I’m Still Confused by PBMs But Trying to Fix That

Last week was the first week in a long time that I haven’t had a Tuesday blog post. Sometimes life happens, and that’s ok. My interest and passion for fixing healthcare continues unabated.

Every time I try to remember the important details about pharmacy benefit managers (PBMs) since writing about them a couple months ago, I have to go back to that post and re-read it. This is annoying to me, and it’s a hint that I haven’t grasped them well enough yet. So this post is me trying to process PBMs more thoroughly.

I haven’t yet talked to anyone who works at a PBM (working on that–let me know if any of you readers have any contacts at one!), but pending that additional information, here is what I understand based on all my research.

But first, a meta thought.

Maybe you haven’t noticed in my writings, but I try to describe the problem needing a solution before I discuss that solution. When a solution is presented in the context of a clear explanation of the problem that preceded it, the solution becomes intuitive why it was created rather than coming across as “interesting and comprehensible yet still kind of a mystery as to its purpose or how it fits into the bigger picture.”

For example, before I explain something like bundled payments, I need to clarify the ways that healthcare stupidly separates out so many things that should really be seen as a single job and how that separation of jobs interferes with people being able to compare prices to make value-sensitive decisions.

I believe most healthcare writers fail to coherently explain the problem before they start describing reforms, and it makes healthcare seem way more complicated than it is.

So, what is the context that created a need for PBMs? My understanding is this . . .

When a patient buys a prescription, the price of that medication is the result of a negotiation between the pharmacy and the insurer (unless, of course, the pharmacy and insurer have no agreement, in which case the total price is whatever the pharmacy has set it at). And that negotiated price gets split into two–the patient pays part and the insurer pays part.

At some point along the way, pharmacies and insurers must have decided that it’s undesirable for patients to pay the full price up front and also it’s undesirable for insurers to pay the full price up front.

Think about it. Patients would hate having to pay the full price up front and then get some of that reimbursed by their insurer weeks later. And patients would also hate to pay nothing up front only to get a bill from their insurer weeks later asking them to pay some crazy amount they never would have agreed to. Additionally, either one of those scenarios would create a post-transaction reconciliation nightmare.

The obvious solution would be to get pharmacies to charge patients the correct copayment right up front.

This would require insurers’ formularies and copayment policies to somehow get integrated into pharmacies’ software systems to calculate the price for the patient right then and there when they ring up the medication. This cannot possibly be a straightforward process, especially when miscalculations can cause people to lose tons of money and get very angry. Maybe large insurers have the resources to hire the right people and build the right process knowledge and software, but wouldn’t it be great if companies existed to do this sort of thing for them so they could focus on their core business?

Suddenly, hiring a separate company–let’s call it a “pharmacy benefit manager”–to do this for them makes a whole lot of sense.

Better yet, a large insurer, acting as an entrepreneur, could see this need in the market and create a spin-off subsidiary that could do that job for them and also do that job for a bunch of other smaller insurers. Boost that revenue, right?

Okay, that helped me to process many of the steps I’d skipped the first time I tried processing this topic. I tried to cover too much ground before. I will continue spending a little more time on these topics. I pity the fool who doesn’t find all of this fascinating!