Part 2: Pharmacy Spending — The Hidden Cost of Rx and PBMs

That is really the number that matters.

A large rebate does not automatically mean an employer received a good deal. Imagine a medication with a $20,000 price tag that generates a $6,000 rebate. Now imagine another clinically appropriate medication that costs $8,000 and generates little or no rebate.

The first option produces a much better-looking rebate.

The second option may still cost the employer $6,000 less.

That is why I have never believed employers should judge pharmacy performance by the size of the rebate check. Rebates are one part of the economics, but they are not the same thing as savings. The real measure should be the net cost to the plan after discounts, rebates, fees, credits, and every other financial arrangement have been taken into account.

The problem is that getting to that number can be harder than it sounds.

PBM contracts are full of definitions, guarantees, exclusions, and revenue arrangements that can materially change the economics of the deal. Two contracts can both claim to offer "100% rebate pass-through" while handling manufacturer administrative fees, data fees, inflation payments, pharmacy fees, and other forms of compensation very differently.

This is why I tell employers that the PBM proposal is not the PBM deal.

A proposal can look fantastic. It can show aggressive discounts, strong rebates, transparent pricing, and projected savings. But the value of those promises depends entirely on what the contract actually says.

What counts as a rebate? Are manufacturer fees included in that definition? What happens to inflation-related payments? Can the employer audit the PBM? Who owns the pharmacy claims data? Can the PBM change the formulary during the contract? Are specialty pharmacy economics fully disclosed? What happens if guarantees are missed?

Those details may look technical, but they can be worth hundreds of thousands of dollars.

Spread pricing is another good example. In a spread arrangement, the PBM may charge the employer one amount for a prescription while reimbursing the pharmacy a lower amount. The PBM keeps some or all of the difference.

There is nothing inherently wrong with a company earning money for providing a service. The issue is whether the employer understands how much is being earned and how the arrangement affects the total cost of the pharmacy benefit.

If the employer pays $200 for a prescription and the dispensing pharmacy receives $130, it is reasonable for the employer to want to understand what happened to the other $70.

That is not an accusation. It is basic financial oversight.

The same thing becomes even more important with specialty medications.

A relatively small number of specialty prescriptions can represent a huge percentage of an employer's total pharmacy spend. These medications can cost tens of thousands, hundreds of thousands, and in some cases much more per year.

When the numbers get that large, the way the drug is purchased matters tremendously.

An employer could spend $150,000 on a single therapy and never know whether the PBM owns the specialty pharmacy dispensing it, what the underlying acquisition cost was, what margin was built into the transaction, or whether another sourcing strategy could have produced a better result.

That should get more attention than it does.

We would never allow a $150,000 technology purchase to move through the organization without asking questions about price, vendor ownership, alternatives, and contract terms. Yet employers routinely spend that kind of money on individual medications through a supply chain they barely understand.

Somehow, healthcare has made that seem normal.

GLP-1 medications have made this issue even more visible. Employers are trying to figure out how to balance meaningful clinical value with rapidly growing utilization and significant long-term cost exposure. Some employers are covering GLP-1 medications broadly. Others are limiting coverage. Some are tying access to diabetes diagnoses, while others are building more comprehensive weight-management programs around clinical qualification, nutrition, coaching, behavioral support, and ongoing engagement.

I do not think there is one answer that works for every employer.

What matters is having an actual strategy.

Who qualifies for treatment? What clinical criteria should apply? What outcomes should be measured? How long should therapy continue? What happens if an employee stops participating in the broader treatment plan? What is the employer actually paying for the medication after rebates and discounts?

Those questions move the employer from simply covering a drug to actually managing the pharmacy benefit.

That distinction is important.

The same applies to every high-cost therapy. Employers need to understand not only whether a medication is covered, but how it is being purchased, whether clinically appropriate alternatives exist, where it is being administered, and whether the price being paid is competitive.

That is especially important because prescription drug spending does not always show up in the pharmacy report.

Some specialty medications are processed through the pharmacy benefit. Others are administered in a physician office, infusion center, or hospital outpatient department and billed through the medical plan.

That can make the total picture very misleading.

An employer may think it understands its pharmacy spend while missing millions of dollars in drugs being billed on the medical side.

The price can also vary dramatically depending on where the medication is administered. The same drug given to the same patient can cost substantially more in a hospital outpatient department than it does in another clinically appropriate setting.

This is where pharmacy management and site-of-care management begin to overlap.

Employers cannot manage prescription drug costs by looking at pharmacy claims in isolation. They need visibility into drug spending across both the medical and pharmacy benefits.

Ownership is another issue that deserves more attention.

Who owns the PBM? Who owns the specialty pharmacy? Who owns the mail-order pharmacy? Who owns the insurance carrier? Are those organizations affiliated with one another?

Healthcare has become increasingly vertically integrated. In some cases, the organization deciding where a prescription should be filled may also own the pharmacy filling the prescription.

That does not automatically mean the arrangement is bad. It may produce excellent service and competitive pricing.

But the employer should understand the relationship.

Transparency is not about assuming everyone involved has bad motives. It is about understanding who gets paid, how they get paid, and whether the incentives line up with the interests of the employer and employees.

That is also why I think PBM contracting is becoming an increasingly important fiduciary issue.

An employer does not need to become a pharmacist or a PBM attorney. But if the health plan spends several million dollars a year on prescription drugs, someone representing the employer needs to understand the financial arrangement.

Leadership should be able to explain how the PBM is compensated, how rebates are handled, what happens with specialty pharmacy revenue, what the contract guarantees, and whether the plan has the right to audit the arrangement.

That should not be considered an unreasonable level of oversight.

It should be considered normal.

This is also why I have a problem with PBM evaluations that ultimately come down to a spreadsheet showing which bidder has the biggest rebate guarantee.

The highest rebate guarantee does not necessarily equal the lowest pharmacy cost.

You have to understand formulary decisions. You have to normalize the pricing. You have to look at specialty pharmacy. You have to understand the definitions inside the contract. You have to review clinical management, audit rights, data access, and the PBM's overall revenue model.

In other words, you need to understand how the PBM actually makes money from your health plan.

If you cannot answer that question, you probably do not fully understand the arrangement.

That does not mean every employer should leave a large national PBM and move to an independent model. It also does not mean an independent PBM is automatically better. Both assumptions oversimplify the issue.

The right answer depends on the employer, the population, the claims, the contract, the clinical strategy, the data, the service model, and the economics.

The point is to make the decision based on those things rather than simply staying with the familiar option.

Employers also have more ability to influence pharmacy spending than they may realize. Better formulary management can make a difference. Biosimilar strategies can make a difference. Specialty pharmacy sourcing, site-of-care management, manufacturer assistance programs, clinical programs, and more competitive contracting can all create opportunities depending on the plan.

There is no single pharmacy strategy that is going to solve the problem for every employer.

But doing nothing because the system is complicated is probably one of the most expensive choices an employer can make.

One of the themes I hope comes through in this series is that healthcare cost management rarely comes from one giant idea. More often, it comes from understanding where the money is going and then fixing the areas where the economics do not make sense.

Pharmacy is a perfect example.

A few percentage points buried in a PBM contract can matter. One poorly sourced specialty medication can matter. One formulary decision can matter. A handful of high-cost prescriptions can completely change the financial performance of a health plan.

When those decisions are multiplied across hundreds or thousands of employees, the dollars add up very quickly.

If I were responsible for an employer health plan, I would ask the PBM, broker, consultant, or carrier to answer one question clearly:

I would want to see the contract.

I would want to see the claims.

I would want to understand the specialty pharmacy economics.

I would want to see the rebate reconciliation.

Most importantly, I would want to know what the health plan actually paid.

That is what real transparency looks like.

Employers are spending too much money on prescription drugs to manage the pharmacy benefit based on assumptions.

In Part 3 of **The Employer Healthcare Cost Crisis: Where Is All the Money Going?**, I am going to move beyond hospitals and pharmacy and look at another area that rarely receives enough attention: the enormous administrative infrastructure surrounding employer healthcare.

In the meantime, I would like to hear what employers and benefits professionals are dealing with today. Are specialty medications your biggest concern? GLP-1 costs? PBM contract language? Rebates? Spread pricing? Specialty pharmacy ownership?

What part of pharmacy benefits still feels unnecessarily difficult to understand?

Leave a comment or send me your question. These are exactly the conversations employers need to be having.