"Traditional" PBM Model. How the Money is Made
In a “traditional” PBM model, the vast majority of their money is made in three ways:
REBATE: PBMs negotiate contracts with Pharmaceutical manufacturers for discounts on products utilized. The amalgamation of all these manufacturer contracts results is a PDL. The PBM then promotes the PDL as a way of increasing the utilization of contracted products and therefore the rebates that can be collected. The key to remember here is that depending on the contracts the PBM has negotiated, rebates can be a good thing or can cost the client money. This happens by promoting the utilization of a product that is more expensive to the client, but also generates better rebates for the PBM. In addition, the PBMs typically collect other fees known as rebate related revenue. Rebates will be more fully discussed in an upcoming article.
NETWORK SPREAD: PBMs contract with retail providers such as Walgreens, CVS, Rite Aid, regional chains and independent pharmacies. The rates they have negotiated with these retail providers are usually different and more aggressive than the rates they bill their client. The difference in these rates is what is known as retail spread and is a significant revenue source for PBMs.
MAIL SERVICE OPERATIONS:Most PBMs offer mail service pharmacy to their clients. As was discussed in a recent article I wrote for Employee Benefit Advisor, this can be a good thing or a bad thing. It depends on many factors such as benefit design, how deep the mail discount is, etc. Because of the differences in operational procedures between retail and mail service, and the more efficient dispensing of 90 days of supply of medication, the mail service operations are quite profitable for PBMs. The key takeaway here is that mail service can save money, but unless it is carefully thought out and well designed, it can also raise costs.