What is Spread Pricing?

Self-insured employers face the ongoing challenge of managing dynamic prescription costs while supporting employees’ diverse healthcare needs. Pharmaceutical costs are rising, and evolving workforces are only part of the equation. 

A practice known as "spread pricing," used by the big three and other non-pass through Pharmacy Benefit Managers (PBMs), sits at the root of escalating employer spend and narrowing drug access for patients. Understanding how spread pricing works, its impact, and how to mitigate its effects is crucial for employers to gain control of both cost and convenience.

Does Spread Pricing Work?

In short, no. Spread pricing does not effectively serve the long-term financial interests of self-insured employers or their employees, nor does it ensure transparency and fair access to medications. While it generates revenue for PBMs, it leads to increased costs and reduced transparency, ultimately putting employers and their employees at a disadvantage.

When a spread pricing model is used, PBMs earn revenue by charging employers more for prescription drugs than what they pay to reimburse pharmacies for those drugs. To understand this practice, it's important to first see exactly how PBMs plug into the healthcare system.

As intermediaries between health insurance providers, pharmacies, and pharmaceutical companies, PBMs negotiate drug contracts and pricing with pharmacies and manage prescription drug formularies for insurers and employers. Ideally, PBMs work to secure the lowest possible drug prices and pass those savings onto their clients—typically self-insured employers who bear the financial risk of their employees' healthcare costs. But spread pricing makes the process a lot less transparent: 

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This practice can lead to significant cost inflation for employers and, ultimately, higher healthcare premiums for employees.

The Impact of Spread Pricing on Self-Insured Employers

The most direct impact of spread pricing is inflated drug costs. Since the PBM is incentivized to maximize the spread, employers and employees end up paying much more than is actually necessary for medications and treatments. Beyond straining a business’s budget with significant increases in overall healthcare spend, the organization’s employees are at risk of being both medically and financially impacted.

When costs rise due to spread pricing, employers are forced to make difficult decisions, like reducing the scope of their prescription drug benefits or increasing employee copayments or monthly premiums to offset the surge. This, in turn, can lead to reduced access to necessary medications for employees, potentially affecting their health long-term.

Outside of company concerns, independent pharmacies are often the hardest hit by spread pricing in practice. PBMs may reimburse these pharmacies at a rate so low that it barely covers the cost of the medication wholesale, leading to financial strain and, in the worst cases, pharmacy closures—further limiting patient access to medications and therapies, especially for those in rural or underserved areas.

How to Mitigate the Effects of Spread Pricing (or Avoid it Altogether)

Employers need to stay proactive to prevent spread pricing from going unchecked or from being implemented without clarity and alignment. The simplest way is the most obvious: partner with PBMs that prioritize overall cost and transparency in their pricing models, and that provide detailed reporting on drug costs and savings, allowing employers to see exactly where their money is going. Transparent PBMs are more likely to offer pass-through pricing and avoid the pitfalls and increased cost of spread pricing as a whole.

Thoroughly read and understand any PBM contract that’s drawn up, and verify that the terms of the contract clearly define how drug prices are determined, as well as what fees the PBM is charging. (Hint: various additional fees are often hidden in the less noticeable sections of contracts). Look for clauses that allow for transparency in pricing, and that require the PBM to disclose the actual costs paid to pharmacies.

Employers can also negotiate a pass-through pricing model, in which the PBM passes on the exact cost of the drug from the pharmacy to the employer, with no hidden markups. The PBM’s compensation comes from a flat administrative fee, making the pricing model more transparent and easier to manage.

Finally, conduct regular audits of your PBM’s pricing and reimbursement practices. An independent audit can help identify instances of spread pricing and ensure that the PBM is adhering to the terms of your contract. If discrepancies are found, you may be able to renegotiate terms or seek retroactive compensation.

Green Flag Checklist: Choosing a Transparent PBM Partner

A transparent PBM is more likely to act in the best interests of your organization and your employees. Here’s what to look for up front when choosing a Pharmacy Benefits Manager to align with your healthcare coverage goals.

• Does the PBM provide full disclosure of all pricing and fees? A transparent PBM will have no issue providing this information and explaining how they make money.
• Have they been involved in any legal disputes or controversies related to spread pricing? Like you would for any candidate interviewing for a role, check the PBM’s references. What do the PBM’s other clients say about their transparency and fairness?
• Do they offer clinical support, formulary management, and other services? This level of support helps manage costs while enhancing the overall effectiveness and quality of your healthcare plan.
• Are they willing to negotiate pass-through pricing models? PBMs should pass on the exact cost of drugs to you without hidden markups, ensuring you only pay what the pharmacy charges plus a clear administrative fee.
• Do they provide detailed, regular reporting on drug costs and savings? Comprehensive reports that break down drug costs, savings, and utilization patterns allow you to monitor spending and identify areas for improvement.
• Is there a commitment to ongoing audits and transparency reviews? Regular, independent audits and reviews ensure that all practices are sound and aligned with your contract terms.

Is there any adjustment or increases to fees based on your member count? If your member count changes, there should be no penalty or increase in fee structure. Are there any clinical programs or services that require a minimum member count for the PBM to execute that service? Clarify with the PBM that fees and charges will not be adjusted based on your member-live count.

At SmithRx, we believe transparency and fairness belong in all aspects of pharmacy benefit management. If you're looking for a PBM partner that puts your interests first, connect with us and discover how our innovative PBM solutions can support your organization’s long-term healthcare and coverage goals.