Navigating PMPM: Understanding its Meaning and Impact in Healthcare

Providing diverse healthcare coverage at a reasonable cost to the business is a priority for self-insured employers. But access doesn’t always align with company cost management, and the figures and factors that influence that spend can get complicated quickly.

One key figure is known as Per Member Per Month (PMPM), a metric designed to give employers a view into what they’re spending on healthcare for each employee. This insight allows for more confident decision-making around pharmacy benefits and overall healthcare plans, helping manage spend without compromising the quality of care.

What is PMPM in Healthcare?

PMPM is the average monthly cost an organization pays for each employee covered by a healthcare plan. It's a valuable metric, but employers are at the mercy of their pharmacy benefits manager (PBM) when it comes to understanding what it means and why it matters. Companies relying on traditional PBMs have less visibility into both the math and the outcomes of their PMPM, and can end up overspending—and underestimating the impact to coverage. 

The Significance of PMPM in Healthcare Cost Management

PMPM is a necessary benchmark in the healthcare industry because it allows employers to assess their healthcare expenses based on a predictable, per-member basis. There are a handful of core advantages: 

• PMPM helps forecast future healthcare costs, allowing businesses to budget more effectively and plan for long-term financial sustainability.
• If an employer is working with a transparent PBM, PMPM can be used to spot trends and identify areas where costs are going up, so adjustments can be made during critical times such as open enrollment periods, annual budget planning, formulary review cycles, or significant workforce changes. 
• This metric helps businesses make informed decisions about their PBM strategies, such as adopting cost-saving measures like promoting the use of generics and biosimilars, or optimizing their drug formulary.

Deciphering PMPM in Healthcare: Frequently Asked Questions

The calculation of PMPM is straightforward, though it’s a combination of various factors. Here’s how it’s done:

PMPM = (Total Annual Healthcare Costs / Number of Members) ➗ 12

So, if an organization spends $1 million annually on healthcare for 500 employees, the PMPM is $1,000,000 ÷ 500 = $2,000 per member per year, or approximately $167 per month. This formula helps employers break down their healthcare expenses in a way that’s both manageable and actionable, but it’s not the only element of understanding PMPM. Below are answers to the most commonly asked questions about Per Member/Per Month.

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Hidden Factors That Influence PMPM

Several things can impact your organization’s PMPM beyond external economic or environmental factors, and while some of it comes down to people, most of it is bureaucracy that affects those people. 

For example, employees in certain age groups or those with chronic conditions may require more expensive and frequent care—but a plan design with higher deductibles or copays meant to offset those potential expenses shifts the cost burden onto all employees. Things like wholesale pricing, manufacturing requirements, and legal compliance, especially for specialty drugs, significantly affect PMPM, making pharmacy benefits management crucial for cost control.

Best Practices: 4 Ways Employers Can Optimize PMPM

Employers have several tools at their disposal to optimize PMPM and control healthcare costs. Here are some best practices:

1. Leverage transparent PBM solutions. Working with a transparent PBM ensures that you have full visibility into drug pricing, rebates, and other cost-saving opportunities. This level of transparency can help employers make more informed decisions, reduce pharmacy costs, and optimize PMPM.
2. Implement preventative care programs. Encouraging preventative care, such as wellness screenings, chronic disease management, and lifestyle interventions, can reduce the need for more costly treatments down the line, ultimately lowering PMPM.
3. Offer tiered pharmacy plans. By providing a tiered pharmacy plan that encourages the use of generics, biosimilars, and more cost-effective medications, employers can help employees save money while reducing overall healthcare costs.
4. Monitor PMPM trends. Regularly tracking PMPM trends helps employers address cost spikes early and adjust strategies as needed, and help plan for the future costs

Cut PMPM Costs with SmithRx 

SmithRx offers transparent PBM solutions designed to help employers optimize their PMPM and control their healthcare costs by providing clarity and control. Unlike traditional PBMs using opaque pricing structures, SmithRx operates with a 100% pass-through model: all rebates, discounts, and savings are directly passed on to employers, giving them a true understanding of their costs and the total savings available. 

By tackling high-cost areas like specialty medications through careful formulary management and containment strategies, our approach is designed to empower self-insured employers to take full control of their pharmacy benefits, reduce unnecessary spending, and offer more sustainable healthcare to employees. To see how much a transparent, 100% pass-through PBM can reduce your PMPM, request a repricing analysis.