There are three primary Pharmacy Benefit Manager (PBM) models today for the management of health plan pharmacy benefits. Those include: the “Traditional” non-transparent model, the “Transparent” model, and the Fiduciary model, which we first introduced into the market in 2007.
The Traditional Model
The traditional model charges no or a low administrative fee for their services and profits from any and all prescriptions filled through the pharmacy benefit. The four most common sources of PBM revenue in this model are: spread pricing (markups on) prescriptions filled by retail pharmacies, retention of drug manufacturer payments and incentives to promote high-cost medications, and dispensing revenues and profits from PBM-owned mail and specialty pharmacies. The primary drawbacks of this model are inherent conflicts of interest, not the least of which is the fact that the more the plan sponsor spends on drugs through their pharmacy benefit, the more the PBM makes. Put another way, if the PBM is expected to keep costs down, that would mean the PBM is expected to lower their revenues, since the lower the plan spend, the less the PBM makes. It is not surprising, therefore, that pharmacy benefit costs have steadily increased and taken over medical expenditures as the fastest-growing segment of total healthcare spend.
The Transparent Model
In the transparent model, the PBM may or may not charge an administrative fee for their services. Typically, the term “Transparent” only applies to the client’s visibility regarding the amount paid to the pharmacies and the amount charged to the client. This means that the PBM is not necessarily free of conflicts of interest and may profit from higher plan spend, a problematic misalignment of interest similar to the traditional model. For example, many “transparent” PBMs own and require their clients to utilize their mail order and specialty pharmacy, a conflicting profit center. Many “transparent” PBMs retain manufacturer revenue, which holds them accountable to manufacturers to maximize utilization of their high-cost drugs. In many cases, transparent PBMs have manipulated drug pricing in non-transparent ways to obscure the true cost of medications charged to their client.
The Fiduciary PBM Model
In the Fiduciary PBM model, the PBM must meet the ERISA definition of fiduciary, which at a high level translates into the following:
- No conflicts of interest of any kind
- Full transparency for all financial and utilization data
- Working solely in the plan and the plan enrollee’s best interests
This also means that the only source of revenue and profits for the PBM is from administrative fees. All but the Fiduciary model can hide revenues and profits in subsidiaries and companies under the same corporate umbrella. For example, a PBM can guarantee 100% of rebates received. Yet, they can have the original rebate amount sent to a subsidiary that keeps a share and then sends the remaining amount to the actual PBM. The PBM then sends the client 100% of what they received from their subsidiary.
In the Fiduciary PBM model, the sole focus is on the two most important expectations of PBMs, excellence in clinical care (not putting PBM profit centers over best practices) and lowest cost sourcing for needed medication therapies (which is often not through the PBM-owned pharmacies).
Fiduciary PBM is the only model that is fully aligned with plan sponsors’ own legal fiduciary responsibility to their plan and plan enrollees. In the face of emerging litigation through employer class action lawsuits against employers by their own employees for breach of fiduciary duty in management and oversight of the pharmacy benefit, fiduciary alignment has become even more important to plan sponsors – not just in the PBM relationship but in all relationships with any vendor that touches the health benefits.
More and more employers are asking their PBM and benefits advisors the right questions to uncover hidden conflicts of interest in their PBM relationship and are demanding cleaner, aligned options. Pharmacy benefits are the most utilized component of most health plans today, and changing PBMs is arguably one of the easiest components to change. Plans moving to the fiduciary model are seeing annual plan and member pharmacy costs drop by 30-50% or more without a change in benefit design or disruption to members…a win…win.
Renzo Luzzatti
Renzo Luzzatti is the President and CEO of US-Rx Care, where he pioneered the nation’s first fiduciary Pharmacy Benefit Manager to restore transparency, accountability, and client-first ethics to the PBM industry. With more than 30 years of leadership in pharmacy risk management and benefit optimization, he has guided employers, health plans, and policymakers toward sustainable models that deliver better outcomes at dramatically lower costs.
