IndexIntroductionDifferent StrategiesAverage Wholesale PriceAdministration and Distribution FeesMaximum Allowable CostTroublesome Issues in PBMConclusionIntroductionPharmacy Benefits Management (PBM) companies are third parties who administer prescription drug plans. They work with insurance companies, employers and pharmacies to establish agreements for prescription drugs. PBMs aim to offer discounted rates on prescription drugs while maintaining a high level of quality. PBMs have several pricing strategies to choose from when deciding how much to charge for prescription drugs. A good pricing strategy is a combination of the average wholesale price and administrative fees. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay Different Strategies PBMs have different ways to determine how much they should charge for prescription drugs. Some of the pricing strategies are simple and are based on the actual cost of the drugs provided by the manufacturers. On the other hand, some other pricing strategies might be more deceptive. The PBM may attempt to deceive some companies into believing that they can get away with not paying administrative or distribution fees, while the PBM simultaneously raises the actual price of prescription drugs above average to make up for the lack of other fees (Sroka, 2000). Another factor related to PBM pricing is the amount of prescription drugs covered by a particular plan. A PBM company might create an affordable plan that initially seems like a great deal. However, the other party may be disappointed if they realize that the number of drugs covered by the program is fewer than those offered in standard plans. PBM contracts must list the number and types of prescription drugs covered under their agreement (Sroka, 2000). For example, one contract might list 400 different prescription drugs that can be purchased at a discounted price, while a different plan might list double that amount. It is the responsibility of the party working with the PBM to pay attention to factors such as the number of drugs covered and the rates at which they are sold. Average Wholesale Price Average Wholesale Price (AWP) is a method used by PBMs to set prices. The AWP is based on the average price that wholesalers charge for a particular prescription drug (Gencarelli, 2002). While average prices can be useful for measuring how a PBM prices a drug, there are also some problems with average wholesale prices. The first is that it doesn't really represent the price that other PBMs are paying. Most PBM companies have private contracts with prescription drug manufacturers (Gencarelli, 2002). The exact prices offered on such contracts are not always available to the public. The average wholesale price is more of a measure of prices offered to companies that have not entered into a special agreement with prescription drug manufacturers. It is not uncommon for PBMs to arrange agreements with manufacturers in which they can purchase prescription drugs at prices up to 20% below the average wholesale price (Gencarelli, 2002). PBMs can profit from average wholesale pricing strategies as a result of the difference between the average price for a particular drug and the price they are able to negotiate with the drug manufacturer. For example, a PBM might contact a drug manufacturer and offer to purchase severaldrugs in large quantities. They may then receive an offer, for example, 20% lower than the average wholesale price. The PBM could then turn to the other parties and offer them a deal 10% lower than the wholesale price. When other companies looked for it, they would think they were getting a good deal. In reality, the PBM made a large profit based on the fact that other organizations were unaware of the actual offer made to them by the drug manufacturer. The PBM could have helped its customers more by offering them an even lower price for the drug. In many cases, the average wholesale price is more beneficial to PBMs than to other parties involved in a contract. Administrative and Dispensing Fees Administrative fees are another consideration for PBMs who are creating a pricing strategy. Fees are charged for processing claims and handling other administrative tasks (Atlas, 2004). Administrative fees vary depending on the company. Some PBMs make most of their profits by charging high administrative fees and offering low prices in other aspects of their contracts. On the other hand, some companies use low administrative fees to attract new customers. Even if they initially claim to offer no administration fees, there may be other hidden costs that their customers are not initially aware of. Delivery charges are another important part of the prices. Dispensing charges are the fees paid to pharmacies for filling a prescription (Atlas, 2004). PBM companies must take disbursement fees into account when creating their strategy. If a pharmacy charges excessively high fees, the PBM may also have to increase its prices to cover the costs of the fees charged by the pharmacy. In many cases, PBMs are able to negotiate lower dispensing rates if they have a good relationship with a pharmacy or pharmacy chain. The more work and orders they bring to the pharmacy, the more bargaining power they have in negotiating lower dispensing rates. Maximum Allowable Cost The Maximum Allowable Cost (MAC) is a list used by PBMs to establish price limits for various drugs. MACs can be useful in some situations where employers want to know details regarding different aspects of a contract with a PBM. However, they can also be problematic because they are unregulated. Instead, MAC lists are generated by PMB companies. Companies are free to create whatever list they see fit. One problem is that they sometimes create different lists for pharmacies and customers, and then profit from the difference. For example, they will list much lower MACs when contracting with a pharmacy, but then they will list much higher MACs when contracting with customers and employers. Neither party has a reasonable way of knowing which MAC list is being shown to the other party, and they are therefore at the mercy of the PBM. Problematic Issues in PBM While PBM companies may choose different strategies when deciding what prices to offer, there are some problematic issues related to the general field. Some critics believe that there should be more government regulation of the PBM industry (Gencarellie, 2002). The lack of government oversight and regulation results in market conditions where PBMs hold the majority of the power in negotiations. If they establish profitable deals with pharmacies, they can then leverage those deals with other customers and make above-average profits. The use of different MAC lists and complex administrative expenses are also things that some people think should be.