It’s easy to feel like your pharmacy benefits manager (PBM) holds all the power over your company’s prescription plan costs. In most cases, they do - and your firm pays through the nose.

A landmark 2004 study compared what PBMs charge employers’ plans to what they actually pay pharmacies. Researchers found staggering overcharges - especially for generic drugs. Unfortunately, four years later, the situation has scarcely changed. All too often, PBMs improve their own bottom line at the expense of the plan sponsor’s.
Chances are, it’s your health insurance vendor - not yourself - who contracts with the PBM to administer the prescription drug portion of your health benefits. So how can you feel confident your firm is getting the best value and service?
Start by asking your health-plan broker these four questions about the current or prospective PBM. 1. How does the PBM calculate price?
Many PBMs gain hidden profits off your plan through a practice called “differential pricing,” says consultant Gerry Purcell. In other words, the PBM pays one price to drug retailers and then sets a lesser discount off the average wholesale price (AWP) for your company’s plan. Example:

• the PBM pays the drugstore the AWP minus 18%
• your plan and employees pay AWP minus 15% for meds, and
• the PBM pockets the difference.

Now for some good news. You do have some leverage in this area. If your drug plan is covered under the ERISA umbrella, the PBM must disclose this info. Ideally, you’ll find the rates are the same on both contracts. But if there’s differential pricing, insist your firm get the full discount.

2. What’s the PMPM?
One key cost figure PBMs can’t manipulate is the per-member-per-month (PMPM) cost of your plan. This number will show if your plan’s costs actually increased or decreased. The PMPM is calculated by dividing the total costs spent by the number of employees enrolled in the drug plan.
It’s also a great tool for comparing different PBMs to see which is the most cost-efficient for the size of your organization, says Peter Reed of Managed Benefits Strategies. 3. Can we get rebates, too?

Some PBMs receive money from drug companies that your brokers won’t tell you about - but may be able to leverage to your plan’s advantage. Example: Many PBMs get rebate checks from drug companies (typically 50 cents to $1.25 per claim) for helping increase the sales of their products.
If you push hard enough for it, your broker may able to work an arrangement where you either:

• split rebates from your plan evenly, or
• let the PBM keep the entire rebate in exchange for a price break on administrative fees.

Important: Ask to find out all the payment types the PBM gets from the drug firms. Rebates are often couched in the form of grants or classified as access fees or formulary fees.

4. How do changes in the formulary work?

In most states, PBMs can change your plan’s list of approved medications without prior notice.
The problem: PBMs often make mid-year switches that save them money, but may not save your organization or employees a dime.
Example: If the PBM adopts a mail-order-only coverage policy on a certain formulary drug, an employee who needs same-day access to the medication may be forced to pay full price for it at a pharmacy. Meanwhile, your plan is still charged the formulary price.To avoid such unpleasant surprises, insist the PBM give written notice of formulary changes, including the addition of new generics.