Rethinking Pharmacy Benefit Management: Misaligned Incentives and Rising Costs

Pharmacy benefit management (PBM) is increasingly becoming a central issue for employers struggling to control healthcare expenses. As prices of prescription drugs soar, businesses are finding themselves trapped in a system that appears to reward high costs rather than efficiency. This irony raises critical questions about how PBMs are structured and what reforms are necessary to align their incentives with those of employers and patients.

Recent figures show a staggering increase in overall prescription drug spending, with a 7.9% rise to $467 billion in just one year, according to the Centers for Medicare & Medicaid Services (CMS). This trend paints a troubling picture as employers grapple with rising healthcare costs despite rebate guarantees and contractual discounts. Even as efforts to enhance financial transparency are made, the underlying mechanisms driving costs remain unaddressed.

Paul Pruitt, Chief Growth Officer of SHARx, asserts that if the pharmacy benefits system were designed today, it would not operate on a model that allows higher drug prices to fuel PBM profits. In essence, when manufacturers and pharmacies profit from inflated prices, the system as a whole does not incentivize lower costs. Instead, the vendor benefits from a situation where costs for employers continue to rise.

The System's Flaws

The current PBM arrangement is multi-layered. Manufacturers compete for inclusion in formularies, PBMs negotiate rebates tied to those placements, and affiliated pharmacies generate revenue by dispensing medications. While employers seek to curb costs and ensure patient access to affordable healthcare, the dynamics favor vendors rather than consumers.

Pruitt encourages employers to treat pharmacy benefit procurement much like any other procurement decision. They need to comprehend what they are purchasing, how compensation flows among parties involved, and evaluate whether there are more cost-effective alternatives available.

This awareness is crucial since various financial incentives could lead vendors to prioritize profit over clients’ interests. Pruitt challenges employers to thoroughly investigate how a PBM operates: does it earn more when costs for patients increase or decrease?

Revenue Growth and Its Impact

The traditional model permits revenue generation via spread pricing, manufacturer payments, and dispensing practices. All of these routes can inflate gross prices, thereby contradicting employers' desires for reduced costs. The U.S. Federal Trade Commission revealed that pharmacies linked with the largest three PBMs earned incredibly high dispensing revenues—over $7.3 billion—on specialty drugs, further illustrating the system’s upside for vendors at the expense of consumers.

The economic metrics often presented to employers, like rebate figures and generic fill rates, may appear positive while obscuring the true, detrimental effect on patient access and affordability. For example, a high generic fill rate does not necessarily reflect a successful PBM performance if few specialty medications constitute the major part of expenditures. Additionally, anticipated savings may vanish if a more cost-effective sourcing avenue is available but neglected in favor of lucrative deals.

The U.S. Government Accountability Office noted a troubling trend: beneficiaries paid more than plan sponsors for 79 out of the top 100 Medicare Part D drugs because of the very rebates designed to alleviate costs. This cycle showcases how favorably presented metrics may serve one party without improving patient affordability.

The Need for a New Paradigm

Pruitt emphasizes that true success within pharmacy benefits should be evaluated based on patient outcomes and cost efficiency rather than merely activity measures. Transparency around cash flow and affiliations must be accompanied by a restructured incentive model that operates independently of drug costs.

A newly envisioned model would separate the compensation from medication costs while evaluating performance through tangible metrics, such as lower total spending, reliable access, adherence, predictable budgeting, and enhanced member experiences. In this framework, reducing a medication's cost would align with the vendor's success rather than hindering it.

Ultimately, the goal is not to dismantle the existing PBM infrastructure but to refocus it so that the financial successes of all parties involved coincide with lowering costs for employers and improving access for patients.

As Pruitt states, "If we were designing the pharmacy benefit system today, we would not build one where higher drug prices create more revenue for the PBM." The new scorecard should focus on delivering the right medications at optimal net costs and ensuring that every participant within the pharmacy ecosystem stands to benefit when patients receive the treatments they need affordably and reliably.