidden fees, and opaque contracts have left employers and patients in the dark, facing unpredictable costs and unclear decision-making processes. But as healthcare costs continue to climb, there's a growing demand for change. Companies and individuals alike are realizing that they’re paying too much. It’s leading to demands for greater transparency and fairness. 

At the heart of this shift is a simple realization: the traditional PBM fee models just aren't cutting it anymore. When PBM profits are tied to drug prices, there's a fundamental misalignment of interests. It's time for a new approach – one that separates drug costs from administrative fees and ensures PBMs are focused on delivering real value, not just driving up costs.

This is where SmithRx comes in. We're leading the charge towards a modern approach to PBM cost structures, built on the pillars of transparency and optimized to drive lower costs. 

Let's dive into what this new structure looks like and how it's reshaping the industry for the better.

Understanding Pharmacy Benefit Costs

When analyzing Pharmacy Benefit Manager (PBM) costs, it's crucial to understand two main components of pharmacy spend:

1. Administrative Fee

What it is: A charge for the PBM's service.

Examples: Claims processing, network management, reporting

2. Drug Costs

What it is: The actual expense of medications given to members.

Factors affecting drug costs:

• Prescribed medication types
• How often medications are used (utilization)
• Prices negotiated with drug manufacturers
• Design of the drug list (formulary)

Admin fees and drug costs should be separate and unrelated. If these costs are combined, it becomes difficult to see the true cost of drugs. This lack of transparency can allow PBMs to make unlimited profits, a practice known as "spread pricing."

In spread pricing, PBMs can charge health plans more for drugs than they pay pharmacies, pocketing the difference. In this model, they are incentivized to drive up the cost of drugs in order to pocket a heftier margin. Keeping admin fees and drug costs separate helps prevent this and promotes transparency in pricing.

The SmithRx Approach: Simple, Cost-Effective, and Client-Aligned

At SmithRx, we've reimagined the PBM fee structure entirely. Our model is built on a simple principle: our success should be directly tied to our clients' success. 

Here's how we've made that a reality:

1. Flat Monthly Administrative Fees

Our revenue comes solely from flat monthly administrative fees that cover ALL our services. This predictable cost structure makes budgeting easier for our clients and removes any incentive for us to push unnecessary services or expensive drugs.

2. Transparent Pass-Through Drug Pricing

We pass through the exact cost of drugs to you, the plan sponsor. No markups, no hidden fees. All rebates and discounts we negotiate? They go directly to you. This transparency ensures you always know exactly what you're paying for.

3. Decoupled Admin Fees and Drug Prices

By separating our admin fees from drug prices, we've eliminated the primary conflict of interest that defines legacy PBMs. We have no financial motivation to steer towards expensive medications. Our goal is simple: find the most cost-effective, clinically appropriate options for your members.

The SmithRx Admin Fee Structure 

Our fee structure consists of two components:

Core: $6 Per Member, Per Month: This covers all the essentials: dedicated account management, US-based member support, full-service utilization and clinical management, on-demand reporting, member tools, compliance reporting, and more.

Connect 360: Capped at $4 Per Member, Per Month (Optional): This is our dynamic set of cost savings programs that evolve with the market. The fee gives clients access to all our in-house cost savings programs, dedicated case agents, direct support, and comprehensive enrollment assistance. What’s more is that the fee comes with a 1.5x ROI guarantee (if your savings isn’t 1.5x your admin fee, we refund the difference annually).  The ROI guarantee makes this a no lose proposition for plan sponsors. Your group will always save – either because of our programs or because we refund you the difference.

To put this in context, the average annual cost of prescription drugs is $1,432 per American (or $119 per member, per month). Our maximum of $10 per member per month (if a client chooses to enroll in Connect 360 in addition to Core) represents a small fraction, allowing us to focus on optimizing your overall pharmacy costs. The end result: the SmithRx book of business performs around $70 per member, per month in pharmacy benefit spend, including our admin fees, which is 40% lower than industry benchmarks.

Why This Structure Works for Everyone

No Volume Incentives: Unlike per-claim models, we don't benefit from a higher number of claims. Our focus is on effective management, not more transactions.

Genuine Savings: We have no reason to inflate initial prices to show larger savings. Our flat fee means we're motivated to find real, sustainable cost reductions.

Drug-Agnostic Approach: With no spread pricing, we have no financial incentive to promote more expensive medications. We're free to recommend the most cost-effective options.

Rebate Transparency: All rebates go back to you. We don't play favorites with high-rebate drugs at the expense of overall cost.

‍Performance-Driven: When it comes to Connect 360, clients only pay if they save significantly. This aligns our interests directly with your outcomes.

Measuring What Matters: The Power of Total PMPM

As you consider your PBM partnership and its related costs, it can feel all too easy to get lost in the details. But at the end of the day, what really matters is the overall value. This is where Total PMPM comes into play.

Think of it like buying a car. You wouldn't focus solely on the cost of manufacturing or just the price of the engine. What matters is the total cost of ownership. Similarly, in PBM partnerships, looking at individual components (like discounts or admin fees) in isolation doesn't give you the full picture.

Total PMPM represents the all-in amount you pay every month for pharmacy benefits, including admin fees, drug costs, and any other related expenses. It's calculated as:

Total PMPM = (Admin Fees + Drug Costs) / Number of Members / Number of Months

For example: If admin fees are $10 PMPM and average drug costs are $63 PMPM, the total average Total PMPM would be $73.

This comprehensive metric allows for fair comparisons between different time periods or PBM providers, provides transparency into your true pharmacy benefit expenses, and helps you track the impact of cost-saving initiatives over time.

At SmithRx, our fee structures are designed to optimize this metric through transparent pricing, passing through all rebates and discounts, focusing on cost-effective drug options, and continuous innovation.

When it comes to your pharmacy benefits program, remember to focus on metrics you can measure and rely on. Complex fee structures and lofty promises are distractions.

With SmithRx, you get a PBM that’s committed to measurable, real-world value—starting with optimizing your Total PMPM. The future of pharmacy benefits is here, and it’s clear, transparent, and built around you.

To see how much a transparent, 100% pass-through PBM can save you, request a repricing analysis.