How Legacy PBMs Fail Pharmacies, Employers, and Patients

The pharmacy benefits industry is broken. Patients pay record out-of-pocket prices, employers continue to spend more year-over-year, and hardworking community pharmacists have been edged out of business.

With every prescription processed, countless individuals and groups are failed by the system that legacy Pharmacy Benefits Managers (PBMs) perpetuate. Alan Pannier, PharmD, MBA, SVP of Product Strategy here at SmithRx recently sat down with David Williams on the CareTalk Podcast, to discuss precisely who is losing in legacy health's game—and what can be done to save pharmacy benefits.

Read on for a rundown of Alan and David’s conversation, or listen to the podcast in its entirety, below.

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The Pharmacy Benefits Fallout

PBMs were originally created in the 1960s to serve as a technological intermediary, connecting pharmacies, patients, and employers to streamline pharmacy benefit payments and data processing. Over time, however, this role has been manipulated, with legacy PBMs inserting themselves as the central, controlling layer of the healthcare ecosystem. 

Legacy PBMs are traditional benefits managers that are heavily entwined with the rest of “Big Health”, such as the nation’s largest insurers, provider networks, and pharmacies. The several largest legacy PBMs (known as the”Big 3”) control about 85% of the market and own their own pharmacies, health plan, and sometimes even manufacturing facilities. This “vertical integration”, by which they own a majority of the pharmacy supply chain, creates a fundamental conflict of interest 

In a system built by legacy PBMs, for legacy PBMs, everyone else in the ecosystem ends up paying the price. Let’s explore the key groups paying the price:

Independent Pharmacies

Legacy PBMs reimburse pharmacies based on an Average Wholesale Price (AWP) for medications, a benchmark that is often inflated and disconnected from the actual cost of drugs. To preserve their margins, legacy PBMs have systematically driven down pharmacy reimbursement rates. National chains can fight back on this encroachment—but community pharmacies cannot. 

What’s more, big box pharmacies operate on economies of scale and aren’t concerned with individual reimbursement rates for drugs, so long as they pay less on average. By contrast, every fill counts for independent pharmacies and many independents have to under-reimburse themselves just to compete with chains. This means that independent and community pharmacies lose money on most fills, and especially on popular, expensive branded medications like GLP-1s.

The pharmacy chains owned by the three largest legacy PBMs (Walgreens, CVS, and Rite Aid) have closed staggering numbers of locations in recent years and totally pulled out of certain geographical areas. Oftentimes, independent pharmacies are the option left to whole communities—and razor thin margins mean these pharmacies are teetering on the edge of closure constantly. This has led to the development of "pharmacy deserts" in rural areas where there aren't enough (or any) pharmacies to serve the community.

Employers

For many businesses and HR departments, legacy PBMs are the only reality they’ve ever known. On paper, they promise significant discounts, but very rarely do those promises lead to real savings for employers. Under a legacy model, not all savings get passed to employers, who are already paying inflated prices for their members’ drugs.

Pharmacy spending can account for a good chunk of overall healthcare costs for employers, so even small increases have a big impact on bottom lines. Compounding these issues is the lack of transparency legacy PBMs offer. The complex and opaque nature of their model, particularly their rebate systems, can make it difficult for employers to manage their pharmacy benefits effectively and understand just how bad of a deal they’re getting.

“Patients are at the forefront of being hurt by legacy PBMs: they're overpaying for healthcare. Now have employees suing their employers, large employers, for not doing their fiduciary duty and choosing more expensive providers of pharmacy benefits.” - Alan Pannier, SVP of Product Strategy at SmithRx

Members

With independent pharmacies and employers paying sky-high prices for drugs, it’s no wonder that members do too. Patients are often stuck with higher out-of-pocket costs and premiums that continue to rise. It’s such a dire situation that some have even filed lawsuits against their employers for not choosing more cost-effective, or fiduciarily-aligned PBMs.

Rethinking the Fundamentals of Pharmacy

The status quo of unsustainable pharmacy costs does not have to be our reality. To make meaningful, positive changes to the pharmacy benefits landscape, there needs to be fundamental re-structuring of PBMs. At SmithRx, we’re proud to lead a growing movement of modern PBMs that operate on transparent, cost-based models rather than a legacy, discount-based model. Delivering the true lowest-net cost, rather than an illusion of a discount, guides everything we do. 

This seismic shift in priorities can lead to significant savings for employers, and in turn, allows them to lower premiums or out-of-pocket costs for their employees.

“The dispensing fees that PBMs typically give pharmacies are less than a dollar. We need to move back to a model where they're getting dispensed for the work they're doing, independent of the cost of the drug. SmithRx has been re-contracting our entire pharmacy network so that we're reimbursing the work that's done, which is a much higher dispensing fee than what's in the market.”

Beyond providing meaningful savings to employers and members, modern PBMs can also play a large role in shaping the future of independent and community pharmacies. Paying equitable reimbursements to independent pharmacies ensures they can operate viably and continue to provide essential services to their communities. 

A new path for pharmacy benefits is emerging, one where independents, employers, and members can all thrive. Hear more about this new age of pharmacy experience in Alan’s full CareTalk episode, now.