What Does a PBM Do to Reduce Costs?

Prescription drug costs continue to be a major financial burden for both individuals and companies, with prices in the U.S. averaging almost 3x of those in other countries. With rising drug prices impacting healthcare budgets, finding ways to control and reduce these costs is a priority. This is where pharmacy benefit managers (PBMs) come into play.

Let’s explore the different ways in which PBMs help manage and reduce drug costs. We’ll look at how they negotiate discounts with pharmaceutical manufacturers, the role of generics and biosimilars, formulary structures, and more.

Negotiation Power: Securing Lower Drug Prices

One of the main ways PBMs reduce prescription drug costs is through their ability to negotiate with pharmaceutical manufacturers. By leveraging their large client base, PBMs can negotiate higher rebates to help lower prices for medications. This allows them to secure significant discounts, often in the form of rebates. These rebates are then passed on to employers and their employees, helping to lower overall drug spend. Though this sounds like a great way to save on drug costs, legacy PBMs have been known to keep a portion of the rebate, instead of passing on the savings.

PBMs will typically have contracts with drug manufacturers to receive rebates based on the volume of prescriptions dispensed. The more drugs a PBM distributes, the more leverage they have when making these negotiations.  These rebates also act as offers or incentives to get a drug included on a PBM’s formulary. Additionally, PBMs negotiate directly with pharmacies to create networks that offer competitive pricing for medications. This ensures that employees can access affordable options while still receiving high-quality care.

While their relationship with drug manufacturers and pharmacies makes PBMs a powerful tool for reducing the cost of prescription medications, there are other tactics they use to reduce drug costs. One of these is the promotion of generic medications and biosimilar medications.

Generics and Biosimilars

Generics are medications that are chemically identical to their brand-name counterparts but are sold at a much lower price. Many PBMs encourage the use of generic drugs when they are available. By substituting generics for brand-name drugs, employers and their employees can see significant savings on their overall drug spend. PBMs may also provide generic drug programs to educate their members and partners about the benefits of generics, helping to ensure that patients are prescribed the most cost-effective options.

In addition to generics, there are biosimilars. Biosimilar medications are ones that are highly similar (but not identical) to an already approved reference biologic drug. Unlike generics, which are made from simple chemicals, biosimilars are complex products derived from living organisms. While these more complex medications are not exact replicas of their reference counterparts, they have no clinically meaningful differences in terms of safety or effectiveness.

Despite their differences, both generics and biosimilars offer significant cost savings, providing patients with more affordable options without compromising on quality of care or treatment outcomes.

Formularies

A prescription drug list, also known as a formulary, is a list of medications that are covered by a health insurance plan. PBMs maintain formularies and steer patients toward medications that are both effective and affordable. Formularies can typically include a mix of brand-name and generic medications, prioritizing the most cost-effective options based on clinical efficacy, safety, and cost.

PBMs often categorize drugs on the formulary into tiers, with lower-cost medications (like generics) placed in lower tiers and high-cost medications (like brand-name specialty medications used to treat complex, chronic illnesses) in higher tiers. By placing low-cost generics and biosimilars on the formulary, at preferred lower tiers, PBMs can help reduce drug costs and alleviate financial burdens while ensuring that members receive necessary treatments.

Utilization Management

Utilization management refers to a set of strategies used by PBMs to assess the necessity, appropriateness, and efficiency of medications prescribed to patients. These strategies are designed to ensure that medications are used appropriately and that the most cost-effective treatments are prescribed. Examples of this include:

Prior Authorization

Prior Authorization requires healthcare providers to obtain approval from the PBM before prescribing certain medications. This makes sure that the prescribed drug is medically necessary and that low cost effective alternatives have been considered first. By limiting unnecessary prescriptions for high-cost medications, PBMs can reduce overall spending for employers and members.

Step Therapy

Step Therapy requires patients to try more affordable medications before they can progress to higher-cost options. Similar to prior authorizations, this approach helps ensure that cost-effective treatments are considered first, avoiding unnecessary spending on more expensive medications.

Clinical Programs

PBMs often develop clinical programs to help identify the effective and safe treatment options for patients. These programs often include disease management, medication therapy management, and adherence programs. By offering these services, PBMs can help patients manage chronic conditions more effectively, reducing the need for expensive treatments in the future.

For example, a PBM might offer a program that supports the transition to biosimilars for patients with chronic conditions like rheumatoid arthritis. By guiding patients through the process of switching to a biosimilar, the PBM helps ensure the medication is effective and well-tolerated. This transition can significantly reduce treatment costs without compromising the quality of care, ultimately benefiting both the patient and the employer by lowering overall healthcare expenses.

Data Analytics

Data Analytics is another powerful tool that PBMs leverage in order to identify trends and optimize drug spend and cost-savings. By analyzing claims data, PBMs can find cost-saving opportunities and better manage drug utilization. They can identify patterns in prescribing behavior, identify medications that are unnecessary or are being overprescribed, and find areas where lower-cost alternatives could be used.

Partner with a Modern, Transparent PBM for Optimal Savings

PBMs play a crucial role in managing prescription drug costs for employers and their employees. Through negotiation power, promoting lower-cost alternatives like generics and biosimilars, and managing formularies, PBMs are able to reduce prescription drug costs. Other cost-saving tactics used by PBMs include implementing clinical programs, leveraging data, and using utilization management strategies like prior authorizations and step therapy.

When selecting a PBM, it’s essential to choose a partner with a proven track record of cost-savings and putting members first. Modern, transparent PBMs like SmithRx provide clarity around what employers are paying for and the savings they are receiving. Our Connect 360 program is designed to identify the lowest cost medications for our members, ensuring significant savings while providing high-quality care. Last year, we saved our members over $200M through specialized autoimmune, Multiple Sclerosis (MS), and other programs included in our Connect 360 suite of programs. Our clients and members also receive full access to all of their data via our online member and partner portals. Through a combination of technology, transparent pricing, and strategic partnerships, SmithRx empowers its partners and members to make informed choices, unlocking further savings and improving access to essential medications.

Ready to take your savings to the next level? To learn more about how partnering with a modern transparent PBM can help reduce your company’s drug costs, connect with a SmithRx representative today!