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PBMs: Their Impact on Local Pharmacy Businesses and How Predictive Analytics Helps Them Fight Back

In 2018 approximately three-quarters of all equivalent prescription claims were handled by three organizations: CVS Health (including Caremark and Aetna), Express Scripts, and the OptumRx business of UnitedHealth. Currently, over 95% of the overall U.S. equivalent prescriptions claims are processed by six pharmacy benefit managers (PBMs).

PBMs entered the pharmaceutical supply chain after the passage of the Medicare Modernization Act in 2003 in the U.S., allowing them to quietly become an integral part of the journey that medication takes, starting at the manufacturing facility and ending inside the medicine cabinet. Recently, PBMs have come under the spotlight against allegations of driving up drug prices and interfering with patients' access to medications.

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But first, what is a PBM?

A PBM - or pharmacy benefit manager - is essentially the middleman. PBMs are supposed to help with the pharmacy-part of a prescription, but it can make things more complicated and expensive than they need be. When a prescription is fulfilled at a network store - such as Walgreens or CVS for example - they work together in partnership with insurance companies like Blue Cross/Blue Shield. This means that if the patient has health coverage through them then those prescriptions should be cheaper. However, PBMs like Express Scripts & Caremark are intermediaries between The Pharmacy Network Stores (Walgreens) on one side and Health Insurance Company (BCBS) on the other, who pays out benefits for dispensing prescriptions.

The three largest PBMs currently are CVS Caremark, Express Scripts and OptumRx (a division of United Healthcare). The “Big Three” PBMs are the ones that most Americans are familiar with, as they often tie into their prescription benefits plan provider, and hold nearly 80% of the prescription benefits market share in the U.S.

What’s wrong with PBMs?

PBMs are one of the most powerful and profitable industries in America with an annual revenue exceeding $315 billion U.S. dollars. Not only do they manage Medicaid and Medicare prescription plans, and bill government for medications at the same rate as private insurance clients, they also own their own pharmacies (retail stores as well) and reimburse themselves higher than other non PBM-owned pharmacy chains like CVS, which make up over 30% of all U.S. retail prescriptions sales annually.

For those in the medical profession, it is well known that there are many hands involved and very little transparency given when it comes to what takes place after a doctor issues a prescription.

Essentially, while pharmacists fill prescriptions and tend to the patients, they are also juggling their need to get reimbursed by insurance companies. PBMs help pharmacies do so, but not necessarily for the benefit of the pharmacists. This is because of the many opaque layers between drug manufacturers and pharmacies where profits can be made.

This multi-layered process is where it is determined when rebates can be given upfront, what the billing rates per pill covered versus pills left out will be, as well as how much will be reimbursed when medications are dispensed at pharmacy counters.

We have overwhelming evidence that the PBM marketplace is highly dysfunctional and exceedingly costly," says Antonio Ciaccia, lobbyist for the Ohio Pharmacists Association who now works for a company that seeks to expose drug-pricing irregularities.

As the drug industry has grown and evolved, so have PBMs. These companies work with pharmaceutical makers to develop a list of covered medications for health plans; they negotiate those prices in part or whole by negotiating rebates from manufacturers themselves, and are given an incentive based on pricing points, which they keep either partially or wholly - depending on their agreement with the manufacturer.

In the end? The patient buys the product but never gets the rebate. PBMs will often structure contracts so that - when a prescription is bought by an insured person and sent in with claims information - there are two different transactions: one from the pharmacy or doctor (who dispenses the medication) and another as part of some administrative fees created by the PBM. The PBM then receives the money through health insurance providers before returning fractions back to the patient, depending on what kind of billing agreement they had made up ahead of time. In effect, this is similar to real estate agents getting paid after selling someone else’s property.

PBMs and Pharmacies

PBMs reimburse the pharmacy for issuing the patient’s medication. The pharmacy has no control over the sale of the medicine. The pharmacist - who has already incurred a cost for the medication - only knows how much they're getting reimbursed for, and the PBM is responsible for determining whether the patient has to copay.

Pharmacies that are owned by PBM are at an advantage. They can charge their customers higher prices for drugs because they are confident that medication will be paid back at a lower cost than the selling price. This is partly why PBMs are not willing to fully disclose how they calculate maximum allowable costs. If potential competitors were given this information there would be ample opportunity to undercut them in sales and take over the market share.

Under PBM's Maximum Allowable Cost (MAC) list, pharmacy benefit managers calculate which set price each covered prescription should receive from insurance providers. The PBM's refusal to offer more information about the cost of drugs and their own margins leaves pharmacies with no choice but to appeal losses they incur in order to fill the prescription. Often those appeals are denied, or simply ignored by the PBM.

However, in 2015, Arkansas passed Act 900, which was the final curtain call to the PBM money-making practice known as "spread pricing." Spread pricing is where more affordable generic medicine is promoted over expensive brand-name versions in an attempt to keep drug costs down. However PBMs often divert fees and markups to themselves, effectively removing any savings that generics would have offered.

“This is a historic victory for independent pharmacies and their patients. And it confirms the rights of states to enact reasonable regulations in the name of fair competition and public health,” says B. Douglas Hoey, National Community Pharmacists Association CEO.

How Predictive Analytics and AI is Giving Pharmacists the Edge the Need

As pharmacists continue to push against the PBM machine in the U.S. they are turning to technology to help them win the war.

What is Predictive Analytics?

Predictive analytics is a technique used to extrapolate information about future events. This is done by using current data from past events that have similar features in order to predict what will happen with the next event.

Predictive analytics is a term that refers to the use of statistical and machine learning techniques - a subset of artificial intelligence (AI) - to identify patterns in data. It’s also known as predictive modeling, but the two terms are often used interchangeably. Predictive analytics can be applied across many industries such as healthcare, finance, retail and agriculture.

Prediction models can be built for any type of event or behavior: predicting customer churn rates based on past interactions; predicting what products they might buy; predicting which patients will require hospitalization by using risk factors like age and medical history.

The reason predictive analytics is so powerful is because it learns from historical data - there's no need for human input.

The New Role of AI in Pharmacy Businesses

AI and predictive analytics can be used by pharmacists to help them circumvent PMB activities, particularly around the clawbacks and what effect this has on business.

Using the power of AI and machine learning (ML), pharmacy businesses can use tools like SEDGE to process vast amounts of historical data from the public domain or part of their own data archives. The analytical and predictive power of SEDGE could then be used to help pharmacies to bypass PMBs, enhance their own business, and help patients get better bargains.

Accurate forecasting and pricing

Accurate forecasting with predictive analytics as a business tool is the need of the hour. The traditional way of using past data to forecast future results has its limitations as - aside from being time-consuming and involving a fair amount of guesstimating - it doesn't take new trends or changes in PBMs activities into account.

Forecasting using SEDGE could predict the script of a prescription which has a high probability of incurring a clawback fee or DIR fee from PBM data and alert the pharmacist. It could help identify discrepancies between the fee charged by the PBM through the pharmacy and if the customer paid the pharmacy directly. The predictive power of SEDGE could also be used by a pharmacy to study customer adherence to following a drug regimen and use it to increase its rating. As a result, clawback or DIR fees come down with a higher rating.

SEDGE analytics could help a pharmacy increase profits by having the option to send reminders of medication follow-ups to its list of clients, and using customer profiles to identify customers with the propensity to frequently switch pharmacies. Customer profiling could also be used to regain customers by catering to their particular needs.

Predictive analytics tools that use AI and ML like SEDGE can give pharmacists a competitive edge. Not only will the AI-powered tool quickly calculate optimal pricing strategies based on their own data, it will also help them as a business by enabling better decision-making, and equip them to take actions based on data-driven insights from real-time data sources.

Protect Your Pharmacy with SEDGE AI

Interested in seeing how the power of AI can work in your pharmacy? Sign up for your no-obligation, free trial of SEDGE today!

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