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.

Outlines

00:00

💊 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.

05:01

💼 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.

10:02

💰 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.

15:05

🤔 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.

Keywords

💡Prescriptions

Prescriptions are written orders from a licensed practitioner, such as a doctor, for a patient to receive a specific medication or treatment. In the context of the video, prescriptions account for about 20% of all healthcare spending, highlighting their significance in the healthcare industry and the economy.

💡Formulary

A formulary is a list of medications that an insurance plan agrees to cover. It is crucial for understanding what medications are included in a patient's insurance coverage. The script discusses how not all medications are covered, and the formulary dictates which ones are included, affecting patient and insurance costs.

💡OTC (Over-The-Counter)

OTC refers to medications that can be purchased without a prescription. The script mentions that insurance typically does not cover OTC medications like Tylenol, which means patients must pay out-of-pocket for these items.

💡Cosmetic Medications

Cosmetic medications are those intended to improve physical appearance, such as creams to reduce wrinkles. The video explains that insurance generally does not cover these medications because they are considered cosmetic rather than medically necessary.

💡Reproductive Medications

Reproductive medications are drugs used to address fertility issues or sexual dysfunction. The script notes that insurance coverage for these medications can vary by state, with some requiring coverage and others not, making them potentially non-formulary or uncovered.

💡Tiers

Tiers refer to the different levels within a formulary that categorize medications based on cost and type. The script explains that tiers determine copay amounts, with Tier 1 being generic medications with the lowest copay and higher tiers indicating more expensive or less preferred medications.

💡Co-pay

A co-pay is a fixed amount that a patient pays for a covered service, such as a prescription medication. The script discusses how co-pays vary depending on the tier of the medication and the type of insurance plan, affecting the out-of-pocket expenses for patients.

💡Specialty Pharmacy

Specialty pharmacy refers to a higher tier of medications that are typically very expensive and used to treat complex or chronic conditions. The video gives examples of such medications, like those for rheumatoid arthritis or hepatitis C, which can cost thousands of dollars per month.

💡Pharmacy Benefits Manager (PBM)

A PBM is a third-party administrator of prescription drug programs for health insurance plans. The script explains that PBMs negotiate prices with pharmaceutical companies, manage formularies, and play a central role in the distribution and cost of medications.

💡Rebate

In the context of PBMs, a rebate is a portion of the price of a medication that is returned to the PBM by the pharmaceutical company after the sale. The script describes how PBMs may keep a portion of the rebate and pass a smaller portion back to the employer, affecting the perceived cost of medications.

💡Spread Pricing

Spread pricing is a method by which PBMs profit from the difference between what they pay for a medication and what they are reimbursed by the insurance company. The script illustrates how this can lead to significant profits for PBMs, even when medications have a low actual cost.

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