Health insurance companies utilize pharmacy benefit managers (PBMs) to manage their pharmacy benefits. This includes developing the formulary, which is a list of drugs that the insurance company will cover, and negotiating prices with drug companies.
- You may be familiar with how rebates work with other consumer goods. If you purchase a brand a contact lens, you may be able to mail in your receipt and receive money back, which is called a rebate.
- But when it comes to prescription drugs, rebate work a little differently. Drug companies set the price.
- PBMs act as an intermediary between pharmaceutical companies and insurance companies and are a critical decision maker in determining when and how patients access their medicines. Pharmaceutical companies negotiate with PBMs to ensure that a medicine “stays on formulary” – an approved list of medicines that will be covered by a patient’s insurance company for a specific illness in a cost-effective way. To help patients access their medicines by keeping them on formulary, pharmaceutical companies negotiate rebates with the PBMs.
Formulary is a list of medications available to enrollees on insurance plans. When used appropriately, formularies can help manage drug costs imposed on the insurance policy. However, for drugs that are not on formulary, patients must pay a larger percentage of the cost of the drug, sometimes 100%. Formularies vary between drug plans and differ in the breadth of drugs covered and costs of co-pay and premiums. Most formularies cover at least one drug in each drug class, and encourage generic substitution (also known as a preferred drug list). The list of covered drug is called a formulary.
Private and public payers alike or insurers as we’ve labeled here, have powerful levers to control drug expenses. Each of these stakeholders have funds that flow in from drug distribution, and in order to assess the challenges we face with drug pricing and coverage, we need to ensure they are all in the conversations.