A Closer Look at PBM Spread Pricing

Brandon Newman

Spread pricing by pharmacy benefit managers (PBMs) is often portrayed in a negative light due to its perceived impact on drug costs and pharmacy reimbursements. However, it’s essential to explore the nuances of this practice to understand its full scope and potential benefits. While the criticism of spread pricing is valid in certain contexts, there’s another side to this coin that deserves attention. It is critical to dive into the complexities of spread pricing in order to find a balanced perspective on its role in the pharmaceutical industry.

Understanding the dynamics of spread pricing is crucial in comprehending its effects on various stakeholders in the healthcare sector. By examining both the possible benefits and the criticisms, one can gain a more holistic view of this practice. This exploration is particularly timely given the ongoing legislative changes and the evolving landscape of pharmacy benefits management. Ultimately, a nuanced understanding of spread pricing is key to fostering informed discussions and making sound policy decisions in healthcare.

A brief overview

Spread pricing is a practice where PBMs charge payers, such as a health plan, a higher price for medications than what they pay to pharmacies, keeping the difference or "spread" as profit. This model is prevalent in the pharma industry and plays a significant role in how drug costs are managed and reimbursed. While it's a standard business practice, it's essential to understand its implications in the context of healthcare.

The concept of spread pricing has drawn criticism, primarily due to concerns about increasing drug costs and decreasing pharmacy reimbursements. Critics argue that spread pricing contributes to soaring pharmacy benefits budgets while leaving pharmacy providers reimbursed at rates that are often unsustainable. This dichotomy raises questions about the fairness and transparency of the practice.

Unseen benefits for self-insured companies

Despite the criticisms, spread-based pricing can offer benefits, particularly to self-insured companies and health plans. In this model, PBMs are incentivized to manage plan costs aggressively, as their income is tied to the spread they generate. This risk-based approach can lead to more effective cost management and potential savings for self-insured entities, which can lead to financial benefits for multiple parties throughout the system.

The "at risk" model inherent in spread pricing incentivizes PBMs to manage and reduce costs actively. This dynamic can be beneficial for self-insured companies, as PBMs are financially motivated to seek cost-effective solutions. However, the effectiveness of this model hinges on the PBM's ability to balance cost management with the needs of patients and providers. Striking this balance is crucial to the success of the model as a whole.

A comparative analysis of spread pricing vs. pass-through pricing

Spread pricing is often contrasted with pass-through pricing, where PBMs charge a set fee and pass the actual drug costs to payers without markup. This model is touted for its transparency but doesn't put PBMs "at risk" for managing costs. In contrast, spread pricing can potentially lead to more aggressive cost management.

Research indicates that, on average, PBMs using spread-based pricing achieve lower net costs compared to those following a pass-through model. However, this is not a one-size-fits-all scenario; the effectiveness varies based on how transparent and accountable the PBMs are in their operations. Each situation must be evaluated on its own merits.

The importance of transparency in PBM practices

Transparency in PBM operations is crucial for ensuring fair and effective drug cost management. When PBMs are open about their pricing models and operations, it fosters trust and allows for better oversight. Transparency is particularly critical in spread pricing, where the potential for undisclosed profits can raise concerns.

The relationship between transparency and cost management is significant, and when done effectively, transparent PBMs can reduce pharmacy benefit costs. They provide clarity on their operations, enabling better decision-making and potentially leading to more sustainable healthcare costs.

Understanding the pending changes to the legislative landscape

There's growing legislative interest in regulating PBMs and spread pricing practices. This reflects broader concerns about drug costs and the transparency of healthcare pricing. Understanding these pending changes is essential for all stakeholders in the healthcare sector.

The potential impacts of legislative changes on the industry are multifaceted. On one hand, increased regulation could lead to more transparency and potentially lower drug costs. On the other hand, it could also impact the business models of PBMs and how they manage costs. The balance between regulation and market dynamics is key.

The future of pharmacy benefits management

Looking ahead, several trends are shaping the future of pharmacy benefits management. They include a focus on real-time data optimization, drug cost transparency, and the growth of biosimilars. These trends reflect a broader shift toward more informed and cost-effective healthcare, and they could play a major role in how the entire system is structured moving forward.

They also align with the overarching goal of achieving the lowest net cost in healthcare. By embracing collaboration, transparency, and data-driven approaches, the pharmacy benefits management sector can navigate the complexities of healthcare costs and contribute to more sustainable and equitable outcomes. It is important to be vigilant regarding upcoming legislation because it could have an impact on how drugs are priced and distributed throughout the healthcare system as a whole.

A balance of perspectives

The discourse around spread pricing and its role in pharmacy benefits management requires a balanced perspective. It's not a black-and-white issue but rather a complex interplay of business models, cost management strategies, and healthcare outcomes. Acknowledging both the potential benefits and the pitfalls of spread pricing is essential in forming a comprehensive understanding. This type of approach can pave the way for more informed decisions and policies in the healthcare sector.

While spread pricing by PBMs has faced criticism, it's important to consider the potential advantages it offers under certain circumstances, especially when transparency and accountability are prioritized. As the landscape of pharmacy benefits management continues to evolve with legislative changes and emerging trends, stakeholders must remain adaptable and proactive. By fostering a culture of transparency and focusing on effective cost management, the goal of sustainable healthcare and lower net costs becomes more attainable. Ultimately, the future of pharmacy benefits management hinges on the industry's ability to balance economic incentives with the needs of patients and healthcare providers.

About the Author

Brandon Newman is the CEO and founder of Xevant.