How Pass-Through Pricing Causes Traditional PBM Clients to Lose

Big PBMs offer clients "pass-through" pricing deals

Big PBMs like OptumRx, Caremark, Prime, and Express Scripts have heard the market demand for more transparent, ethical behavior from PBMs, and they have responded by offering a “pass-through” option for some of their clients.

On the surface, this seems like a great development. Maybe the Big PBMs are finally putting clients and patients ahead of their corporate “hide the money” games?

But it's just another pricing game

Unfortunately, this is not the case.

Years ago I worked for a PBM that offered both traditional pricing and pass-through pricing to our clients. The goal of offering both was to get an equal number of clients under both models.

The reason? Internally we called it "MAC list arbitrage" but let me explain what that means in more simple terms:

PBMs have contracts with pharmacies that require them to pay a certain amount for certain categories of drugs on average throughout a given year. The on-average part is critical because it means that PBMs can vary the price that they pay the pharmacy depending on which of their clients is buying the drug.

This creates strange situations where the same drug, from the same PBM, at the same pharmacy can have significantly different costs. The chart below from 3 Axis Advisors illustrates this in practice:

This average pricing dynamic is important to understand if you’re offered a pass-through deal from a Big PBM. If you take it, when your members fill a claim the PBM will pay the pharmacy a higher price for the drug than the average price that the PBM needs to hit with the pharmacy over the course of the year. Then they pass on this higher price to you, their client.

For their spread clients (spread means that the PBM adds an additional margin to the cost of the drug between the pharmacy and the client), Big PBMs do the opposite. They pay the pharmacy an amount that’s lower than the average price that they need to pay the pharmacy over the course of the year. This gives the PBM plenty of room to add more margin on top of that lower price, which it then keeps for its own profit.

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Because of this game, being on a pass-through contract with a PBM that offers both models is the worst deal you can be on. You will pay more for your prescriptions, and your overpayments to the pharmacy will enable the PBM to extract even larger margins from its spread clients.

Fortunately, there’s a simple solution: only work with PBMs like SmithRx who are 100% pass-through, all the time. At SmithRx we never take spread for any of our clients, so we always have an incentive to drive down drug costs for all of our clients.