SPREAD PRICING
Another proposal under discussion in Massachusetts would restrict or prohibit so-called “spread pricing” in prescription drug benefits.
Like many aspects of the prescription drug system, this issue is often presented in simple terms. But for union health plans and employer-sponsored coverage, the reality involves important tradeoffs and it is important to keep sight of what is actually driving costs in the system.
What is Spread Pricing?
Spread pricing is one of several ways pharmacy benefit managers (PBMs) are compensated for administering prescription drug benefits.
Under this model, a PBM negotiates:
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A price with the health plan or employer for a prescription drug
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A separate reimbursement rate with the pharmacy that dispenses the drug
The difference between those two amounts is called the “spread.”
It is important to remember that this is not the only pricing model used by plan sponsors, as some choose to use it as part of a broader benefit design.
DIFFERENT PBM MODELS EXIST
Union and employer plan sponsors typically choose between different contracting approaches based on their needs, workforce, and budget priorities.
These can include:
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Pass-through models, where the PBM charges an administrative fee and passes through pharmacy costs
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Spread pricing models, where the PBM assumes more responsibility for managing pharmacy pricing and is compensated through the spread
Each model reflects a different balance of risk and, importantly, plan sponsor choice.
What is driving prescription drug costs
As policymakers evaluate spread pricing, it is critical to distinguish between how costs are structured (ie different pricing models) and where prices originate.
The primary driver of prescription drug spending is the price set by drug manufacturers.
Many brand-name drugs launch at high prices and continue to increase over time. Specialty drugs, often used to treat complex or chronic conditions, can cost tens or even hundreds of thousands of dollars per year.
These prices are set by drug manufacturers - before PBMs, pharmacies, or health plans are even involved.
PBMs and plan sponsors operate within this pricing environment. Their role is to negotiate discounts, manage utilization, and structure benefits to mitigate the impact of those prices for plans.
Changes to PBM contracting models do not reduce manufacturer list prices. They change how those costs managed by plans.
WHY SOME PLANS CHOOSE SPREAD PRICING
For some union health plans and employers, spread pricing is a deliberate choice based on how they want to structure and manage their pharmacy benefits.
Spread pricing can offer:
• More predictable pharmacy costs
• Reduced administrative burden
• A way to outsource pricing volatility and network management
In these arrangements, the PBM takes on responsibility for negotiating pharmacy reimbursement and managing fluctuations in drug pricing. If not for the PBM, these functions that would otherwise need to be handled directly by the plan.
THE TRADEOFF FOR UNIONS AND EMPLOYERS
If spread pricing is restricted, plans may be required to shift to alternative models—typically, administrative fee or pass-through arrangements.
That can result in:
• Higher or more visible administrative fees
• Greater exposure to pharmacy price fluctuations
• Increased complexity in managing pharmacy benefits
Plans lose the ability to choose the model that best balances cost, risk, and administrative burden for their members.
Transparency vs. cost control - and choice
There is broad agreement that transparency in prescription drug pricing is important.
Massachusetts has already taken significant steps in this direction, including new reporting requirements and oversight enacted in last session’s health care cost legislation.
As that framework is implemented, it will provide more data on how different PBM arrangements operate in practice.
But transparency alone does not lower the price of drugs. Policies that focus solely on PBM contracting models overlook the primary driver of costs in the system: manufacturer pricing. And they come at the expense of plan sponsor flexibility.
Policy decisions involve tradeoffs
For unions and employers, the central question is not whether one model is universally better than another.
It is whether plan sponsors should have the flexibility to choose the approach that best fits their needs as they manage the impact of high and rising drug prices.