In the United States , a third-party administrator ( TPA ) is an organization that processes insurance claims or certain aspects of employee benefit plans for a separate entity. It is also a term used to define organizations within the insurance industry which administer other services such as underwriting and customer service. This can be viewed as outsourcing the administration of the claims processing, since the TPA is performing a task traditionally handled by the company providing the insurance or the company itself. Often, in the case of insurance claims, a TPA handles the claims processing for an employer that self-insures its employees. Thus, the employer is acting as an insurance company and underwrites the risk . The risk of loss remains with the employer, and not with the TPA. An insurance company may also use a TPA to manage its claims processing, provider networks, utilization review , or membership functions. While some third-party administrators may operate as units of insurance companies, they are often independent.
44-750: In the United States, a pharmacy benefit manager ( PBM ) is a third-party administrator of prescription drug programs for commercial health plans, self-insured employer plans, Medicare Part D plans , the Federal Employees Health Benefits Program , and state government employee plans. PBMs operate inside of integrated healthcare systems (e.g., Kaiser Permanente or Veterans Health Administration ), as part of retail pharmacies (e.g., CVS Pharmacy ), and as part of insurance companies (e.g., UnitedHealth Group ). The role of pharmacy benefit managers includes managing formularies, maintaining
88-510: A medical service is accessed. It is technically a form of coinsurance , but is defined differently in health insurance where a coinsurance is a percentage payment after the deductible up to a certain limit. It must be paid before any policy benefit is payable by an insurance company. Copayments do not usually contribute towards any policy out-of-pocket maximum, whereas coinsurance payments do. Insurance companies use copayments to share health care costs to prevent moral hazard . It may be
132-900: A 2022 web search conducted by Mattingly et al. it was found that "A total of 45 states implemented policies on pharmacy operations, 41 states on pricing and reimbursement , 36 states on licensure and registration, 26 on reporting requirements, and 25 on pharmacy networks ". These are some ways in which states regulate drug pricing and pharmacy reimbursement funds: maximum allowable cost (MAC) lists, timely payment for pharmacy services, prevention of spread pricing, adjudication fee limit, and calculations for drug price reimbursement. National Regulation S.127 - Pharmacy Benefit Manager Transparency Act of 2023 The Pharmacy Benefit Manager Transparency Act of 2023, Introduced on January 26, 2023, states that pharmacy benefit managers cannot unfairly lower rebate payments to pharmacies, claw back reimbursement payments, or charge arbitrary fees. If PBMs pass all discounts to
176-506: A Tuesday in late September, a senate hearing was held where Lars Fruergaard Jørgensen, the CEO of Novo Nordisk , the Danish pharmaceutical company that owns these two drugs, expressed his concerns to several congressional leaders, including Vermont Senator Bernie Sanders, stating that PBMs are the reason for Novo Nordisk not being able to lower the list prices since PBMs may take the drug off their list if
220-533: A claims adjuster for the insurance company and sometimes works in conjunction with the inside insurance company claims adjuster or an outside claims investigator as well as the defense counsel. The defense counsel in some situations is selected by the TPA. The point is that the larger the SIR, the more responsibility the TPA has over the control of the way the claim is handled and ultimately resolved. Some self-insured retentions are in
264-403: A deductible, but rather than being paid at the end of a claim (when a loss payment is made to a claimant), the money is paid up front by the insured for costs, expenses, attorney fees etc. as the claim moves forward. If there is a settlement or verdict within the SIR, then that is also paid by the insured up to the limit of the SIR, before the insurer steps in and pays its portion. The TPA acts like
308-774: A formulary to encourage or even require "health plan participants to use preferred formulary products to treat their conditions". In 2012, Express Scripts and CVS Caremark transitioned from using tiered formularies, to those that excluded drugs from their formulary. As of 2013, in the United States, a majority of the large managed prescription drug benefit expenditures were conducted by about 60 PBMs. Few PBMs are independently owned and operated. PBMs operate inside of integrated healthcare systems (e.g., Kaiser Permanente or Veterans Health Administration ), as part of retail pharmacies, major chain drug stores (e.g., CVS Pharmacy or Rite-Aid ), and as subsidiaries of managed care plans or insurance companies (e.g., UnitedHealth Group ). As of 2015,
352-581: A higher copay to incentivize consumers to buy drugs on a preferred tier. Drugs which do not appear on the formulary at all mean consumers must pay the full list price. To get drugs listed on the formulary, manufacturers are usually required to pay the PBM a manufacturer's rebate, which lowers the net price of the drug, while keeping the list price the same. The complex pricing structure of the formulary can have unexpected consequences. When filing an insurance claim, patients usually are charged an insurance copayment which
396-881: A middleman rip-off as you are going to find”, because they make more money when they pick a higher-priced drug over a lower-priced drug. In June 2024, the New York Times released its first article in a series critiquing pharmacy benefit managers for artificially raising drug prices. In July 2024, the Federal Trade Commission released an interim report on its 2-year investigation into pharmacy benefit managers, many of which it accuses of raising drug prices due to conflicts of interest , consolidation, and other factors. It looks likely to sue as soon as August 2024. As of July 2024, states that have already filed suits against PBMs include Vermont , California , Kentucky , Ohio , and Hawaii . Bill Head, assistant vice president at
440-538: A pharmacy network, setting up rebate payments to pharmacies, processing prescription drug claims, providing mail order services, and managing drug use. PBMs play a role as the middlemen between pharmacies, drug manufacturers, wholesalers, and health insurance plan companies. As of 2023, PBMs managed pharmacy benefits for 275 million Americans. As of 2023, The three largest PBMs in the US, CVS Caremark , Cigna Express Scripts , and UnitedHealth Group’s Optum Rx, make up about 80% of
484-592: A small portion of the actual cost of the medical service but is meant to deter people from seeking medical care that may not be necessary, e.g., an infection by the common cold . In health systems with prices below the market clearing level in which waiting lists act as rationing tools, copayment can serve to reduce the welfare cost of waiting lists. However, a copay may also discourage people from seeking necessary medical care, and higher copays may result in non-use of essential medical services and prescriptions. The German healthcare system had introduced copayments in
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#1732905092343528-482: A third-party administrator. For example, an employer may choose to help finance the health care costs of its employees by contracting with a TPA to administer many aspects of a self-funded health care plan. This term is also now commonly used in commercial general liability (CGL) policies or so called "casualty" business. In these instances, the liability policies are written with a large (in excess of $ 50,000) self-insured retention (SIR) that operates somewhat like
572-443: Is based on the public list price, and not the confidential net price. Around a quarter of the time, the cost of the insurance copayment on the list price is more than the entire price of the drug bought directly in cash. The PBM can then pocket the difference, in a practice known as a "clawback". Consumers can choose to buy the drug in cash, but in their contracts with pharmacies, PBMs would forbid pharmacists from telling consumers about
616-404: Is reduced in price insurers will agree to classify it as generic for copayment purposes (as occurred with simvastatin ). Pharmaceutical companies have a very long term (frequently 20 years or longer) lock on a drug as a brand name drug which for patent reasons cannot be produced as a generic drug. However, much of this time is exhausted during pre-clinical and clinical research . To cushion
660-878: The Department of Managed Health Care to disclose information. SB 966: Pharmacy benefits SB 966: Pharmacy benefits is a California state bill written by state senators Aisha Wahab and Scott Weiner . It is currently in the process of becoming law. Adding on to the Knox Knee Act, SB 966 requires all PBMs to acquire licensure under the California Department of Insurance and file annual business reports disclosing information about revenue and purchaser-specific benefits. SB 966 also prohibits pharmacy benefit managers from discriminating against nonaffiliated pharmacies and requiring customers to purchase from affiliated pharmacies. According to Assemblymember Devon Mathis, co-author of
704-491: The Pharmaceutical Care Management Association (PCMA) , claims that “[Pharmacy benefits managers] are the only entity in the drug-supply chain that exert downward pressure on drug prices by negotiating rebates and discounts with manufacturers". Since September 2024, brand name drugs Ozempic and Wegovy, two common weight loss and anti-diabetic drugs, have been experiencing increased list prices. On
748-510: The collective buying power of enrollees through their client health plans, enabling plan sponsors and individuals to obtain lower prices for their prescription drugs. PBMs negotiate price discounts from retail pharmacies, rebates from pharmaceutical manufacturers, and mail-service pharmacies which home-deliver prescriptions without consulting face-to-face with a pharmacist. Pharmacy benefit management companies can make revenue in several ways. First, they collect administrative and service fees from
792-485: The PBM from discussing costs and reimbursements. This leads to lack of transparency. Therefore, states are often unaware of how much money they lose due to spread pricing, and the extent to which drug rebates are passed on to enrollees of Medicare plans. In response, states like Ohio, West Virginia, and Louisiana have taken action to regulate PBMs within their Medicaid programs. For instance, they have created new contracts that require all discounts and rebates to be reported to
836-472: The U.S. (5 to 6 days). The difference is partly driven by the fact that hospital reimbursement is chiefly a function of the number of hospital days as opposed to procedures or the patient's diagnosis. Drug costs have increased substantially, rising nearly 60% from 1991 through 2005. Despite attempts to contain costs, overall health care expenditures rose to 10.7% of GDP in 2005, comparable to other western European nations, but substantially less than that spent in
880-578: The U.S. (nearly 16% of GDP). However, after research studies by the Forschungsinstitut zur Zukunft der Arbeit (Research Institute for the Future of Labor) showed the copayment system was ineffective in reducing doctor visits , it was voted out by the Bundestag in 2012. Some insurance companies set the copay percentage for non-generic drugs higher than for generic drugs . Occasionally if a non-generic drug
924-424: The United States, health insurance providers often hire an outside company to handle price negotiations, insurance claims, and distribution of prescription drugs . Providers which use such pharmacy benefit managers include commercial health plans , self-insured employer plans, Medicare Part D plans , the Federal Employees Health Benefits Program , and state government employee plans. PBMs are designed to aggregate
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#1732905092343968-644: The Wall Street Journal wrote that while PBMs had "steered doctors to cheaper drugs, especially low-cost generic copies of branded drugs from big pharmaceutical companies" from 1992 through 2002, they had "quietly moved" into marketing expensive brand name drugs. In 2007, when CVS acquired Caremark, the function of PBMs changed "from simply processing prescription transactions to managing the pharmacy benefit for health plans", negotiating "drug discounts with pharmaceutical manufacturers", and providing "drug utilization reviews and disease management". PBMs also created
1012-666: The area of diabetes drugs. United States Secretary of Health and Human Services Alex Azar stated regarding PBMs, "Everybody wins when list prices rise, except for the patient. It’s rather a startling and perverse system that has evolved over time." On January 31, 2019, Health and Human Services released a proposed rule to remove the Anti-kickback Statute, safe harbor protections for PBMs and other plan sponsors, that previously allowed PBMs to seek rebates from drug manufacturers. Ron Wyden stated in April 2019 that they were as “clear
1056-472: The average. Third-party administrator Third-party administrators also handle many aspects of other employee benefit plans such as the processing of retirement plans and flexible spending accounts . Many employee benefit plans have highly technical aspects and difficult administration that can make using a specialized entity such as a TPA more cost effective than doing the same processing in house. Third-party administrators are prominent players in
1100-485: The bill, this would effectively reduce drug prices for consumers. Additionally, the National Community Pharmacists Association reported that health insurance premiums increased by a nationwide average of 16.66% between 2015 and 2019. In states with licensing regulations, the increase in premiums was 0.3% lower than the national average, while in states without these regulations, it was 0.4% above
1144-979: The cause of high prices of these drugs. More recently, federal lawmakers have become more critical of the business practices in the PBM industry. For example, gag clauses between PBMs and pharmacies regarding pricing plans were banned on a nationwide scale following the enactment of both the Patient Right to Know Drug Prices Act and the Know the Lowest Price Act in 2018. Much of the controversy surrounding PBM practices has to do with how PBMs are incentivized by profits to raise drug costs. Due to this, regulators are mainly concerned with managing drug costs and pharmacy reimbursement rates. Many states have their own way of regulating PBM activities. These relate to different areas of PBM practice from managing reimbursement rates to increasing transparency about PBM business practices. In
1188-529: The drugs they sell. PBMs are not required to share how these rebate rates are calculated and this can result in local pharmacies being paid back less or the same as the sticker prices of the drugs themselves. Clint Hopkins, joint owner of Pucci's Pharmacy in Sacramento, reports regularly turning away customers rather than lose money on high-end prescriptions. In 1968, the first PBM was founded when Pharmaceutical Card System Inc. (PCS, later AdvancePCS) invented
1232-566: The federal Justice Department, and their effectiveness in reducing prescription costs and saving clients money was questioned. In 2004, litigation added to the uncertainty about PBM practices. In 2015, there were seven lawsuits against PBMs involving fraud, deception, or antitrust claims. State legislatures have been using "transparency," "fiduciary," and "disclosure" provisions to improve the business practices of PBMs. A 2013 Centers for Medicare & Medicaid Services study found negotiated prices at mail order pharmacy to be up to 83% higher than
1276-441: The health care industry and have the expertise and capability to administer all or a portion of the claims process. They are normally contracted by a health insurer or self-insuring companies to administer services, including claims administration, premium collection, enrollment and other administrative activities. A hospital or provider organization desiring to set up its own health plan will often outsource certain responsibilities to
1320-535: The health plan and provide them with pricing information about their services, they will be exempt from these prohibitions. Under this act, PBMs would also need to disclose information about payments from health plans to the Federal Trade Commission (FTC) through annual reports. The Knox-Keene Health Care Service Plan Act of 1975 is a set of Californian laws that regulate Healthcare Service Plans. Under these laws, pharmacy benefit managers with contracts to Health care service plans are required by law to be registered with
1364-411: The high copay costs of brand name drugs, some pharmaceutical companies offer drug coupons or temporary subsidized copayment reduction programs lasting from two months to twelve months. Thereafter, if a patient is still taking the brand name medication, the pharmaceutical companies might remove the option and require full payments. If no similar drug is available, the patient is "locked in" to either using
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1408-502: The investment company may contract with a third-party administrator to handle much of the administrative work and only handle the remaining investment work. Copayment A copayment or copay (called a gap in Australian English) is a fixed amount for a covered service, paid by a patient to the provider of service before receiving the service. It may be defined in an insurance policy and paid by an insured person each time
1452-626: The late 1990s in an attempt to prevent overutilization and control costs. For example, Techniker Krankenkasse -insured members above 18 years pay the copayments costs for some medicines, therapeutic measures and appliances such as physiotherapy and hearing aids up to the limit of 2% of the family's annual gross income. For chronically ill patients, the co-payment limit is 1% including any dependant living in their home. The average length of hospital stay in Germany has decreased in recent years from 14 days to 9 days, still considerably longer than average stays in
1496-547: The market share and cover approximately 270 million people. This consolidation and concentration has led to lawsuits and bipartisan criticism for unfair business practices. In 2024, The New York Times , Federal Trade Commission , and many states Attorneys General accused pharmacy benefit managers of unfairly raising prices on drugs. Additionally, several states have created regulations and policies concerning PBM business practices, however, more research must be conducted on how these regulations will affect patient outcomes. In
1540-545: The millions of dollars and the TPAs are large multinational non-insurance entities that handle all the claims. In contrast, some self-insureds choose not to outsource claims handling to a TPA, preferring instead to handle all claims in house. This is known as self-administration. Retirement plans such as a 401(k) are often partly managed by an investment company. Instead of handling all the plan contributions by employees, distributions to employees, and other aspects of plan processing,
1584-533: The negotiated prices at community pharmacies. A 2014 ERISA (Employee Retirement Income Security Act of 1974) hearing noted that vertically integrated PBMs may pose conflicts of interest and that PBMs' health plan sponsors "face considerable obstacles in...determin[ing] compliance with PBM contracts including direct and indirect PBM compensation contract terms". In 2017, the Los Angeles Times wrote that PBMs cause an inflation in drug costs, especially within
1628-481: The original insurance plan. They can also collect rebates from the manufacturer. Traditional PBMs do not disclose the negotiated net price of the prescription drugs, allowing them to resell drugs at a public list price (also known as a sticker price) which is higher than the net price they negotiate with the manufacturer. This practice is known as "spread pricing". The industry argues that savings are trade secrets . Pharmacies and insurance companies are often prohibited by
1672-529: The pieces become too low decreasing access to the drug for everyone. However, this was not the case as written commitments by all three major PBMs (Caremark, Express Scripts, and Optum Rx) promised not to withdraw coverage should Novo Nordisk decide to reduce their prices. Following the hearing the Senate Health, Education, Labor, and Pensions Committee submitted a report on the drug pricing strategies of Novo Nordisk, from which it can be concluded that PBMs were not
1716-492: The plastic benefit card. By the "1970s, [they] serve[d] as fiscal intermediaries by adjudicating prescription drug claims by paper and then, in the 1980s, electronically". By the late 1980s, PBMs had become a major force "as health care and prescription costs were escalating". Diversified Pharmaceutical Services was one of the earliest examples of a PBM which came from within a national health maintenance organization United HealthCare (now United HealthGroup). In August 2002,
1760-810: The possibility of buying their medication for a cheaper price without an insurance claim, unless consumers directly ask about it. Since 2017, six states have passed legislation making such "gag clauses" illegal. This has recently been followed by a federal bans on gag orders for private insurance effective Oct 2018, and for Medicare effective Jan 2020. The New York Times , Federal Trade Commission , and many states' Attorneys General argue pharmacy benefit managers unfairly raise prices on drugs. A report by House Committee on Oversight and Accountability chairman, Kentucky Rep. James Comer , found that PBMs use utilization schemes to increase pricing for payers and health plans. PBMs regulate how much community pharmacies are reimbursed by drug companies and health insurance plans for
1804-430: The states. In return, Medicaid pays PBMs a flat administrative fee. PBMs advise their clients on ways to "structure drug benefits" and offer complex selections at a variety of price rates from which clients choose. This happens by constructing a "formulary" or list of specific drugs that will be covered by the healthcare plan. The formulary is usually divided into several "tiers" of preference, with low tiers being assigned
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1848-555: The three largest public PBMs were Express Scripts , CVS Health (formerly CVS Caremark) and United Health/OptumRx/Catamaran . As of 2022, Caremark Rx, Express Scripts, OptumRx, Humana, Prime Therapeutics, and MedImpact Healthcare Systems were the six largest public PBMs that control 95% of the market, while the top three control 80% of the market. In 2012 Express Scripts acquired rival Medco Health Solutions for $ 29.1 billion and became "a powerhouse in managing prescription drug benefits". As of 2015, Express Scripts Holding Company
1892-545: Was the largest pharmacy benefit management organization in the United States. In October 2015 Express Scripts began reviewing pharmacy programs run by AbbVie Inc and Teva Pharmaceuticals Industries Ltd regarding the potential use of tactics that "can allow drugmakers to work around reimbursement restrictions" from Express Scripts and other insurers. These reviews resulted from investigations into "questionable practices" at Valeant Pharmaceuticals International Inc 's partner pharmacy, Philidor Rx Services . In 2011 Caremark Rx
1936-944: Was the nation's second-largest PBM. Caremark Rx was subject to a class action lawsuit in Tennessee, which alleged that Caremark kept discounts from drug manufacturers instead of sharing them with member benefit plans, secretly negotiated rebates for drugs and kept the money, and provided plan members with more expensive drugs when less expensive alternatives were available. CVS Caremark paid $ 20 million to three states over fraud allegations. In March 2015 UnitedHealth Group acquired Catamaran Corporation for about $ 12.8 billion to extend grow its PBM business. PBMs have recently been subject to scrutiny mainly due to their lack of transparency regarding their complex drug pricing strategies and multiple facets of their business practices that contribute to rising drug pricing. In 1998, PBMs were under investigation by Assistant U.S. Attorney James Sheehan of
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