How Prescription Drug Coverage Works: Formulary Tiers, PBM, Rebates, Spread-Pricing Explained

Summary

This 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.