PBMs reap huge profits through "marking-up" prescription drug benefit claims, billing health plans more for the drug than your local pharmacist charged for the drug. This PBM scheme is known as "spread pricing" and costs health plans millions of dollars each month.
Here's what typically goes on: The PBM pays your pharmacy $100 for filling a prescription for a 30-day supply of drug X. The PBM bills the health insurance plan sponsor, such as your employer or union, $110 whenever one of its employees or dependents fills a prescription for drug X.
The PBM keeps the $10 difference between what the PBM pays the pharmacy and what the PBM bills the health plan or what PBMs call the "retail spread". Bear in mind that approximately 4 billion prescriptions were filled in 2011, so spreads, big and small, really matter and add to the cost of your prescription benefit.
Health plans are often unaware of the spread because it is not explicitly written into the PBM contract or the PBM contract hides the practice in complex language. Generally, in neither instance does the PBM fully and effectively disclose how much it is paying the pharmacy or how much it is keeping. This is called a lack of transparency.
As a Wells Fargo Insurance Services executive told Employee Benefit News, PBM spread pricing can drive the $300 annual cost of medication therapy for a patient with hypertension up to $2,000 or above. Yet most people are unaware of this practice even though they pay for this extra cost. A report by Creighton University analyzing drug claims documented spread pricing that generally averaged $5 per prescription and ran as high as $200 per prescription on the claims researchers examined.
In addition, the spread price is added on top of any so-called "administration fees" a plan sponsor agrees to pay the PBM for processing claims and "managing" the benefit. A PBM also usually receives "rebates" and "discounts" from various drug manufacturers for promoting their products over those of other manufacturers. (See Rebate Pumping.) The rebates and discounts are rarely fully shared with the plan sponsor. All of these tactics boost PBM profits and increase costs for the plan sponsor and those covered by it.