Page 23 - Management Theory 2023-2024 Edition

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20. Growth of Pharmacy Benefit Management (PBMs)

PBMs are classified as the type of business entity that develop and manage prescription drug benefits for
managed care organizations, for government programs such as Medicare and Medicaid, and for their staff
insured employers.

There are three major groups that own or use the PBM services to provide prescription related services to their
plan members. They are:

1. HMO, PPO, POS, insurance career
2. Medicaid, CHAMPUS, Federal Employer Benefit Program (government sponsored program)
3. Large companies that manage their employees’ benefits (e.g. Walmart)

When an HMO, PPO, POS or any self-insured employer group cannot use their own pharmacy benefit program
efficiently, they should approach the PBM service providers to increase the plan efficiency and reduce costs.

PBMs are originated through one of two distinct channels:

1. As independent companies
2. From within HMOs

The following are examples of a few PBMs that originated or were created from HMOs.

HMO Generated PBM from HMO

1. United Healthcare Diversified Pharmaceutical Services (DPS)

2. Blue Cross Blue Shield of Maryland Advance Program (AP)

3. Prescription Care Prescription Solution (PS)

The question arises that if HMOs are capable and efficient enough to run their own internal pharmacy programs,
then why would they need the PBM’s help? The major factor that drives the growth of PBMs is their large scale
operation. A large size HMO, PPO or POS may manage at the most one million members, but PBMs manage over
10 to 50 million members. Due to the large scale of operation, they are more capable of negotiating with
pharmaceutical companies and other healthcare- related entities to bring down cost, yet at the same time
provide satisfied and quality services to plan members compared to an independent HMO, PPO or POS. This is
the major reason for the overwhelming growth of PBMs.

Advantages of using PBMs over internal pharmacy management programs provided by an independent HMO,
PPO, or POS:

1. By using a PBM service, managed care organizations (HMO, PPO, POS) can save program development
costs, and system and real estate investment related expenses.

2. A PBM will provide more efficient service compared to managed care organizations due to their large
pharmacy networking and manufacturer's contracts.

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