Navigating PBMs: Ensuring Cost-Effective and Transparent Pharmacy Benefits for Self-Funded Employers

Pharmacy Benefit Managers (PBMs) play a pivotal role in the healthcare industry, especially for self-funded employers. PBMs are the intermediaries that administer prescription drug programs on behalf of self-funded employers, health plans, and other payers. Their role, while complex and often misunderstood, is crucial for controlling prescription costs and ensuring employees have access to medications. 

However, scrutiny is growing over PBMs’ business practices and the financial impact they have on drug pricing. Proposed regulations are emerging, and many are questioning whether PBMs should be held to the same fiduciary standards as plan sponsors. This blog will explore the role of PBMs, why self-funded employers rely on them, and the changing regulatory landscape. 

What Are Pharmacy Benefit Managers? 

PBMs act as an intermediary between health insurers, pharmacies, and drug manufacturers. Their primary function is to manage prescription drug benefits on behalf of health plans. This includes negotiating prices with drug manufacturers, setting up pharmacy networks, processing claims, and determining which medications are covered by health plans (a process known as formulary management). The reasoning behind using PBMs is that they can leverage their scale and expertise to reduce prescription drug costs, which are a significant and growing portion of healthcare spending. 

Why Do Self-Funded Employers Work with Pharmacy Benefit Managers? 

Controlling healthcare costs is crucial for self-funded employers. Unlike fully insured employers who pay fixed premiums, self-funded employers bear the financial risk for employees’ healthcare claims. This arrangement gives them more control over their benefit plan design. But it also exposes them to greater financial risk, especially when it comes to high-cost prescription drugs. 

PBMs offer several benefits to self-funded employers: 

1. Cost Control: By negotiating rebates and discounts, PBMs can help self-funded employers reduce their prescription drug spend. Without PBMs, employers would have little bargaining power with drug manufacturers and pharmacies.

2. Administrative Efficiency: PBMs handle the complex tasks of claims processing, drug utilization reviews, and regulatory compliance. These tasks are resource-intensive for employers to manage on their own.

3. Access to Networks: PBMs establish pharmacy networks that ensure employees can fill prescriptions conveniently and at competitive prices.

4. Formulary Management: PBMs help design formularies that balance providing access to necessary medications and controlling costs through the inclusion of generic alternatives or preferred brand-name drugs.

For self-funded employers working with benefit partners like The Alliance, which focuses on designing custom provider networks and value-based care initiatives, PBMs are essential in ensuring that the pharmacy component of their health benefit strategy aligns with their broader cost-containment goals.  

Should Pharmacy Benefit Managers Be Fiduciaries? 

One of the most contentious issues surrounding PBMs is whether they should be held to fiduciary standards. A fiduciary is legally required to act in the best interest of the parties they represent. Currently, PBMs do not have fiduciary obligations. This means they are not legally bound to prioritize the interests of employers and plan members over their own profitability. 

Some argue PBMs should meet the same fiduciary standards as plan sponsors due to their influence on drug prices. By doing so, PBMs would be required to act in the best interests of their clients. This could potentially reduce conflicts of interest and ensure greater transparency in pricing and rebate negotiations.

Supporters of PBM fiduciary status believe it would help address some of the criticisms of current PBM practices, such as: 

Rebate Retention: PBMs often negotiate rebates from drug manufacturers. However, they do not always pass the full value of those rebates to the employer or plan members. 

Spread Pricing: PBMs can engage in spread pricing, where they charge the plan sponsor more than they reimburse the pharmacy for the drug, keeping the difference as profit. 

Lack of Transparency: PBMs’ pricing structures and rebate arrangements make it difficult for employers to fully understand the true cost of their pharmacy benefits. 

The argument for fiduciary status is that it would encourage PBMs to operate more transparently, ensuring that cost savings are passed on to employers and their employees.  

Proposed Regulations and PBM Oversight 

As scrutiny of PBM practices increases, so have legislative efforts to regulate their operations. At both the state and federal levels, there are growing calls for more oversight of PBMs. Some of the proposed regulations include: 

1. Requiring PBMs to Disclose Rebates and Fees: This would mandate greater transparency in how PBMs negotiate and distribute rebates and fees.

2. Banning Spread Pricing: This would prohibit PBMs from engaging in spread pricing. It would also require them to pass on the full value of rebates to the plan sponsor.

3. Requiring Fiduciary Responsibility: This would hold PBMs to fiduciary standards, ensuring they act in the best interests of their clients.

For self-funded employers, these regulatory changes could bring more transparency and cost savings. However, there are complexities with considering PBMs as fiduciaries. Josh Bindl, CEO at National CooperativeRX, said, “Plan sponsors create plans that PBMs administer, but the way these plans are managed may not align with the best interests of individual participants, to the benefit of the overall plan. PBMs do not dictate plan design or control plan assets. A PBM as a fiduciary may be unwilling to take risks and administer certain programs and plan designs the plan sponsor desires.  

While I believe there is potential for establishing more fiduciary-like responsibilities for PBMs at the federal level, I feel the current state-level reform approach is not the best solution as it can result in participants in different states receiving unequal treatment. Additionally, if PBMs decide to exit certain markets due to regulatory pressures, it may reduce competition and lead to higher costs.” 

Benefit Partners Working Together 

The Alliance collaborates with trusted partners, including brokers, TPAs, and Pharmacy Benefit Managers to help employers provide better benefits at a lower cost. 

Our broker partners help employers select and negotiate with PBMs. They also provide guidance on plan design and monitor PBM performance to optimize value for employers. TPAs help self-funded employers administer their benefit plan, including their relationship with their PBM. Together, they form a powerful team—PBMs specialize in medications, and TPAs ensure seamless plan administration—delivering cost-effective, optimized prescription benefits for employees. 

Organizations like National CooperativeRx are already working toward policy reform by advocating for transparency and fair pricing. National CooperativeRx is a not-for-profit cooperative that negotiates pharmacy benefits on behalf of its members, including self-funded employers, TPAs, and other healthcare coalitions like The Alliance. To be fully transparent, The Alliance helped found what is now National Cooperative Rx and we consider them a sister organization. National CooperativeRx pools the purchasing power of its members to secure better contracts with PBMs. They advocate for transparency, which supports better decision-making and cost management aligned incentives. This organization is a key partner for employers looking to optimize their pharmacy benefit strategies. 

Pharmacy Benefit Managers are critical players in the healthcare ecosystem, especially for self-funded employers seeking to control prescription drug costs. While PBMs provide valuable services, concerns about their practices and potential conflicts of interest have spurred calls for increased regulation and oversight, including the possibility of fiduciary responsibility.  

Navigating this complex landscape is essential for self-funded employers to achieve cost-effective, transparent pharmacy benefits that align with their broader health benefit goals. 

Reach out to your Account Executive if you need assistance selecting a PBM or want to learn more about our trusted benefit partners.