Inflated copays are only one of the ways to make money here. Just because money doesn’t actually change hands doesn’t mean a transaction is free; premiums are still paying for the full list price and this is the majority of the profit. There is also spread pricing and rebates. Before I get into those let me show you what I mean.
I (the company running the pharmacy and insurer) pay maybe $400 for a drug. You pay me a copay of $200, on top of your monthly premium. My accounting is like this:
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Insurance division: $(3,800) benefits paid out, +$600 PBM admin = $(3,200) total, loss
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Pharmacy division: $(400) drug acquisition, +$200 patient coins, +$3800 insurer reimbursement, +$40 rebate = $3,640 total, profit
Because I keep the accounting separate for my insurance and pharmacy divisions I get to offset the insurance losses entirely by raising premiums of my own insured, if the market will bear it.
Note, aspects of this arrangement are prohibited in some states.
Spread Pricing
Traditionally, a third-party PBM not only negotiates drug prices on behalf of insurers but also administers the payments for prescription drugs. Spread pricing is the practice of charging the insurer a little bit more than is actually paid to the pharmacy, and pocketing the difference. There’s nothing inherently wrong with the practice so long as there is transparency, but there often isn’t. The major advantage of having an in-house PBM is that the insurer cuts out the middleman’s fee. In the 34 states lacking relevant legislation, who is to say if the savings are passed on to consumers or retained as profit?
For reference, the Affordable Care Act requires most insurers to spend at least 80% of premiums on actual benefits. But in 2019, the state of Maine found that insurers were accounting for everything paid to PBMs as benefits rather than overhead, even as PBMs skimmed about 11% off the top.
Rebates
Drug manufacturers also offer rebates. I don’t know exactly how the rebates are split between pharmacy and insurer; it seems to be a closely guarded trade secret. However in my former capacity running a doctor’s office, when we ordered specialty medications from a distributor, we would get a rebate check every quarter for 1% to 3% of what we spent, based on volume. And we were small fish, a big pharmacy probably gets 10-30% depending on the drug.
Rebates ultimately work to the drug manufacturer’s advantage as a loyalty device. Mainly they are used as leverage to prevent insurers from covering cheaper competing drugs, which in and of itself significantly raises costs for the consumer.
Otherwise, rebates don’t raise drug prices directly because every insurer knows the pharmacy is getting a rebate, so natural market forces will cause insurers to claim those savings via lower reimbursement rates. Unless, of course, the insurer and the pharmacy are in cahoots and operate in one of the 26 states where it is legal to discriminate against non-affiliated pharmacies. To their credit, PBMs claim to pass along >95% of rebates to the insurer, which I believe is probably true since that number has been reported by government agencies in some states. When the insurer and the pharmacy are the same entity, and fail to set a lower price point, do these savings from rebates actually reach the consumer in the form of lower premiums, or is it just 10-30% of pure profit? The data necessary to answer that question independently is confidential.
~Max