The Imperative Evolution of PBMs: 6 Modern Answers to Legacy Challenges

The pharmaceutical industry is experiencing a revolution, with Pharmacy Benefit Managers (PBMs) at its epicenter. This transformation goes far beyond surface-level changes, marking a pivotal shift from "legacy" to "modern" PBM practices. More than just new terminology, this movement is a complete reimagining of how PBMs function and create value. 

Below, we explore six key areas where this evolution is most evident— and most critical. 

1. Traditional vs. Pass-Through

One of the most significant transformations is the evolution of pricing models. This change reflects a broader alignment of interests between PBMs and their clients.

Legacy PBMs: Traditionally, PBMs have operated on a complex system that often prioritizes their own profitability over client savings. They employ a spread pricing model, where they pocket the difference between what they charge clients and what they pay pharmacies. Additionally, these PBMs typically retain a portion of manufacturer rebates, often without full disclosure to clients. 

Their revenue streams are further complicated by various hidden fees, which obscure the true cost of services. This lack of transparency makes it challenging for clients to understand and control their pharmacy benefit costs.

Modern PBMs: In contrast, modern pass-through PBMs have adopted a radically different approach. These PBMs pass all pharmacy costs directly to clients without markup, ensuring that clients pay exactly what the PBM pays for medications. They also transfer 100% of manufacturer rebates to clients, eliminating any conflict of interest in drug selection and pricing. The only revenue modern PBMs generate comes from clearly disclosed administrative fees. This transparent model allows clients to see exactly where every dollar is spent, fostering trust and enabling more effective cost management.

2. Opaque vs. Transparent

Another key area where the evolution of PBMs is particularly evident is in the approach to operational transparency. This shift reflects a growing demand from clients and regulators for greater clarity in healthcare costs and practices. 

Legacy PBMs: Historically, PBMs have been criticized for their lack of transparency. Complex contracts, hidden fees, and unclear pricing structures have made it difficult for clients to understand true costs.

Modern PBMs: Transparency is a cornerstone of modern PBM practices. They provide clear, detailed reporting on all aspects of drug spend. This openness allows clients to make informed decisions and hold their PBM accountable.

3. Discount-Focused vs. Cost-Focused

When it comes to drug pricing, what you see isn't always what you get. As PBMs evolve, they're challenging long-standing practices in pharmaceutical cost management. 

Legacy PBMs: Discount-focused strategies rely heavily on inflated list prices. The higher the initial price, the more impressive the discount appears. This creates a perverse incentive for drug manufacturers to raise list prices, allowing for larger "discounts" while still maintaining high actual costs. In this model, a 50% discount on an artificially inflated price may still result in a higher net cost than a 20% discount on a more reasonable baseline price.

Modern PBMs: In contrast, cost-focused PBMs prioritize the bottom line: what clients and patients actually pay. This approach considers the true cost of drugs, factoring in not just the discounted price, but also rebates, administrative fees, and other often-hidden expenses. By focusing on net cost rather than headline-grabbing discount percentages, cost-focused PBMs align their strategies with genuine savings for their clients.

The mutually exclusive nature of these approaches becomes clear in negotiation and formulary management. Discount-focused PBMs might favor drugs with higher list prices and larger discounts, even if the net cost is higher. Cost-focused PBMs, on the other hand, will opt for lower-cost alternatives that might come with smaller nominal discounts but result in lower overall spending.

4. Proposal vs. Platform

The PBM industry is shedding its old skin of intricate proposals and murky pricing structures. In their place, we’re seeing the rise of clear-cut platforms that offer the same tools and opportunities to all clients. 

Legacy PBMs: Old-school PBMs play a game of smoke and mirrors. They offer "custom" deals that often benefit themselves more than clients. Think complex contracts, hidden costs, and a lot of haggling.

Modern PBMs: Today's PBMs are flipping the script. They offer a single, powerful platform for all clients. No special deals, no hidden fees - just straightforward access to tools and data that put clients in control.

The platform approach has seen success in many industries. Just as Kayak and Expedia transformed the travel industry by providing transparency and empowering consumers, the PBM industry is poised for a similar revolution. 

5. Fixed vs. Dynamic Deals 

Rather than rigid, long-term agreements, we're seeing the rise of contracts that breathe and bend with the market. It's about creating deals that can pivot when healthcare throws a curveball, ensuring that both PBMs and their clients can stay ahead of the game.

Legacy PBMs: Traditional PBMs typically offer fixed deals characterized by static pricing based on Average Wholesale Price (AWP) discounts and rebate guarantees. These one-size-fits-all approaches don't actively seek out the lowest-cost options and remain inflexible in the face of major market changes. Such standard offerings from discount-based PBMs may not align with client interests and can leave clients vulnerable to market shifts. For instance, the emergence of biosimilars can impact rebate guarantees, or changes in pharmacy models (like CVS moving to a cost-plus model) can disadvantage clients locked into fixed terms. Perhaps most tellingly, in this structure, when PBMs find ways to reduce supply costs, they often pocket the savings rather than passing them on to clients.

This rigid approach can leave clients locked into suboptimal arrangements as the market evolves, potentially missing out on cost-saving opportunities that arise over time.

Modern PBMs: Modern PBMs are embracing a more adaptive approach with dynamic deals. In this model, PBMs continuously scan the market for improved cost pathways. When a lower-cost option is identified, they swiftly act to drive volume through these channels. The key differentiator is that the cost benefits of these lower-cost pathways immediately flow through to the client.

This dynamic approach ensures that as the pharmaceutical landscape shifts, both the PBM and the client can pivot quickly to take advantage of new opportunities for savings. It creates a system where flexibility is built-in, allowing for rapid adaptation to market changes and ensuring clients always benefit from the most current cost-saving opportunities. Importantly, this proactive stance aligns PBM incentives with client interests, fostering a more collaborative and transparent relationship.

By embracing flexibility and continuous optimization, modern PBMs are creating a more responsive, client-centric model that can adapt to the ever-changing pharmaceutical market. 

6. From Conflict-Ridden to Conflict-Free

PBM-client relationships are changing along with the PBMs themselves. Today we’re collectively focused on creating an environment where trust is paramount and decisions are made solely to benefit those the PBM serves. 

Legacy PBMs: Traditional PBMs often operate with inherent conflicts of interest. Many own their own pharmacies or mail-order services, creating a situation where their recommendations and pricing strategies may be influenced by these additional revenue streams. This structure has led to widespread criticism, as it can result in decisions that prioritize the PBM's profitability over client interests. The complex web of ownership and services in legacy PBMs can obscure true motivations and make it challenging for clients to trust that they're receiving unbiased, cost-effective solutions.

Modern PBMs: Today’s more forward-thinking PBMs are embracing a conflict-free model. They structure their businesses to eliminate potential conflicts of interest. They don't own pharmacies or have other business interests that could compromise their role as objective advisors and negotiators for their clients. This clear separation allows modern PBMs to focus solely on optimizing pharmacy benefits for their clients without the distraction or influence of other profit centers.

By removing these potential conflicts, modern PBMs create an environment where trust is paramount. Decisions are made solely to benefit the clients and members the PBM serves, rather than to bolster other business units or revenue streams. 

A New Chapter in Pharmacy Benefit Management

Modern PBMs like SmithRx are revolutionizing the industry with a fresh perspective. We're empowering clients through enhanced control, offering tools for better cost management and complete transparency in spending. This approach creates a system that genuinely serves patients' needs while optimizing resources.

As early adopters of these innovative models, our clients are at the forefront of a movement towards more effective healthcare. This transformation goes to the heart of how we manage health benefits, promising significant improvements for all stakeholders.

Ready to experience the difference of a modern PBM?

At SmithRx, we're committed to transparency, flexibility, and client-centric solutions. If you're interested in learning more about how our innovative approach can benefit your organization, we'd love to hear from you. If you're thinking about choosing a new PBM for your company, we encourage you to check out our PBM Evaluation Guide, a comprehensive resource designed to help you make an informed decision.