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by

James McSpadden, AARP Public Policy Institute

Health insurance plans assemble pharmacy networks annually by contracting with pharmacies to serve as access points for enrollees to fill prescriptions. These pharmacy networks have a

considerable influence on how older adults – who fill more than four prescriptions per month on average and rely on retail pharmacies to fill most of their prescriptions – access needed

medications.

In this Spotlight report, AARP’s Public Policy Institute (PPI) continues its Medication Literacy Series by exploring how plans develop pharmacy networks and how these networks affect older

adults. Specifically, PPI considers what the shift to preferred pharmacy networks means for older adults’ cost sharing and whether current standards of network accountability are sufficient.

It also identifies steps that policymakers can take to ensure that pharmacy networks continue to work for older adults.  

Pharmacy Networks

Pharmacy networks essentially administer a plan’s prescription drug benefit to its enrollees. In practice, health insurers and employers (plan sponsors) contract with third parties known as

pharmacy benefit managers (PBMs) to build pharmacy networks. PBMs negotiate agreements with hundreds or thousands of pharmacies each year to be in a plan’s network (i.e., in network).

Under these agreements, pharmacies accept certain reimbursements from the plan when they fill prescriptions and fulfill the terms of a plan’s benefit, including: what an enrollee pays for a

drug (copay or coinsurance); any restrictions, such as prior authorization, on the drug (utilization management); and whether the drug is on the plan’s formulary and can be filled

(coverage). In return, pharmacies expect that a portion of enrollees will use their services.

Typically, health plans shape their pharmacy networks into one of three models:

enrollees to use only network pharmacies. Preferred – establishes selective contracts with a subset of in-network pharmacies to create two levels (i.e., preferred and nonpreferred) within

the network.

Preferred Pharmacy Networks

The dominant shape of pharmacy networks has become the preferred network. By embracing preferred networks, which rely on selective contracts between a subset of network pharmacies and plans,

health plans can reduce their prescription drug spending by encouraging enrollees to use lower-cost pharmacies. Under preferred network contracts, plans use additional leverage to negotiate

lower reimbursement with these pharmacies, namely reduced cost sharing for consumers intended to drive a higher volume of business to preferred pharmacies.

Effect of Pharmacy Network Design on Consumers

Although consumers stand to pay less at a preferred pharmacy than they would at other in-network pharmacies, savings may vary based on which preferred pharmacy is used. Negotiations between

pharmacies, PBMs, manufacturers, and other entities in the supply chain can result in prescription drug price variation across retail pharmacies. So, an enrollee in a plan with a preferred

pharmacy network may discover that the annual out-of-pocket cost of a drug at one preferred pharmacy is lower than the annual out-of-pocket cost of the same drug at a different preferred

pharmacy. The variation could be hundreds of dollars, depending on the drug and the plan.

A recent survey of adults showed that coverage, convenience, and cost—factors connected to a plan’s pharmacy network—predominantly influenced consumer choice of pharmacy. Whether a pharmacy

was in their plan’s network was the top factor (64 percent), followed by proximity to where they live (59 percent), store hours (44 percent), and lower cost for prescriptions (40 percent). 

Yet information about pharmacy networks does not always reach enrollees, and it may not be actionable.

See infographic for how consumers can learn about their pharmacy networks.

Monitoring Preferred Pharmacy Networks 

If networks do not include enough pharmacies, or include a limited number of pharmacies in a certain geographic area, consumers may not have inconsistent access to the medicines they need.

As such, federal and state officials have put in place standards for the adequacy of a plan’s pharmacy network that seek to ensure sufficient access for all enrollees of a plan.

Those standards do not, however, measure accessibility within preferred networks. There are no federal or state standards requiring that a plan’s preferred pharmacy network meet the same

access standards as the plan’s entire network.

Policy Solutions

As plans continue to build pharmacy networks and shape them in various ways, policymakers should find ways to improve networks so older adults can continue to access affordable prescription

drugs.

Federal and/or state policies should:

transparency

Information about pharmacy networks and associated cost sharing remains opaque for many older adults. Greater transparency and improved oversight and administration can help ensure that

older adults continue to access and afford the drugs they need.     

Suggested Citation: McSpadden, James. Medication Literacy Series: The Role That Pharmacy Networks Play in Accessing and Affording Prescription Drugs. Washington, DC: AARP Public Policy

Institute, October 9, 2024. https://doi.org/10.26419/ppi.00337.001

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