The Paradox of Cost-Based vs. Discount-Based PBM Evaluation Methods

Earlier this year, we introduced two different approaches to PBM evaluation: cost based and discount based. While they both claim to optimize drug expenditure, they are paradoxically at odds with each other. 

In this exploration, we further delve into the intricacies of these methods and unearth how cost-based evaluation is the only method that optimizes for lower drug spend.

What is Cost-Based PBM Evaluation? 

A cost-based evaluation method, as the name suggests, looks at the real costs employers face on drug costs with their PBMs. This starts with the actual cost of each medication and, if applicable, deducts any discounts or rebates available for each. The sum of all of these costs for all medications for all members is then divided by total number of members to yield a per member per month (PMPM) calculation. This approach is rooted in transparency because it starts with the actual cost of the medication meaning that the approach is an accurate reflection of what the employer actually spends.

On the flip side, discount-based evaluation methods focus on the rebates or discounts negotiated from a predetermined list price. Instead of starting with the cost of the medication, discount-based methods focus on delivering a certain dollar or percentage amount of actual spend back to the employer. 

While discounts might seem beneficial at first glance, by not surfacing—or worse, obfuscating—the actual cost of the medication, the discount is meaningless. The actual amount spent by the employer may, and usually is, higher because the base cost of the drug was higher. That’s because pharmaceutical companies often set high list prices to accommodate discounts and rebates negotiated with various entities like insurers and PBMs. In addition, focusing on rebates disincentivizes the PBM from suggesting alternative lower cost drugs, like generics or biosimilars, where relevant because those drugs often come with less of a discount or minimal rebate.

There is, no doubt, an inherent conflict between these two methodologies. Cost-based evaluation emphasizes transparency of prices and ensures that total out of pocket cost to the employer is considered. Conversely, discount-based evaluation emphasizes negotiation prowess, often resulting in convoluted pricing structures that mask the true cost of medications. Discount guarantees, which are typically what’s compared in a discount based PBM evaluation, do not take into account the actual out of pocket cost to the employer but rather just the rebate they’ll receive.

But the conflict between these approaches is more than just a philosophical one. Cost-based evaluation methods are consistently proven to result in lower costs to employers than discount based methods.  There are plenty of individual drugs, like those shown above, where optimizing for lowest cost (using cost-based evaluation) results in lower spend than optimizing for rebates.

 When we compare this across channels we consistently see lower PMPM costs for clients who use a cost-based approach

Navigating the PBM Evaluation Paradox: Choosing the Optimal Path

One thing to be aware of: While it may be enticing to try to combine approaches and use both a cost based and discount based evaluation to find the right PBM, the two methods are mutually exclusive and thus can not be used in conjunction without compromising your ability to get the lowest cost. Optimizing for discounts drives manufacturers to increase the net cost and will result in greater PMPM. Optimizing for PMPM will inevitably reduce your discount guarantees. But judging from the experience of our clients and data available in the market, it is the approach that will result in lower overall pharmacy spend.

It's time to unravel the paradox and embrace the only PBM evaluation model that benefits all stakeholders in the pharmaceutical landscape.