Table of ContentsIntroductionDifferent StrategiesAverage Wholesale PricingAdministrative and Dispensing FeesMaximum Allowable CostPBM Problematic IssuesConclusionIntroductionPharmacy Benefit Management (PBM) Companies are third-party organizations that manage prescription drug plans. They work with insurance companies, employers and pharmacies to reach agreements for prescription drugs. PBMs aim to offer discounted prices on prescription drugs while maintaining a high level of quality. PBMs have a choice of pricing strategies when deciding how much to charge for prescription drugs. A good pricing strategy is a combination of average wholesale price and administrative costs. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay Different Strategies PBMs have several different ways to determine what they should charge for prescription drugs. Some pricing strategies are simple and based on the actual cost of drugs from manufacturers. On the other hand, some other pricing strategies can be more misleading. The PBM may attempt to make some companies believe that they can get away with paying administrative fees or dispensing fees, while the PBM simultaneously increases the real price of prescription drugs above the average in order to compensate for the absence of other charges (Sroka, 2000).Another factor related to PBM pricing is the quantity of prescription drugs covered by a particular plan. A PBM company might create a cheap plan that initially seems like a good deal. However, the other party may be disappointed if they realize that the number of medications covered by the program is fewer than those offered in standard plans. PBM contracts must list the number and types of prescription drugs that are covered by their agreement (Sroka, 2000). For example, one contract might list 400 different prescription drugs that can be purchased at a discounted rate, while another plan might list double that amount. It is the responsibility of the party working with the PBM to pay attention to such things as the number of medications covered and the rates at which they are sold. Average Wholesale PriceAverage Wholesale Price (AWP) is a method used by PBMs to establish prices. The AWP is based on the average price charged by wholesalers for a particular prescription drug (Gencarelli, 2002). Although average prices can be useful in measuring how a PBM sets the price of a drug, average wholesale prices also pose some problems. The first is that it doesn't actually represent the price other PBMs pay. Most PBM companies have private contracts with prescription drug manufacturers (Gencarelli, 2002). The exact prices offered on these contracts are not always publicly available. The average wholesale price is more of a measure of prices offered to companies that don't have special deals with prescription drug manufacturers. It is not uncommon for PBMs to enter into agreements with manufacturers in which they can purchase prescription drugs at prices as low as 20 percent below the average wholesale price (Gencarelli, 2002). PBMs can take advantage of average wholesale pricing strategies because of the difference between the average price of a particular drug and the pricethat they can negotiate with the drug manufacturer. For example, a PBM might contact a drug manufacturer and offer to purchase several different drugs in bulk. They could then receive an offer, say 20 percent lower than the average wholesale price. The PBM could then go to the other parties and offer them a deal 10 percent below the wholesale price. When other companies look for it, they think they are getting a good deal. In reality, the PBM made a significant profit because the other organizations were unaware of the actual offer being made to them by the drug manufacturer. The PBM could have helped its customers more by offering them an even lower price for drugs. In many cases, the average wholesale price is more beneficial to PBMs than to other parties to the contract. Administrative and Waiver Fees Administrative fees are another consideration for PBMs creating a pricing strategy. Fees are charged for processing claims and handling other administrative tasks (Atlas, 2004). Administrative costs vary depending on the company. Some PBMs make most of their profits by charging high administrative fees and offering low prices on 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 administrative fees, there may be other hidden costs that their customers are not initially aware of. Prescription dispensing fees are another important element of pricing. Dispensing fees are the fees paid to pharmacies to fill a prescription (Atlas, 2004). PBM companies should consider dispensing fees when developing their strategy. If a pharmacy charges excessively high fees, the PBM may also need to increase its own prices in order to cover the fees charged by the pharmacy. In many cases, PBMs are able to negotiate lower dispensing fees 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 to negotiate lower prescription dispensing fees. Maximum Allowable CostThe maximum allowable cost (MAC) is a list that PBMs have used to establish price limits for different drugs. MACs can be useful in certain 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 not regulated. Instead, MAC lists are generated by PMB companies. Businesses are free to create whatever lists they deem appropriate. One of the problems is that they sometimes create different lists for pharmacies and customers and then profit from the difference. For example, they will indicate much lower MACs when negotiating with a pharmacy, but then indicate much higher MACs when negotiating with customers and employers. Neither party has a reasonable way of knowing what MAC list is being presented to the other party and so they are at the mercy of the PBM. Problematic Issues Related to PBM Although PBM companies can choose different strategies when deciding what prices to offer, there are some problematic issues related to the field as a whole. Some critics believe that more government regulation is needed in the PBM industry (Gencarellie, 2002). Lack of government oversight and regulation.