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How does PBM spread pricing work?

by Nathan Zachary

PBMs handle prescription drug benefits on behalf of health insurers, Medicare Part D prescription drug plans, significant employers, and other payers. By negotiating with drug manufacturers and pharmacies to reduce drug spending, PBMs have a significant behind-the-scenes effect on deciding total drug costs for insurers, controlling patients’ access to prescriptions, and dictating how much pharmacies compensated.

What impact does PBMs have on the cost of prescription drugs?

PBMs work in the center of the prescription drug distribution chain. As a result, they:

  • Create and manage lists, or formularies, of covered pharmaceuticals on behalf of health insurers, which determine which drugs patients use and out-of-pocket payments.
  • Utilizing their purchasing power to negotiate rebates and discounts with pharmaceutical manufacturers
  • contract directly with individual pharmacies to compensate beneficiaries for medications dispensed.

The federal Centers for Medicare and Medicaid Services discovered that the capacity of PBMs to negotiate more significant rebates from manufacturers had helped reduce prescription prices and slowed the growth of drug expenditures over the past three years. However, PBMs may also incentivize promoting expensive pharmaceuticals over more cost-effective ones. Because rebates are frequently determine as a percentage of the manufacturer’s list price, pharmacy benefit managers (PBMs) receive a more significant refund for expensive pharmaceuticals than those that may give more excellent value at a lower cost. Consequently, those with high-deductible plans or copayments based on a drug’s list price may experience higher out-of-pocket expenses.

The mere suggestion of pharmacy benefits might induce anxiety among companies. It is unclear why prescription costs are increasing so rapidly and whether Pharmacy Benefit Managers (PBMs) effectively manage those costs and deliver the value they should.

We aim to help business executives like you grasp the context and gain insight into what’s happening in the pharmaceutical benefit market behind the scenes. Ultimately, this knowledge can aid in maximizing the value of your pharmacy benefits plan for your firm and its employees.

Trends in prescription medications

Americans utilize pharmacy benefits more frequently than any other part of health care. According to recent research from Express Scripts, this is the case.

In 2019, approximately 19 prescriptions per person filled, and more than three-quarters of those prescriptions filled for individuals with chronic diseases.

We’re reaching a perfect storm of new expensive treatments, increased chronic disease rates, frequent prescription use, and quickly escalating brand-name drug prices. In 2018, Americans spent $335 billion on prescription medications; by 2025, that number is expected to reach $511.1 billion.

The news is awful for businesses. The rapidly growing financial risk associated with prescription medications is currently the top health care concern for self-funded employers. Imagine a self-insured employer with 1,000 employees; a few unanticipated pharmaceutical claims of $1 million may bankrupt them.

Specialty medications are a significant cost driver for prescription drugs.

Increasingly expensive brand-name and specialty medications are significant contributors to this rising cost. Specialty pharmaceuticals are the category of expensive medications for rare or persistent conditions. Typically of biological origin, they necessitate medical supervision, patient care, and professional drug handling and administration.

Few organizations have the resources or perseverance to build the professional market knowledge of an experienced PBM. However, it is helpful to recognize that there are alternatives to the standard PBM approach. Which can be opaque and filled with potentially skewed incentives.

Employers should be aware that they can exert considerable influence over their pharmacy benefit management — in the best-case scenario, by negotiating unfettered visibility to all manufacturer revenues and drug pricing based on actual costs plus a reasonable price for services.

What Does PBM Spread Pricing Entail?

In the spread pricing model. PBMs charge a payer more than the pharmacy reimbursed for a specific drug and keep the difference. It is unknown how much of this payment is allocated to pharmacies vs. PBM profits.

Spread pricing contrasts with the “pass-through model,” PBMs charge payers the exact amount they reimburse pharmacies plus a predetermined administrative fee. The federal government mandates that Medicaid fee-for-service providers utilize the pass-through model; however, this requirement does not apply to PBM contracts with Medicaid MCOs or the private sector.


Pharmacy benefit managers negotiate pricing for each prescription dispensed by a pharmacy. Based on these contractual prices, the PBM pays the pharmacy.

Marking up the spread is use when a pharmaceutical benefits manager (PBM) uses spread pricing to charge more than they pay the pharmacy, whether the practice is disclosed. They may employ this strategy when they know that the plan sponsor will do nothing.

This results in plan sponsor frequently paying expensive costs without their knowledge.


Transparency measures are gaining popularity in the healthcare industry to stimulate competition, reduce spending, and boost responsibility. The CAA has some standards designed to promote and support these efforts, such as the requirement that plans and issuers provide specific information regarding prescription drugs and another healthcare spending to the Departments.

This data submission must include information on the most frequently prescribed and most expensive medications. It also mandates the disclosure of information regarding prescription medicine rebates provided by drug makers to groups authorized to promote their products. For more information visit https://www.spectrumpsp.com/.

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