BLUNDERS. in Contracting With a PBM

Transcription

1 5 COMMON BLUNDERS in Contracting With a PBM by Gannon Murphy, Ph.D., and Seth A. Friedman The language in contracts with pharmacy benefit managers (PBMs) can be quite complex. Avoiding these five common mistakes when negotiating a PBM contract can increase the transparency of these deals and help benefit plans save money. 36 benefits magazine march 2018

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3 2. Differing Definitions The old maxim the devil s in the details could not be more applicable with respect to how terms are defined in PBM contracts. What actually constitutes a brand drug, generic or specialty medication? This would seem simple and straightforward but, alas, it is not where PBMs are concerned. And, once again, a proprietary algorithm is often at play. Some PBMs redefine a portion of the generic drugs available in the marprescription drug benefits Pharmacy benefit managers (PBMs) manage the pharmacy benefits for some 266 million people in the United States, whether through commercial health plans, self-funded employer plans, unions, state and federal programs, or Medicare and Medicaid. 1 Three companies Express Scripts, Inc., CVS/Caremark and OptumRx (a UnitedHealth Group-owned company) manage pharmacy benefits of about 80% of those beneficiaries. The remaining market share for pharmacy benefits is picked up by one of several dozen other small- to mid-sized PBMs. PBM contract language has become increasingly complex. The terms laid out in most contracts not to mention the pricing itself can be utterly mindboggling. Complexity breeds confusion, and confusion can lead to missed opportunities, both in terms of cost and quality of service. PBMs continue to provide a vital service to plan sponsors and beneficiaries, but the complexity and lack of transparency has marred takeaways many of the relationships PBMs have with the organizations they serve. A recent survey conducted by Gallagher Benefit Services on behalf of the National Pharmaceutical Council found that more than half (58%) of employers think their PBM contract is too complicated and often benefits the PBM at their own expense. Only 30% indicated that they understand the details of their contract. 2 This article will cover five common mistakes plan sponsors make when contracting with a PBM. The underlying issue in all five of these mistakes is that there is fundamental difference between price and cost when contracting with PBMs. Price is what is printed on a page (usually in the form of percentage-based discounts off of average wholesale price (AWP), dispensing fees and any administrative fees and then offset by applicable rebates). Cost, on the other hand, is what the PBM actually pays when all is said and done, in hard dollars. Pharmacy benefit manager (PBM) contract language is complex. More than half of employers that responded to a recent survey said their PBM contract is too complicated and often benefits the PBM at the employer s expense. Only 30% indicated that they understand the details of their contract. One challenge in PBM contracting is lack of regulation governing average wholesale price (AWP), which is the standard industry benchmark for establishing drug prices. The definitions of brand, generic and specialty medications differ among PBMs, making it more difficult to accurately compare the discounts that they offer. Under pass-through deals, PBMs pass through the discounts they negotiate with their pharmacies directly to their customers. But some pass-through deals carry less attractive discounts when compared with traditional deals. Some PBMs use a practice known as offsetting that allows them to make up for a shortfall in one guarantee with overperformance in a different guarantee. Any form of offsetting should be clear and equitable and protect the interest of the plan. 1. Fuzzy Math AWP, mentioned before, is the standard industry benchmark for establishing the drug prices that nearly all PBM deals are based on. Guaranteed AWP discounts are established in each PBM contract in the aggregate for brand drugs, generics and specialty medications. What may be surprising, however, is that there is no regulation whatsoever in the industry that governs what AWP actually is. Some in the profession sometimes not-so-jokingly refer to AWP as standing for Ain t What s Paid. While some PBMs have committed to using a more recognized, objective and independent source to establish AWP (such as the regularly updated indexes published by Medi-Span 3 ) others establish their own version of AWP, sometimes using a proprietary algorithm. PBMs that use such algorithms to establish AWP amounts that are higher than what is market-competitive create a margin for themselves to quote drug discounts that look better than they really are. Solution: Ensure the contract states that both the PBM price quotes and its reconciliation of guarantees will be based on an objective, independent source. 38 benefits magazine march 2018

4 prescription drug benefits ket and reclassify them as brand drugs. Many generic drugs, known as single-source generics (SSGs), have only one manufacturer. PBMs can negotiate deeper discounts on SSGs with the pharmacies in their network compared with discounts they can negotiate on brand drugs, but the discounts are considerably weaker than those on most other generics. Thus, some PBMs redefine brand drugs to include SSGs. When quoted this way in their discounts, this practice makes it appear that the PBM has improved the discounts to both the generics and brands. Consider this analogy: Imagine that I m one of two watch sellers in town. In front of my competitor s storefront is a sign that says 20% Off All Deluxe Watches! On my sign, however, it says, 30% Off Deluxe Watches! Most people would take my deal. But they don t realize that while my competitor s definition of deluxe includes only the finest watches made, my definition includes those, plus lower cost watches. Not only does this enable me to inflate the value of my discounts on deluxe watches, it also enables me to claim deeper discounts on standard watches. Ultimately, the question with every discount is: discount off of what? Solution: PBM proposals and contracts should be required to use an objective source for the definition of brands, generics and specialty medications. 3. Transparent-Lite PBMs know that their customers are demanding greater transparency. As such, more and more are offering what they purport to be transparent deals, and many are, indeed, considerably more transparent. They begin by using more objective drug-pricing and drug-classification sources as outlined previously. Next, they offer pass-through pricing. This form of pricing differs from the traditional model in which PBMs make money through spread the difference in money collected from their customers versus what they owe back to the pharmacies in their network for the drugs dispensed. For example, a PBM might guarantee customers a brand discount of AWP minus 15% while having negotiated an actual discount with the pharmacy of 18%. Under a traditional model, the PBM pockets the 3% spread. Under a pass-through deal, PBMs pass through the same discount they negotiate with their pharmacies directly to their customer. Rather than collecting spread dollars, they apply a straight administrative fee that is charged either per claim, per member per month (PMPM) or on some other basis. Pass-through deals have the added benefit of constituting minimum guarantees, meaning that if the PBM can negotiate deeper discounts with the pharmacies in their network over the life of the contract, their clients reap the benefit. Traditional deals, on the other hand, constitute maximum guarantees. If the PBM negotiates deeper discounts, the PBM reaps the benefit. Many of these more transparent deals are quite good and, for the most part, do what they re intended to do. The old maxim the devil s in the details could not be more applicable with respect to how terms are defined in PBM contracts. However, many so-called transparent contracts are just as murky as the traditional ones. Some are even worse. Some PBMs quote prices to plan sponsors based on both a passthrough and traditional basis. Often the traditional deal carries deeper discounts, and the deals are structured in such a way as to clearly incentivize the traditional offer. How can this be? Aren t they supposed to be giving their customers exactly what they get on a pass-through model? While there are several possible explanations for this, one of them is as follows: When quoting on a pass-through basis, the PBM is assuming a completely different set of negotiated rates and contract terms with its pharmacies, namely, weaker discounts and contracts with other fees attached. Such contracts may be accompanied by undisclosed administrative fees that the pharmacies must agree to pay to PBMs for the privilege of being in their network (sometimes known march 2018 benefits magazine 39

5 prescription drug benefits bios Gannon Murphy, Ph.D., is area vice president of pharmacy benefit consulting for the Arthur J. Gallagher & Co. national pharmacy practice, where he consults with self-insured employer groups. Murphy has more than 21 years of experience in pharmacy benefit management and consulting. He was previously senior director of sales and account management with Prime Therapeutic and spent 15 years in the pharmacy benefit manager (PBM) industry, working for Pharmaceutical Strategies Group, UnitedHealth Group and Express Scripts, Inc. He completed his undergraduate work in business management at Cardinal Stritch University, followed by graduate studies in philosophy and religion at Bethel University. He earned his Ph.D. degree in philosophy and religious studies at Trinity Saint David College, University of Wales. Murphy is a member of PBM Professionals and Benefits and Health & Welfare Professionals. Seth A. Friedman is national pharmacy practice leader for Arthur J. Gallagher & Co. where he is responsible for the overall pharmacy consulting practice strategy, value proposition, thought leadership and results. Friedman has more than 20 years of experience in the pharmacy benefit management space working both as a consultant and for a pharmacy benefit manager (PBM). Clients have included Fortune 500 employers, Taft-Hartley funds, municipalities, thirdparty administrators, health systems and more. He is a nationally recognized speaker at PBM industry forums. Friedman previously was vice president in Aon Hewitt s National Pharmacy Practice and spent 15 years with Medco Health Solutions. He graduated from Quinnipiac University with a bachelor of science degree in health management and received his M.B.A. degree from Fairleigh Dickinson University. He is a member of the International Foundation Corporate Board. as direct and indirect reimbursement or (DIR) fees). Whatever spread dollars they may lose by offering a passthrough arrangement will be made up for by other undisclosed fees. Similarly, the numbers usually make the traditional deal look more attractive. In fact, it actually might be. PBMs that engage in such practices don t want customers to know how deep their negotiated discounts can really go with pharmacies. It s part of their secret sauce and, as they might argue, customers don t have a right to know what those rates are, any more than they have a right to know what car dealers paid for a car they are trying to sell us. Rather, plans must determine on their own whether the offer seems fair as it s presented. Solution: Have the numbers independently modeled and compared by a qualified professional. Doing so just makes good sense and will help establish whether the terms are really transparent or whether they re transparentlite. 4. Inflation Games Overall drug costs increased by 2.1% last year, a 318% greater increase than other products such as food and energy. In addition to outpacing the costs of other products, prescription drug costs are also outpacing overall inflation. 4 In some instances, certain drugs have more than tripled or quadrupled in price. The cost of at least one medication EpiPen nearly sextupled, increasing from $103 in 2009 to more than $608 in PBMs attempt to fight drug inflation by negotiating with drug manufacturers (rebates are only one, though a central part, of those negotiations). Not all payers, however, get the full benefit of these negotiations. Most PBMs, for example, have inflation cap guarantees in their agreements with manufacturers known as inflation protection programs. But PBMs do not always pass along all of the money they receive from these negotiations to their customers. This creates another undisclosed margin of opportunity for the PBM. PBMs also try to tamp down high drug costs and inflation through utilization management (UM) programs such as quantity limits, step therapy and prior authorization. But are the PBM s incentives truly aligned with those of the plan? PBMs typically charge for these programs, which are meant to screen the appropriateness of certain medications before they are dispensed. 40 benefits magazine march 2018

6 prescription drug benefits But what if the approval rate is 90%? That is not a good use of either the plan s or the plan participants money (not to mention the unnecessary delays it can potentially create). It also is not uncommon to find PBMs preferring certain medications over viable, lower cost alternatives. These types of situations can result in a series of missed opportunities that represent significant dollar amounts. Solution: Ensure that the PBM incentives are aligned with those of the plan. The contract should secure a benefit to the plan from both inflation caps and should have guarantees in place that drive sound clinical decisions. 5. Not-So-Guaranteed PBMs often state in their contracts that a shortfall in a particular guarantee can be made up for by overperformance in a different guarantee. This practice, known as offsetting, can result in more lost revenue. For example, a PBM may perform weakly against its guarantee around retail pharmacy discounts but overperform on rebates. The PBM then applies the rebate dollars to offset the weak discounts. Similarly, overachievement on brand discounts could be used to offset underachievement on generic discounts. A payer that may have had a shortfall of, say, $250,000 in generic discounts has no recourse with the PBM following an audit because the brand discounts overperformed by $275,000. In some scenarios, the PBM contract might even state that it can use guarantees made in nonfinancial areas to offset other guarantees that are. For example, a PBM might state that if it overperforms in its generic dispensing rate (GDR), the PBM can use that to offset missed discounts. Situations like this won t be caught by some benefits professionals that merely conduct a spreadsheeting exercise in which they do little more than compare the numbers on a page as presented by bidding PBMs. As with terms and definitions, the contract language has a direct impact on the guarantees (remember price versus cost). Contract language and financials are two sides of the same coin and cannot be decoupled in the evaluation of offers. Certain guarantees learn more Education 37th Annual ISCEBS Employee Benefits Symposium August 26-29, Boston, Massachusetts Visit for more details. Certificate Series Health Care Cost Management September 28-29, Washington, D.C. Visit for more information. From the Bookstore Pharmacy Benefits: Plan Design and Management F. Randy Vogenberg. International Foundation Visit for more details. may look good on the surface, but if the contract language that undergirds them is adverse, the value of those guarantees can be feeble or even meaningless. Solution: Before signing anything, ensure up front that any form of offsetting used by the PBM is clear and equitable and protects the interests of the plan While there are other things to look out for in PBM contracts, st arting with these five common mistakes will go a long way toward avoiding some of today s most common blunders and will help to drive greater transparency in a PBM relationship. Endnotes 1. Pharmaceutical Care Management Association (PCMA), Our Industry. Retrieved December 5, 2017 from 2. National Pharmaceutical Council (October 25, 2017), Toward Better Value: Employer Perspectives on What s Wrong With the Management Of Prescription Drug Benefits and How To Fix It, pp Medi-Span is a part of Wolters Kluwer Health, provider of information for professionals and students in medicine, nursing, allied health, pharmacy and the pharmaceutical industry. Medi-Span has created a Master Drug Data Base. 4. Toich, L. (May 11, 2017). Drug Cost Inflation Continues to Grow at a Rapid Pace. American Journal of Pharmacy Benefits (AJPB). Retrieved December 5, 2017 from -to-grow-at-a-rapid-pace. MAGAZINE Reproduced with permission from Benefits Magazine, Volume 55, No. 3, March 2018, pages 36-41, published by the International Foundation of Employee Benefit Plans ( Brookfield, Wis. All rights reserved. Statements or opinions expressed in this article are those of the author and do not necessarily represent the views or positions of the International Foundation, its officers, directors or staff. No further transmission or electronic distribution of this material is permitted. pdf/218 march 2018 benefits magazine 41