Pass-Through Versus Spread Pharmacy Pricing: 7 Tips for Determining Which is Better

By Brett McCabe
Thu, May, 04, 2017 @ 10:05 AM

As the PBM industry evolves, employers often must choose among an ever-changing array of financial terms and structures offered by the PBM. In theory, such arrangements give employers more choices so they can pick those that are most likely to save them the most money over the life of their PBM contract.

But understanding which arrangements make the most sense is generally a very tricky proposition. Take the issue of traditional spread pharmacy network arrangements versus transparent pass through pharmacy network arrangements.

Under a traditional spread arrangement, the amount billed to the employer for the drug dispensed by the pharmacy is not necessarily the same amount the PBM pays the pharmacy. The difference is the spread, which the PBM retains as revenue. Most arrangements in place today apply some level of traditional spread pricing. In general, the discounts in a traditional spread arrangement typically perform very close to the minimum levels guaranteed by the PBM.

By contrast, with a pass-through arrangement, the employer pays the actual contracted discounted pharmacy prices and dispensing fees that the PBM has negotiated with the retail pharmacy network. The guaranteed discount in a pass through proposal should be viewed by the employer as a minimum acceptable performance level, although higher discounts than those guaranteed are often achieved.

On the surface, the pass-through arrangement would appear to be financially advantageous to the employer. But there are downsides in pass-through contracts to consider, including much higher administrative fees paid by the employer to the PBM, which can negatively impact cash flow and potentially cost more over the long term. It is very important to understand that simply eliminating PBM spread does not guarantee you will lower your total drug costs. In fact, the very opposite can happen.

Here are 7 tips for determining which type of pharmacy pricing arrangement works in your best financial interests:

  • Conduct a careful, thorough analysis before deciding which arrangement to pursue. Again, do not assume that pass-through arrangements will always save you money.
  • It’s especially important to understand and evaluate your pharmacy network arrangements when entering new PBM contact negotiations, renegotiations, or when using a new pharmacy network.
  • Do not rely on the PBM’s analysis of the value of the proposal. Instead, work with an independent consulting partner who can recognize specific language in the PBM’s proposal that is not in the employer’s best interests.
  • Run, or have your consulting partner run, a separate analysis of your claims data to account for all discounts net of all PBM fees. Again, do not let the PBM do this.
  • Make sure you understand the PBM contract’s terms regarding how and when minimum guarantees are measured and trued up.
  • Make sure your PBM contract gives you the right to audit your PBM. If you opt for a pass-through network arrangement, make sure your contract gives you the additional ability to review contracts between the PBM and the network retail pharmacies to ensure correct claim pricing has been applied.
  • For traditional spread network arrangements, your contract should stipulate your right to audit the PBM; however, you will most likely not be able to access the PBM-retail contracts. Instead, your contract should allow you to independently validate the PBM’s pharmacy network discount performance in aggregate.