The provisioning, payment, selection and administration of medical benefits plans for employers became ripe for outsourcing when ERISA was enacted in 1974. Since then, the increasingly bureaucratic and complex nature of the healthcare delivery system for employees under insurance (or self-funded) plans continue to justify outsourcing.
However, U.S. legislation governing the uses and abuses of private, personally identifiable information now applies to healthcare. In other countries, privacy regulation is more pervasive and reaches into any form of abuse of private information.
Employers may offer medical insurance plans for their employees and retirees. Such plans may either be purchased from insurers or managed by administrators under a self-insured plan.
Third Party Administration (“TPA”) Services
“Third party administrators” of self-insured medical benefits plans help design, operate, administer and account for spending under the plans. TPA’s functions may be regulated and require licensure, depending on the plan and the local laws. TPA’s and others emerged as outsourcers of medical and pharmacy benefits plans when ERISA was enacted in 1974.
Pharmacy Benefit Management (“PBM”) Services
Pharmacy benefit managers (“PBM’s”) design plans for employers that provide drug benefits as part of their medical and healthcare coverage for employees. In addition to designing plans, PBM’s manage claims, create programs to improve the delivery of drugs to covered individuals, help patients understand drug usage and help doctors monitor medical outcomes.
Bundled Pricing
Traditional pharmacy benefit managers (“PBM’s”) have acted as independent contractors to purchase drugs for client companies. The PBM’s classic pricing model bundled the costs of the drugs purchased with their fees for administration by charging a resale price without disclosing the cost of drugs resold. Total clarity in pricing for PBM’s is relatively rare, perhaps only in 10% of all PBM contracts in place today, reported the Wall Street Journal (Aug. 18, 2005, p. C5, col. 3). The PBM’s have been reluctant to disclose all their discounts and rebates from pharmaceutical manufacturers and other drug suppliers. Enterprise customers may prefer the predictability of pricing to the transparency of the operation under a “pass-through” costing model.
Fee for Service with Transparency in Pass-Through Costs
In a new model (similar to other BPO pricing models), PBM’s have begun to adopt a more transparent pricing structure that separates the costs of drugs purchased from the PBM’s service fees. In the “pass-through” pricing model, the PBM negotiates discounts and rebates with pharmaceutical manufacturers and other drug suppliers, but passes these savings along to the enterprise customer in return for a higher management fee.
Impact of Pricing Model on Type of Services
The pricing model has a significant impact upon the service provider’s profitability. Generic drug prices may be 30% to 60% less expensive than comparable prescription drugs, but PBM’s may have a higher profitability on generic drugs because margins may be greater and cash flow may be better due to lower amounts of cash invested in “inventory.”