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PBMs: Impact on Employer-Provided Coverage Contract & Benefit Design


Contracting flexibility encourages health insurance provider innovation that drives lower prescription drug spending and benefits employer clients

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Published on May 9, 2024

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Private Market Competition, Flexibility, and Contracting Innovation Benefits Consumers

A robust health insurance market encourages competition and innovation and reduces growth in health care costs, including prescription drug spending. Contracting flexibility is a critical tool that allows employers to select the plan that is best for their employees, best fits their budget, and best aligns with their tolerance for assuming financial risk. Contracting flexibility also encourages health insurance provider innovation that drives lower prescription drug spending and benefits employer clients.

AHIP supports transparency provisions that allow employers to better compare prescription drug benefits. However, anti-competitive reporting mandates would give drug manufacturers access to confidential information and enable pricing collusion. Placing mandates limiting contract flexibility provides businesses with fewer options to lower costs for their employees’ coverage. These contracting flexibilities, including government-mandated contract structures for spread pricing, a risk mitigation model, and the accounting and treatment of prescription drug rebates negotiated with manufacturers in benefit plans and design, allow employers to determine what terms best work for their employees.

Employers Want to Retain Options

Bank of America’s 2023 annual pharmacy benefit manager (PBM) survey found substantial variation in employers’ preference for a prescription benefit contract: 34% want a shared savings model, 22% want a variable fee model incorporating rebates and spread pricing, and 14% want a fixed fee model incorporating rebates – all models that would be prohibited under proposed legislation. Only 24% of employers wanted a fixed fee model per prescription with no spread pricing or rebates – the only model available if Congress bans spread pricing and mandates full rebate pass-throughs.

Eliminating Employer Options Would Increase Costs for Americans and Employers

Both spread pricing and variable rebate models are gainsharing contract models that share key characteristics with other types of health care cost risk-sharing models and value-based contracts. Under a spread pricing contract, an employer negotiates a fixed cost for a generic drug, encouraging the PBM to pay for the drug at a lower cost by shifting any risk of cost increases to the PBM. This is the same way that pharmacies operate – they receive a fixed payment from the PBM for a generic drug and then attempt to obtain the drug at a lower acquisition price/cost, keeping the difference, or “spread.” Together, these two features increase the pressure to reduce generic drug prices over time, bringing down costs to market participants, including employers.

Variable rebate models operate similarly – an employer contracts with a PBM for a guaranteed rebate but will partially share in any additional rebate that the PBM negotiates. Absent these gainsharing models, PBMs would have less powerful incentives to negotiate lower drug prices, increasing drug spending.

Given employer preferences for contracting flexibility and the importance of gainsharing contracts in reducing prescription drug spending, legislative proposals aimed at banning either spread pricing in the commercial market or variable rebate contracts restrict PBMs’ ability to work with employers to design the plan that is right for their employees. With increased pricing transparency to plan sponsors, employers will be well-positioned to negotiate contract terms and select models that reduce prescription drug spending.