Pharmacy benefit companies, also known as PBMs, administer the prescription drug benefits for a wide range of health plan sponsors, including employers, labor unions, health insurers, state governments, and of course the federal government. What all of these health plan sponsors have in common is that they are the final authority for all aspects of their drug benefits.
How does the employer-PBM relationship function? A common misconception about this relationship centers around decision making. To be clear, PBMs are the recommender, and the employer is the decider.
As they do with any other health plan sponsor, pharmacy benefit companies make pharmacy benefit recommendations based on the client’s initial Request for Proposal and before signing a contract, the employer decides whether to accept those recommendations or to make changes and customize their benefits. In describing this PBM-employer relationship, three words come to mind: choice, flexibility, and final say.
The PBM-employer relationship is characterized by choice, flexibility, and final say.
The first choice an employer gets to make is the most basic: whether to hire a pharmacy benefit company in the first place. No employer is required to work with a pharmacy benefit company – they could choose to design and administer their drug benefits on their own. And any health plan sponsor can choose to drop their pharmacy benefit company. In fact, this year Blue Shield of California chose to restructure the management of their pharmacy benefit offerings. And nearly all employers – big and small – choose to hire a PBM. A recent survey of employers shows that satisfaction with their current pharmacy benefit company and the perceived value of the services they provide are high.
When it comes to the design of those benefits, there are many choices that employers make. One of the choices made by employers that is most visible and impactful to the employees and their families is prescription drug formulary design. Only 72 percent of employers surveyed by Pharmaceutical Strategies Group (PSG), an industry research firm, reported using their pharmacy benefit company’s recommended basic formulary (including the recommended drug exclusions) – and that number drops to 45 percent for health insurance company respondents. And 19 percent of large employers chose to customize their formulary. Pharmacy benefit companies do not force a single benefit design onto employers. Rather, they present a set of choices, from which employers decide what works best for their budget and their employees.
The pharmacy benefit company market also offers employers flexibility to find a company and a model that works for them. There are 73 full-service pharmacy benefit companies in the market in 2023, up from 66 in 2019. These companies differentiate themselves through different services, contract terms, and product offerings.
Pharmacy benefit companies make recommendations, while employers make decisions.
Employers can tailor their PBM’s contracts and benefit designs to meet their unique needs. For example, 73 percent of large employers chose a 100% rebate pass-through contract in 2022; however, 53 percent of small employers made the same choice. Employers – large and small – value the flexibility and choice to contract with their PBM in the way that works best for them, and it’s evident by the numbers that a one size/type-fits-all does not fit here.
And in offering flexibility and choice, pharmacy benefit companies know that the employers have the final say in every contract and every benefit design. In another PSG survey, when asked which core PBM services they were satisfied with, the second highest satisfaction rating was for “manages to contractual language” (after “meets financial guarantees”). Just 5 percent of respondents were dissatisfied with their PBM’s ability to manage to contractual language. The employer decides their contract, the pharmacy benefit companies administer the benefits to meet that contractual language.
Pharmacy benefit companies make recommendations, while employers make decisions. When it comes to their PBM contracts and pharmacy benefits, employers make the final decisions.
