Thursday 10 April 2025
The pharmacy benefit manager (PBM) industry has long been shrouded in mystery, with critics accusing them of prioritizing profits over patient needs. A new paper offers a glimpse into the inner workings of these companies, proposing two alternative insurance business models that could revolutionize the way prescription drugs are dispensed.
PBMs act as intermediaries between pharmaceutical companies and health insurance plans, negotiating prices for medications and handling claims processing. However, their opaque methods have led to accusations of profiteering, with some critics arguing that they prioritize maximizing profits over ensuring patients receive affordable treatment.
The paper proposes two alternative business models: a capitated premium model tied to a medical loss ratio (MLR), and a fee-for-service (FFS) model that includes a key performance indicator (KPI) for delivered drug trend. In both scenarios, PBMs would be incentivized to manage costs effectively, rather than simply maximizing profits.
The capitated premium model would see PBMs receiving a fixed premium from health insurance plans, with the potential to earn more if they meet certain KPIs, such as a target MLR of 92%. This approach could encourage PBMs to adopt cost-effective strategies, such as negotiating better prices with pharmaceutical companies or implementing effective utilization management programs.
The FFS model would see PBMs receiving a fee for each prescription dispensed, with the potential to earn more if they deliver a lower drug trend. This approach could incentivize PBMs to prioritize patient needs over profits, by ensuring that patients receive the most cost-effective treatment options.
Both models would require significant changes to the current PBM landscape, including the elimination of opaque administrative fees and price protection rebates. Instead, PBMs would need to focus on delivering high-quality, cost-effective care to patients.
The paper also highlights the potential benefits of vertical integration between PBMs and insurance companies, which could lead to more effective management of prescription drug costs. This approach has already been adopted by some companies, with United Healthcare’s OptumRx launching a new pricing model that guarantees a lower drug trend for patients.
While the proposed models offer a promising alternative to the current PBM system, they are not without their challenges. For example, PBMs would need to adapt to new business models and incentives, which could require significant investments in infrastructure and staffing.
Furthermore, patients may face higher out-of-pocket costs under these new models, as PBMs prioritize cost-effective treatment options over discounted prices for brand-name medications.
Cite this article: “Disrupting the Status Quo: A Case for Pharmacy Benefit Manager Insurance Business Models”, The Science Archive, 2025.
Pharmacy Benefit Manager, Prescription Drugs, Insurance Business Models, Medical Loss Ratio, Fee-For-Service, Key Performance Indicator, Capitated Premium Model, Administrative Fees, Price Protection Rebates, Vertical Integration
Reference: Lawrence W. Abrams, “A Pharmacy Benefit Manager Insurance Business Model” (2025).
