Legacy PBM Fee Structures: 4 Tactics That Hide True Costs

Legacy PBMs often employ complex fee structures with a clear goal: to appear less expensive than they truly are when pitching to potential clients. It's like a shell game – they present a low upfront price while obscuring additional costs elsewhere.

In the traditional model, PBMs frequently show no fees at all, leaving clients in the dark about the PBM's actual profits. This lack of transparency makes it nearly impossible for clients to accurately assess the value they're receiving or compare services between different PBMs.

While this approach may seem attractive during sales presentations, it often results in unexpected expenses for clients later on. It's a strategy that prioritizes winning contracts over providing genuine value and transparency.

To help you navigate these murky waters, let's examine four common tactics legacy PBMs use to obscure their true costs.

1. Nickel-and-Diming

Have you ever been lured by a budget airline's irresistibly low fares, only to watch the price steadily climb as you progress through checkout? The surprises don't end there. Upon arrival at the airport, you might encounter a barrage of unexpected fees for everything from slightly overweight baggage to the audacity of checking in with a human agent. What started as a bargain quickly becomes a costly lesson in the art of reading fine print.

Legacy PBMs employ a similar strategy. They may advertise an attractive base rate (or no base rate), but the total cost of their services often includes various additional charges.

For instance, a legacy PBM might quote a base administrative fee of $2 PMPM (Per Member Per Month). However, the final cost could be substantially higher when accounting for potential additional fees such as:

• Report generation fees
• Data access charges
• Enterprise compliance support costs

These extra charges, while not always immediately apparent, can add up quickly - much like those budget airline fees. The result? A final price that's often much, much higher than initially expected.

Below is a real example of a pass-through PBMs fee structure. On its surface, it seems like this PBM charges just $4.10 PMPM. But after all of the ad-hoc surcharges are taken into account, the fee jumps to over $10.

At SmithRx, ALL of the above fees are fully included in our flat, simple Core Admin Fee.

2. Direct Spread

People are generally familiar with network spread pricing, but it can occur in other forms as well. Here are just a few of the methods PBMs use to "earn" money by keeping funds that should rightfully belong to the client:

• Rebates: A PBM retains a portion of rebates
• Rebate MAF: A PBM retains rebate ancillary revenue streams like Manufacturer Admin Fee
• Pharmacy network: A PBM charges you more than they reimburse the pharmacy, and keeps the difference
• Owned pharmacy: A PBM increases the margin for your drugs at a pharmacy it owns
• Pharmacy commission: A PBM is paid by a third-party pharmacy to direct volume
• Discount card commissions: A PBM may route claims through a discount card (like GoodRx), which pays the PBM for doing so
• Bolt-on commissions: PBMs may receive payment from bolt-on providers (like specialty management or international sourcing companies)

At SmithRx, we never take spread in ANY form. Our only revenue streams are our flat Core Admin fee and Connect 360 fee.

3. Third-Party Spread (Drug Pricing Arbitrage)

Third-party spread is one of the most insidious forms of PBM fee-making. 

This practice involves:

• The PBM increases drug costs for a client on a pass-through deal
• The PBM reimburses the pharmacy at this higher pass-through price
• This allows the PBM to reimburse the pharmacy less for its traditional clients

In effect, pass-through clients overpay so that the PBM can make more money off its traditional clients. This hidden practice undermines the transparency promised in pass-through arrangements and unfairly shifts costs between different client groups.

At SmithRx, we reject all forms of spread pricing, including third-party spread. Our commitment to transparency means all clients receive fair, consistent pricing without hidden fees or cost-shifting tactics.

4. Percent-of-Savings Fees

This fee structure is common with bolt-on providers and sometimes with PBMs as well. Percent-of-savings fees sound good in practice, but unfortunately they are frequently the most expensive way to pay for services. The concept of “savings” is easily manipulated by PBMs and bolt-on providers to increase their take.

The table below illustrates how much more expensive a percent-of-savings fee structure on savings programs can be compared to the SmithRx approach. Our flat fee structure saves our clients more than $5 PMPM compared to bolt-on providers and percent-of-savings models. Because our clients always have full awareness and control over their member counts, this fee structure cannot be gamed. 

The SmithRx Fee Structure: Simple, Transparent, and Competitive

As a modern PBM,  SmithRx believes in keeping things straightforward. Our standard fee structure consists of two components:

• Core: $6 Per Member Per Month (PMPM)
• Connect 360: Capped at $4 PMPM (optional)

What's Included in Our Core Fee?

Our Core offering forms the foundation of our service to all customers. For a competitive rate of $6 PMPM, you receive access to our comprehensive suite of PBM services:

• Dedicated account management
• US-based, 4+ star rated member support team
• Full-service utilization and clinical management
• On-demand reporting through account managers or our client portal
• Member tools including a user-friendly portal
• Compliance reporting, including CAA
• 8+ years of trusted PBM operations
• A 500+ person team working daily to improve cost and clinical outcomes
• Experience serving 3,000+ clients 

PBM Pricing Structures: What You See vs. What You Pay

When evaluating PBM options, it's crucial to consider the total cost of services beyond initial quotes. While some PBMs may offer low upfront fees or high apparent discounts, these figures often don't reflect the full financial impact. Hidden revenue streams such as spread pricing, undisclosed fees, and complex purportedly "pass-through" models can significantly increase actual costs over time (and we’re beginning to see high profile examples of it play out in real time). 

Consider the allegations in the recent suit against Wells Fargo. The lawsuit alleges that the defendants agreed to a contract with Express Scripts that resulted in excessive costs for the plan. Specifically, it alleges:

1. The administrative fees agreed upon exceeded even those charged by pass-through PBMs, which typically charge around $6 per-member, per-month without collecting spread or retaining rebates.
2. The lawsuit cites SmithRx as an example, alleging that it charges $6 per-member, per-month for PBM services comparable to those provided by Express Scripts.
3. In contrast, the lawsuit alleges that the defendants agreed to pay over $11 per-member, per-month in administrative fees to Express Scripts.
4. Moreover, the suit alleges that on top of these higher administrative fees, the contract allowed Express Scripts to charge inflated drug prices, collect spread pricing, and retain rebates.
5. The lawsuit alleges that this arrangement was imprudent due to both excessive administrative fees and unreasonably high drug prices.

This case underscores the importance of scrutinizing PBM contracts beyond face value. What may appear as competitive pricing upfront can potentially mask substantial hidden costs. It highlights the need for plan sponsors to carefully evaluate the full scope of PBM pricing structures, including administrative fees, drug pricing methodologies, and rebate arrangements, to ensure they're getting a truly cost-effective solution.

SmithRx's pricing structure aims to provide a clear, comprehensive view of all fees from the beginning. This approach allows for more accurate cost projections and informed decision-making. 

If you’re curious to see how much SmithRx could save you with this transparent, cost-focused approach, start by requesting a repricing analysis.