Pharmacy Benefit Management

A Pharmacy Benefit Manager (PBM) is a third party administrator of prescription drug programs. They are primarily responsible for processing and paying prescription drug claims. They also are responsible for developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers.

Due to their larger purchasing pool for prescription drugs, PBMs can negotiate rebates and discounts on behalf of their clients. However, in recent years, lawsuits filed by the federal and state governments and by PBM clients have alleged that PBMs have been operating against their clients' interests -- and breaching their fiduciary duties to their clients -- by secretly retaining rebates and discounts that the PBMs were obligated to pass through to their clients.

PBMs also often have the ability to offer initiatives that give value and flexibility to participants, such as tablet splitting, sampling and mail order service.

PBMs operate on different "business models". Most PBMs implement "spread pricing", meaning PBMs execute contracts with their clients allowing the PBMs to purchase drugs at lower prices, but invoice their clients at higher prices, thus profiting from a "spread" in the pricing. A few PBMs implement "pass through pricing". These PBMs execute contracts with their clients that require the PBMs to "pass through" to their clients the PBM's precise purchase or reimbursement drug cost. These PBMs generate their profits by charging a flat, per claim, or per member, administrative fee. From an organizational perspective, PBMs can be "captive", in that they are part of a larger organizational pharmacy or buyer, such as Caremark (which is captive to CVS Caremark) , Walgreens Health Services (which is captive to Walgreens), and Immediate Pharmaceutical Services (which is captive to Discount Drug Mart) or they can be independent entities, such as Medco Health Solutions or Express Scripts. Some PBMs are part of larger managed care organizations such as Prescription Solutions (which is a subsidiary of UnitedHealth Group.)

From a strategic perspective, PBMs can be "carved-out", in that they were hired directly by an employee's company to provide PBM services, or "carved-in", in that they were hired to be an employee's company through a MCO or HMO.

Many PBMs are currently working towards establishing Consumer Directed Health plans, which are essentially health savings accounts, in an attempt to shift the awareness of drug purchases to the customer.