Behold, new health industry jargon!
Health insurers, like private plans, employer-insured plans, and even many federal and state-level health plans (including Medicare), have to come up with ways to offer coverage for drugs to their plan members. What drugs are covered? How much does insurance cover? How much is the out-of-pocket cost? Questions like that are typically answered in what is called a formulary.
Let’s slow down, what’s a formulary? A formulary is a tiered list of drugs that an insurer will cover. A higher tier drug is what the insurer prefers that a patient uses, and thus, insurance covers more of it. For lower-tier drugs, patients pay a higher co-pay or co-insurance to disincentivize getting these drugs, and for drugs not on the formulary, the patient has to face the full list price of the drug.
Health plans typically contract out pharmacy benefit managers (PBMs) to negotiate the contents of the formulary with drug manufacturers and even retail pharmacies. With retail pharmacies, the PBM may negotiate discounts on the list price of the drug. With the manufacturer, the drugs are placed on the tiers according to how much a manufacturer pays in a rebate to the PBM.
Why would the manufacturer pay to get their drug on a formulary? Well, if their drug is expensive to patients by either being low on the formulary tiers or not on it at all, then the sales of the drug will be low.
While PBMs claim to create large cost savings for patients and their clients (health plans), there are a number of conflicting pieces of information.
For one thing, pharmacies, manufacturers, and insurers are not allowed to disclose the difference between the list price and the final negotiated price on the formulary. So, there is no ability for the market to correct itself when PBMs price in a predatory manner, because no one really has an easy way of figuring out what other plans are paying. Then, we also have the great market concentration of the industry.