Have you ever wondered why some things have different prices at different places – even though it’s the EXACT same product? Every day stuff – like a gallon of milk, or gas for your car, or maybe even your regular prescriptions? Why does it cost more at one place, but can be significantly cheaper across the street?
In the world of medicines and pharmaceuticals – those discrepancies are largely influenced by incentives – but these are not incentives to individuals – but rather incentives to the ones dispensing the drugs and are often based on who owns the pharmacy.
Let’s take a look.
Today – almost every dispensed medication comes under the watch of businesses known as Pharmacy Benefit Managers – or commonly referenced as PBMs. Dating back to the 1960s, PBMs were originally established to set reimbursement rates to pharmacists, process claims, and eventually pay pharmacies. Fast forward to 2025, PBMs are much more complex – and they are also for profit organizations (important point).
Ok – so why does that matter in the price differences for my prescriptions?
The simple answer is … it’s a function of making money – or profits (and greed).
Here’s how it goes. The PBM included as part of the group health plan. Their role is to:
- “Negotiate” rebates and discounts from the drug manufacturers on behalf of insurance companies.
(Important – it’s on behalf of the insurer … not the individual) - Create a list of “approved drugs”, which is otherwise known as a formulary.
Ok, this sounds good … creating consistency among prices that are charged. But again – this is for the benefit of the insurance companies. - Contract with pharmacies to participate in networks.
This provides consistency on reimbursements (or payments) to the pharmacist who dispenses the drugs and “helps” with the processing of claims. Again – this is for the benefit of the insurance company.
So what about these incentives? Where do they come into the puzzle?
- Along the way, PBMs (and their parent companies) realized that there are significant revenue opportunities in this supply chain, like managing the “spread” between the true cost of the drug and what is reimbursed to the pharmacist. For generic drugs, PBMs keep the difference between what they are reimbursed by health plans and insurers and what they actually pay the dispensing pharmacies.
- Drug manufacturers will often offer rebates, calculated as high as $334 billion in 2023. While PBMs pass along “most” of these rebates to the insurance carriers, it’s estimated they keep about 9-10% of those rebates. 10% of $334 billion is $3.34 billion. That’s revenue that goes to the PBM with the profits being passed along to their shareholders.
- And finally – PBMs are increasingly steering individuals to have their prescriptions filled at “affiliated pharmacies” which are often large chains that create additional sources of potential revenue and profits through buying power and other fundamental business processes.
And there you have it. Three types of incentives that influence the price of every day stuff. PBMs are well-intentioned in concept, but over time, their primary objectives have largely shifted from a focus on helping individuals – to a focus of driving revenue and growing profits for their shareholders.
For an employer who offers a group health plan this is one area where employers should evaluate options as part of their overall plan.
We can help you look at those options – with the objective being on what will be the best approach for your team – and for you.
Contact us today.
