The Employer's Guide Blog for Overseeing PBMs

The Definition of Oversee: to watch over and direct (an undertaking, a group of workers, etc.) in order to ensure a satisfactory outcome or performance.

Hidden Profits In the Prescription Drug Supply Chain

Depending on how you look at them, pharmacy-benefit managers are either low-margin middlemen that fight to reduce drug costs, or highly profitable intermediaries that take a cut of every prescription and earn more when drug prices rise.

Pharmacy-benefit managers are hired by businesses such as insurers that pay for drugs to negotiate lower prices with pharmaceutical companies. When the largest pharmacy-benefits manager, Express Scripts Holding, reports fourth quarter earnings on Tuesday, analysts expect a profit margin of just 4.7%, according to FactSet. Rival companies owned by CVS Health CVS -0.07% and UnitedHealth Group UNH +1.39% report similarly low margins.

But a closer look shows the business is far more attractive than those low margins would suggest. Included in Express Scripts’ revenue is the cost of the underlying drugs they sell. Thus Express Scripts generated gross profit of just $1.8 billion on total sales of $24.7 billion in the third quarter. Gross profit is revenue minus the cost of goods sold, but nothing else.

Tyrone’s Commentary:

The pharmacy benefit version of the “fee-only financial adviser” has emerged in response to a desire among certain pharmacy stakeholders to bring radical transparency to the drug pricing process. Although all PBM contracts with clients are viewable by both parties, PBMs operating under a non-fiduciary model often employ contractual wording that allows for pricing and reimbursement mechanisms that render clarity of expenditure and actual cost drivers to be elusive, and are designed to maximize the overall margin for the PBM. Under a fiduciary model, contracts negotiated between PBMs, clients, and pharmacies are designed to be as understandable and transparent as possible which, ostensibly, is meant to encourage the best therapeutic outcomes and financial interests for both plan sponsors and plan participants.

In general, however, the pharmacy-benefits manager doesn’t actually take delivery of the drug. That means these companies don’t spend much on fixed assets, which keeps selling and administrative costs, as well as depreciation and amortization charges, very low.

Tyrone Squires, MBA, CPBS

I am the proud founder and managing director of TransparentRx, a fiduciary-model PBM based in Las Vegas, Nevada. We help health plan sponsors reduce pharmacy spend, by as much as 50%, without cutting benefits or shifting costs to employees.

Leave a Reply