How Prescription Drug Coverage Works: Formulary Tiers, PBM, Rebates, Spread-Pricing Explained
Summary
TLDRThis video script delves into the complexities of prescription drug costs within healthcare spending, highlighting the role of formularies and the tiers that determine copays. It explains non-formulary medications, such as OTC and cosmetic drugs, which insurance typically doesn't cover. The script also explores Pharmacy Benefits Managers (PBMs), their influence on drug pricing through rebates and spread pricing, and the major PBM players in the U.S. healthcare system. The aim is to clarify how PBMs can impact both the cost of medications and the overall healthcare expenses.
Takeaways
- 💊 Prescriptions account for about 20% of all healthcare spending, emphasizing their importance in the healthcare system.
- 📋 A formulary is a list of medications covered by insurance, with some medications like over-the-counter (OTC) and cosmetic drugs typically not covered.
- 🚫 Non-formulary medications include OTC drugs, cosmetic medications, and certain reproductive medications, which are often not covered by insurance.
- 💸 Formularies are divided into tiers that determine copay amounts, affecting PPO, HMO, and POS plans, but not CDHP plans which do not have co-pays.
- 💹 Tier one medications are generic and have the lowest copay, while tier four includes specialty pharmacy medications that are very expensive and may require coinsurance.
- 💉 Specialty medications, such as those for rheumatoid arthritis or Crohn's disease, can cost thousands of dollars per month and often require self-administration.
- 🤝 Pharmacy Benefit Managers (PBMs) negotiate with pharmaceutical companies on behalf of insurance companies to determine formulary inclusion and pricing tiers.
- 🏢 Major PBMs in the U.S. include Express Scripts (now Evernorth), CVS Caremark, OptumRx, and Prime Therapeutics, which are often subsidiaries of larger health insurance companies.
- 💼 PBMs make money through rebates on brand-name medications and spread pricing on generics, where they negotiate discounts and keep the difference.
- 📈 The incentive structure for PBMs encourages higher drug costs and more prescriptions, as their revenue is tied to the volume and price of medications sold.
- 💵 The actual cost of some generic medications may be much lower than what is paid by insurance, with PBMs and pharmacies keeping the difference between the negotiated price and the true cost.
Q & A
What is the significance of the formulary in healthcare spending?
-The formulary is a list of covered medications and it plays a significant role in healthcare spending as it determines which medications are covered by insurance, thus affecting about 20% of all healthcare costs.
Why might insurance not cover certain medications?
-Insurance may not cover over-the-counter (OTC) medications, cosmetic medications, and reproductive medications like those for erectile dysfunction or infertility treatment, as these are often considered non-formulary medications.
How does the tier system in a formulary affect the cost of medications?
-The tier system categorizes medications into different levels, each with a specific copay amount. Tier one has the lowest copay for generic medications, while higher tiers have higher copays for preferred and non-preferred brand name medications, and the highest for specialty pharmacy medications.
What is the role of Pharmacy Benefit Managers (PBMs) in the healthcare system?
-PBMs act as intermediaries between insurance companies, pharmaceutical manufacturers, and pharmacies. They negotiate prices with pharmaceutical companies and set up the formulary and medication tiers, affecting the cost of medications for consumers.
Which types of health plans are not affected by the tier system for co-pays?
-Consumer-Driven Health Plans (CDHPs) are not affected by the tier system for co-pays because they are not allowed to have co-pays for office visits or prescriptions.
How do PBMs make money through rebates?
-PBMs make money through rebates by negotiating a discount with pharmaceutical companies on brand name medications. They keep a portion of the rebate for themselves and pass a smaller portion back to the employer.
What is spread pricing and how does it benefit PBMs?
-Spread pricing is a method where PBMs negotiate a discount off the Average Wholesale Price (AWP) of a medication and pay the pharmacy a Maximum Allowable Cost (MAC) that is lower than the negotiated price. The difference between the two is the spread, which is the PBM's profit.
Why might the actual cost of a generic medication be much lower than the price negotiated by PBMs?
-The actual cost of a generic medication might be lower because the National Average Drug Acquisition Cost (NADAC), which is what pharmacies pay to acquire the medication, is often significantly less than the AWP or the MAC set by PBMs.
How does the incentive structure for PBMs affect the cost of medications?
-The incentive structure encourages PBMs to negotiate higher prices and more prescriptions because their revenue is tied to the cost of medications and the volume of prescriptions filled, which can lead to higher healthcare costs.
What are some examples of the major PBMs in the United States?
-Some major PBMs in the United States include Express Scripts (now Evernorth), CVS Caremark, OptumRx, and Prime Therapeutics.
How can self-funded employers choose their PBM?
-Self-funded employers can choose their PBM independently of their insurance provider. They can opt for a PBM associated with their insurance or choose a competing PBM that best fits their needs.
Outlines
💊 Understanding Prescriptions and Formularies
The video script discusses the significance of prescriptions in healthcare spending, constituting about 20% of the total expenses. It introduces the concept of a formulary, which is a list of medications covered by insurance. The script clarifies that not all medications are covered, such as over-the-counter (OTC) drugs and cosmetic medications, which are typically not reimbursed by insurance companies. It also touches on reproductive medications, like those for erectile dysfunction or infertility treatments, which may not be covered depending on state regulations. The formulary is divided into tiers that affect the copay amounts for medications at the pharmacy. The script explains that these tiers apply to PPO, HMO, and POS plans but not to Consumer-Driven Health Plans (CDHPs), which do not have co-pays. Tier 1 medications are generic with the lowest copay, while Tier 2 includes preferred brand-name medications with higher co-pays. Tier 3 consists of non-preferred brands with even higher co-pays, and Tier 4 covers specialty pharmacy medications, which are very expensive and usually have a coinsurance rate rather than a flat copay.
💼 Pharmacy Benefit Managers (PBMs) and Their Role
This section delves into the role of Pharmacy Benefit Managers (PBMs), explaining that they act as intermediaries between health insurance companies, employers, and pharmacies. PBMs are responsible for setting up contracts with pharmaceutical companies to determine the prices at which medications are covered by insurance plans. The script outlines the four major PBMs in the U.S., which are owned by health insurance companies and include Express Scripts (now part of Cigna and renamed Evernorth), Caremark (owned by CVS and now part of CVS Health), OptumRx (a subsidiary of UnitedHealth Group), and Prime Therapeutics (independent with major investors being Blue Cross plans). The video also discusses how PBMs can be 'carved out' for self-funded health plans, allowing them to choose different PBMs than those tied to their insurance provider.
💰 How PBMs Generate Revenue Through Rebates and Spread Pricing
The script explains the complex revenue models of PBMs, focusing on two primary methods: rebates and spread pricing. For brand-name medications, PBMs negotiate rebates with pharmaceutical companies, keeping a portion of the rebate as revenue while passing a portion back to the employer. This creates an incentive for PBMs to favor higher-cost medications, as their revenue is tied to the cost of the drugs. Spread pricing is applied to generic medications, where PBMs negotiate a discount off the Average Wholesale Price (AWP) and pay the pharmacy a Maximum Allowable Cost (MAC). The difference between what the PBM receives from the insurance company and what they pay to the pharmacy is kept as profit. The script points out that the AWP may not reflect the actual cost of the medication, as it is often set by companies that may not base it on actual transactions, leading to potential discrepancies between the perceived value of the medication and its true cost.
🤔 The Financial Incentives and Implications for PBMs
The final paragraph examines the financial incentives of PBMs, which are structured in a way that benefits from higher drug costs and increased prescription volume. The higher the cost of medications, the larger the rebates PBMs can negotiate, and the more revenue they generate. This system potentially drives up drug prices rather than reducing them. The script also highlights the issue with spread pricing for generics, where the actual cost of the medication (NADAC) can be significantly lower than the price negotiated by PBMs (AWP). This can lead to significant profits for both PBMs and pharmacies while employers and insurance companies may believe they are receiving substantial discounts, unaware of the actual, much lower cost of the medications.
Mindmap
Keywords
💡Prescriptions
💡Formulary
💡OTC (Over-The-Counter)
💡Cosmetic Medications
💡Reproductive Medications
💡Tiers
💡Co-pay
💡Specialty Pharmacy
💡Pharmacy Benefits Manager (PBM)
💡Rebate
💡Spread Pricing
Highlights
Prescription medications account for approximately 20% of all healthcare spending.
A formulary is a list of covered medications by insurance, with not all medications being covered.
Over-the-counter (OTC) medications are typically not covered by insurance.
Cosmetic medications are often not covered by insurance, even if prescribed.
Reproductive medications, such as those for erectile dysfunction or infertility, are frequently non-formulary.
Formularies are divided into tiers that determine copay amounts at the pharmacy.
Tier one of a formulary includes generic medications with the lowest copays.
Tier two consists of preferred brand medications with higher copays than generics.
Tier three includes non-preferred brand medications with higher copays due to less favorable insurance negotiations.
Tier four involves specialty pharmacy medications, which are very expensive and typically have a coinsurance model.
Pharmacy Benefit Managers (PBMs) negotiate prices with pharmaceutical companies on behalf of insurance companies.
PBMs are owned by health insurance companies and play a crucial role in the healthcare system.
The four major PBMs in America are Express Scripts, Caremark, OptumRx, and Prime Therapeutics.
PBMs make money through rebates and spread pricing, with complex incentives that may not always align with reducing drug costs.
Rebates are negotiated for brand name medications, with a portion kept by PBMs and a portion passed to employers.
Spread pricing involves PBMs negotiating discounts off of a potentially fictitious average wholesale price (AWP).
The actual cost of generic medications can be much lower than what is paid by insurance through PBMs.
PBMs' revenue is tied to the volume and cost of prescriptions, which may incentivize higher drug prices.
Transcripts
hello and welcome back today we're going
to be discussing in this session all
things prescriptions as i mentioned in a
previous video prescriptions end up
being about
20
of all healthcare spending so we have to
understand prescriptions now
one of the most important things is the
formulator so what's a formulary so it's
a list of covered medications so believe
it or not not all medications are
covered right so we're going to go
through that we're going to go through
the non-formulary medications that
insurance will not cover at all so what
are those
otc over-the-counter medications right
you go into the pharmacy you're like
tylenol okay you got to pay cash for
tylenol and you're like but i want my
insurance to pay for my tylenol your
insurance is not going to pay for your
timeline because it's over the counter
as is true for most other
over-the-counter medications two for
cosmetic medications now this time
oftentimes they are prescriptions and
this happens a lot in with
dermatologists where some of their
prescription creams might be for like
helping with like reducing wrinkles okay
well your insurance is not going to pay
for
creams to reduce your wrinkles because
it's cosmetic next up
reproductive medications so that might
be related to you know what it was
sometimes referred to as lifestyle
medications like viagra for erectile
dysfunction but also there's uh there's
pill medications that are used for uh
infertility treatment as well now it
varies by states some states require uh
fertility treatment to be covered other
states don't have requirements for them
so just know that in many cases
fertility related medications are also
uncovered non-formulary okay now the
formulary is broken up into tears as
well and those tiers determine what
copay the person pays at the pharmacy
when they get the medication now
this applies to ppo plans html plans and
pos plans this by definition does not
apply to consumer driven health plans or
cdhp plans because cdhps are not allowed
to have co-pays for office visits like
we talked about but cdhps also could not
have co-pays for prescriptions as well
so these tiers only apply to the ppo
html and positions which of course are
the majority of health plans in america
okay so tier one they're your generic
medications they have the lowest copay
typically it's around five or ten
dollars
now
that is for
particularly a 30-day supply if it is a
chronic medication or a lot of times
like for an antibiotic they only write
you for like a five-day prescription or
maybe a seven-day prescription well they
don't charge you for a quarter of a
copay because it's a quarter of the
month though you still have to pay the
entire copay for a script even if it's
for less than a month's supply of
medications okay next tier two
is preferred brands these are brand name
medications so you know an example here
might be
like simvastatin is the generic form of
the cholesterol medication zokor so
zokor so maybe the sympathetic is the
generic that you pick 10 bucks for but
if you wanted the zokor that might be a
preferred brand and you have to pay 30
for a one month supply now
preferred means it is preferred to the
insurance company in the pbm and we're
going to talk about pharmacy benefits
managers in the next video but basically
the the pbm within the insurance company
goes out and negotiates the actual
prices with the pharmaceutical company
with pfizer and mark and um
astrazeneca etc so a preferred brand is
just a brand name medication that the
insurance pbm has been able to negotiate
a better deal on with the pbm with the
pharmaceutical company so they offer it
a lower copay which then brings into
tier three which is non-preferred brand
so again these are brand name
medications in this case it might be
like crest store for high cholesterol
and so the pbm might have gotten a good
good deal on the zocor but they were not
able to negotiate a very good price on
the crest store and so like well we
don't want our patients and our members
taken as much crystal because we didn't
get as good of a deal on it so they give
it a higher copay of sixty dollars
instead of the thirty dollars now
tier four is specialty pharmacy now
especially pharmacy is special one
because it tends to be very expensive so
this is not like so typically these
branding medications might be two three
maybe even four hundred dollars a month
generics
the actual cost of the medication
shoot in some situations the generic
actually costs less than the copay so it
actually helps to look
uh and see you know you could you know
go to the website you can use like
goodrx or whatever and just see what the
cash price is i remember we got a
prescription diaper rash cream for one
of my kids their baby and it was a
dollar and eighty cents instead of the
ten dollar copay so actually not using
the insurance and just paying the cash
price was actually cheaper than the
co-pay okay but in the case of the
specialty pharmacy super expensive these
medications are thousands of dollars a
month now they're typically for things
like injections so self-administered
injections not into your bloodstream but
just an injection under the skin and
sort of the prototypical example that is
humira which is the highest grossing
medication in the world and in america
and it's used to treat rheumatoid
arthritis and crohn's disease and people
give themselves a shot every two weeks
and that costs like two thousand dollars
a month okay likewise uh doesn't have to
be an injection it could be a pill so
some hiv pill medications are also like
thousands of dollars a month likewise
you act they're actually starting to
come out with some chemotherapies that
are actually pill chemotherapies that
again are thousand dollars a month
there's even a treatment for hepatitis c
that it cures hepatitis c
but it it you take it
for a month but literally a one month
supply of that hepatitis c medication is
40 thousand dollars i mean just one pill
is over a thousand bucks one pill costs
more than a laptop computer so you're
not gonna pay a sixty dollar copay for
that so typically this the benefits are
set up such that you have twenty percent
coinsurance for specialty pharmacy tier
four and so if you're paying to if the
medication costs two thousand dollars a
month that means that your call
insurance is four hundred dollars a
month times total money you're paying
four thousand eight hundred dollars a
year for your specialty pharmacy so
these medications can be very expensive
now to the extent that you can treat
your condition with a brand or a generic
instead of a specialty pharmacy it's
going to save the patient a ton of money
out of pocket and it's going to save the
plan money as well and i'll even give
you one example of that so first line
therapy for rheumatoid arthritis is
actually a medication called
methotrexate
that is generic it's been around for
decades and the american college of
rheumatology actually recommends that
people try megaphotrexate first before
trying humira for their rheumatoid
arthritis so you can actually treat
rheumatoid arthritis with a 10 copay as
opposed to paying 400
a month
eight well i won't get into it but a lot
of
people are put on humira right away
without ever being tried on methotrexate
first so the point is is that there are
these tiers within the formulary they
have different amounts of co-pays and um
that's it for our first session on
prescriptions we'll be moving on to pbms
next
okay welcome back now we are going to
discuss pharmacy
benefits
managers or pbms for short now i've got
to take you back to that drawing of that
quadrilateral from the very beginning
where we have the four
actors within the healthcare system
right you've got the employer the
employee the provider in this case the
pharmacies we're talking about
prescriptions and the insurance company
so the employer is providing insurance
coverage to the employees the employees
are going to the pharmacy and getting
their medications maybe they got to pay
a co-pay there okay the employer is
paying premium to the health insurance
company for the coverage and then the
insurance company is then paying the
pharmacy is reimbursing the pharmacy for
medication now it's not literally the
insurance company that does that it's
actually a division within the insurance
company called the pbm so all the pbms
in america are actually owned by the
health insurance companies and so what
the pbo does is it goes out and
it actually
sets up the contract with the
pharmaceutical company for how much they
pay them so when i said the insurance
company pays the pharmacy they pay the
pharmacy some but what they're really
doing is they're paying the
pharmaceutical manufacturer the money
that they got from the employer from the
premiums and again overall healthcare
costs 20 prescriptions so 20 of that
premium that's going to the insurance
company is making its way over here to
the pharmaceutical manufacturer so it's
the pbm that sets up what's formulary
and what's not formulated and it's the
pbm that sets up what tiers the
different medications are and then this
is the pharmaceutical manufacturer you
see a little factory here you see little
pills coming out of the assembly line
and then the pharmaceutical manufacturer
is getting the uh making the pills that
go over to the pharmacy now there's even
a pharmacy distributor in the middle
here so there's mckesson and amerisource
virgin and cardinal that actually are
the wholesale distributors we're not
going to get into that but just know
that the pills eventually make their way
to the pharmacy okay now there are four
major
pbns in america that make up like over
90 of the pbm so really and of these
four the express scripts carry mark um
and optima rx are by far the biggest
three now let's go through now so
express scripts based in st louis um
used to be its own company sometimes it
was referred to just as esi for short
and it was actually bought by cigna so
now it's a part of cigna like i said
pbm's are all part of entrance company
now and cygnet has even renamed it
evernorth so a lot of people still call
it express scripts or esi because it's
been around for so long but officially
cigna changed the name to evernote so
you might hear that next up we've got
caremark so caremark is a pbm that was
bought by cbs about 20 years ago excuse
me about 15 years ago it's about the
year 2005
and because obviously cvs that brand of
uh pharmacies but then they bought the
pbm and believe it or not and that's
what was called cvs caremark for a while
and believe it or not the majority of
cvs's revenue actually comes from the
camera pbm it does not come from selling
band-aids and for actually dispensing
prescriptions in their stores it's
actually the pbm that makes more money
than any other part of their business
and then cvs went out and they actually
bought an insurance company they bought
aetna and so now the combination of cbs
plus carry mark plus now they're trying
to rebrand it cvs health but obviously a
lot of people still refer to the
insurance company as aetna and a lot of
people even still refer to the pbn as
caremark now the third biggest one used
to be called catamaran but there's a
division it's actually half of all of
the united health group is called optum
the united health group has two parts
it's got optimum and it's got united
health care the insurance company and so
optum went out they bought catamaran
so again optum was part of the united
health group and then
united health group said okay well so
united health groups here optim is a
subsidiary of united health group and
then optum rx the pbm is a subsidiary of
outcomes so it's like a subsidiary of
subsidiary so optima rx is the third
largest pbm in america now the fourth
largest is prime therapeutics now prime
is independent it's but
it has major investors uh slash owners
of multiple blue cross plans
so like blue cross blue shield of texas
in illinois which is hcsc blue cross
nebraska several other blue cross plans
are actually part owners of prime
therapeutics so a lot of blue cross
plains actually use prime therapeutics
as their pbm likewise
if you've got united healthcare it's
likely you have
optima rx likewise if you've got uh
aetna you've got cbs care mark and
likewise if you got cigna you likely
have express scripts now interestingly
anthem used to have did used to use
express scripts but then when their
competitors signaled about them they're
like we need to have our own pdf so now
anthem has created their own ppm and
then the final piece because it's super
confusing but the final piece i'll say
is is that
if you are self-funded then your pbm is
like tied to your insurance if you're
fully insured
it's tied together right so if you've
got uhcs your insurance you've got
optimal rx is your pbm you have no
choice however if you're self-funded you
can actually carve out your pbm
and there's a few other small pbms that
you can use or you can actually use a
competing health insurance pbm if you
want to so for example there's a lot of
pb there's a lot of companies that use
unitedhealthcare as their insurance but
they use
cvs caremark or express scripts as their
pbm so just know that you can do that so
i wanted to go through what a pbm is how
it works and who the major players are
thank you for watching
hello and welcome back now we're going
to talk about how pbms pharmacy benefits
managers make money now this is super
complicated so bear with me so there's
two main ways that they do this first is
through rebates second is through spread
pricing now the rebate methodology is
used for brand name medications where
let's say a pharmaceutical company
wants to sell a brand name medication
to
a pbm for 400 for a one month supply of
medication and the pbm says okay
but we're going to negotiate a 100
rebate
where we're going to take 100 of those
400
and we're going to keep 75 of it
ourselves and then we're going to pass
along 25 of the hundred dollars to the
employer
so if the firm's if the pbm was going to
keep the full hundred dollars it's not
rebate at all this is a commission right
if you go to a car dealership and the
car salesman sells you a car for 400 and
then the car salesman gets paid a
hundred dollars well that's just a
commission for selling you the car for
400
so the pbm doesn't want to call it a
commission because they want to sound
like they're negotiating a good deal for
the employer who's ultimately paying for
this so instead the ppm says okay
we've been able employer we've been able
to negotiate a 25
rebate for every 400 dollars you spent
on that medication the employer's like
oh that's great but the pbm never tells
them that the full rebate was actually a
hundred dollars and that they're keeping
75 out of 100 now i'm just making up
numbers here but it's the general
principle that applies okay
next up
no
before i move on so what does this do in
terms of the incentive for the pbm so
the pdm goes the employer is like we're
going to help lower your drug costs by
um
by negotiating uh lower amounts okay
however this incentive structure which
is essentially a commission means that
the higher the drug cost is and the more
prescriptions that are written the more
money the pbm makes so the pbm actually
wants more prescriptions of higher cost
medications and they want the cost of
medications to go up because the higher
the medication is the more of a rebate
they can negotiate and the more they can
keep next up so they want to more rebate
dollars and that ends up increasing the
pbm revenue so pbms are actually
incentivized to have more prescriptions
and more expensive prescriptions okay
next up is spread pricing now this
applies to generic medications and
actually the revenue from spread pricing
for pbm is just as much if not even more
than the revenue from rivets and in
sprint pricing for generic medications
let's say a generic medication has
an initial average wholesale price or
awp and let's say for this particular
generic medication that that awp is
thirty dollars a month so then the pbm
says okay and that's what the
pharmaceutical company wants to uh
sell the medication to the pbm form pbs
says okay well we're going to negotiate
an 80
discount off of that 30
so that the plan is only gonna pay six
dollars a month that sounds like a
wonderful deal only six dollars a month
now
remember the pbm is just facilitating
the transaction that money eventually
has to make it to the pharmacy because
that's actually where the person picked
the medication up from so the amount of
money that the pbm pays the pharmacy is
referred to as the maximum allowable
cost or the mac
now
the maximum reliable cost that the pbm
pays to the pharmacy is two dollars a
month for that particular vacation so in
this case the pbm is keeping four
dollars the difference between the six
dollars and the two dollars so you're
like okay well the pharmacy is getting
raw and raw into the deal here but then
the pharmacy in turn has to buy the
medication from the
uh the prescription distributor and the
pharmaceutical company and so
that cost that the pharmacy has to pay
to actually buy the medication is called
the nadec the national average drug
acquisition cost and the nadaq might
only be
30 cents a month so we think we're
getting a great deal on that six dollars
a month generally you're like oh that
generic is so affordable when in fact
the actual cost of the generic
medication is 30 cents a month that's
right many generic medications are a
penny a pill and some are even less than
a penny a pill so in fact the pharmacy
is keeping the difference between the
two dollars a month that it's getting
from the pdm plus the
minus the 30 cents that they're paying
out to the farms the pharmaceutical
manufacturer so the pharmacy is keeping
a dollar seventy so all the while the
employer thinks that they're getting a
great deal paying six dollars a month
when ultimately the actual cost is 30
cents and the reason they think they're
getting this great deal is because of
this average wholesale price or awp
and where does awp come from
well there's two very sort of quiet
companies
that arguably just make this number up
so sort of a uh an inside joke in the
pbm world is awp stand for it stands for
ain't what's paid so arguably the pbms
are negotiating a discount off of a
fictitious price to begin with so that's
the basics of how pbms make money thank
you for watching
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