Common Ways PBMs Take Away Payers’ Savings
Background
As highlighted in previous blogs,[1] the rising cost of prescription drugs has caused more payers to scrutinize the role their PBMs play in controlling direct and indirect costs of prescription drugs. Among the myriad of important PBM functions, a few can be specifically tied to cost containment. These functions maintain the integrity of the pharmacy program by ensuring appropriate use of medications by patients and at the lowest net cost to payers. Some of these functions include maintaining an accessible pharmacy network and drug formulary, establishing utilization controls and other clinical management solutions, securing drug rebates from manufacturers, and the fundamental activity of a PBM – adjudicating prescription claims per payers’ pharmacy program specifications. While most PBMs could (and some do) deliver savings to payers through one or more of these functions, the challenge is quantifying and retaining savings over the life of the contract. Over the years, some PBMs have used different mechanisms to muddy the water, bait payers with lucrative savings, and tactfully switch the rules to brazenly erode the very savings they promised payers. Below are three of these common practices.
Contractual Discount Guarantees
The primary mechanism by which PBMs deliver savings to payers is through contractually guaranteed discounts to payers. Discount guarantees are typically structured as a percentage off the average wholesale price (AWP) and vary by payer size, program structure and pricing arrangement between payer and PBM. The AWP is an arbitrary price listed by the drug manufacturers but has become the standard reference price used for prescription reimbursement. The AWP for a single generic drug, for example, may vary significantly between generic manufacturers and sometimes even for the same manufacturer over a specific period. This has caused significant confusion for payers when they see very different prices for the same drug, quantity, and dosage form. Some pharmacies have exploited this loophole by selecting drugs with the highest AWP to improve their bottom line at the expense of payers. To combat this practice, PBMs instituted the Maximum Allowable Cost (MAC) list, to cap the amount the PBM will reimburse based on the best market rate, thereby taking away the incentive for the pharmacy to only dispense drug products with the highest AWP. However, this is where things turn upside down.
PBMs have exploited the MAC list against both pharmacies and payers by playing fast and loose with it. Multiple MAC lists for payers and pharmacies exist to convolute reimbursement further and disguise the actual spread and discounts applicable. You can read more about the MAC list in our earlier blog.[2] In addition to manipulating the MAC list, PBMs may exclude certain products such as compound drugs or topicals from the guarantees or may choose to apply discounts on an aggregated basis to offset underperformance in certain areas. For example, they may use single source generics to offset underperformance in brand guarantees by simply changing their definition from generic to brand.
While there are several ways to address this, the most efficient is prevention by addressing specific contractual terms during the selection or renewal of the PBM contract. Payers must insist on the use of a single MAC list for the payer and pharmacy and focus on clear definition of terms such as brand vs. specialty vs. generic drug and eliminating practices such as offsetting.
Rebates
Rebates continue to be a double-edged sword for payers. PBMs may deliver significant savings through rebates that the PBMs negotiate and capture on behalf of the payer. These savings are derived from the drugs utilized by patients under the payer’s pharmacy program. Rebates are typically higher for specialty drugs rather than traditional brand drugs and are also higher for mail/home delivery than regular retail drugs. While rebates can provide significant savings depending on the payer’s drug mix and program setup, they can also increase a payers’ drug cost. This occurs when the PBMs formulary is developed primarily to optimize rebate collection. A rebate-driven formulary is risky, especially if the PBM does not pass a substantial amount of the rebates back to the payer. Even when PBMs claim they share the rebates, payers must ask clarifying questions based on several practices that have emerged over the years, the most troubling being PBMs use of multiple layers of rebate “aggregators.”
Rebate aggregators serve an essential function in pooling prescription records from multiple, typically midsize, and small PBMs to negotiate and accurately collect rebates from manufacturers. Aggregators perform this function for a fee of 8-10% of the total rebates collected. By using multiple layers of “aggregators,” each collecting its own fees, PBMs dilute the net rebates paid to the payer. In some cases, these so-called “aggregators” are owned by the PBMs who fail to disclose this relationship to payers.
To prevent this practice, payers should request information from their PBMs regarding how rebates are collected and aggregated. PBMs should provide information about their rebate aggregator(s), the fees deducted/collected by the aggregator(s) and explain their financial relationship, if any, with each aggregator. If a financial relationship exists, payers should require financial disclosure from the PBMs regarding how the payer is impacted by this financial relationship. In addition, payers should negotiate minimum rebate guarantees for each brand and specialty drug that is rebate eligible. Every PBM should be willing to entertain these safeguards.
Clinical Programs
Clinical programs such as medication therapy management, pharmacist intervention, disease management, clinical tools, healthcare apps, digital health, and more, are key parts of the total solution offered by PBMs to improve patient outcomes and reduce cost. These programs are offered at an additional cost to payers. The pricing for these services is typically allocated at cost per active per program utilizer, per script or are sometimes embedded in the “spread.”
Most clinical programs offered by PBMs provide some intrinsic value to patients and payers. The key is translating the value of these programs into clinical and financial outcomes to determine their ROI. While some performance measures such as the quality of adjusted life years (QALY) have been broadly used in recent years, they are not generally used by PBMs as a performance metric, nor are they generally applicable. There is a lack of consistent methodology to score clinical programs offered by PBMs. As a result, PBMs have developed their own scoring and in most cases applying fuzzy math to calculate the ROI of their programs. Unless payers can validate to a certain level of confidence, that a clinical program brings tangible savings or sufficiently impacts patient outcome, they must be leery of the PBMs calculation alone as the basis for determining the ROI. payers must always base their decision to pay for clinical programs on the ROI the program brings.
Is Pass Through Pricing the Answer?
This is a common question a lot of payers have raised. It is a legitimate one. While some payers believe, and rightfully so, that switching to a passthrough pricing model will solve all the ailments of the PBM industry it is not a panacea.
The pass-through model is susceptible to all the challenges discussed above. Some “pass-through” PBMs use unclear contract language for their benefit, practice offsetting to meet guarantees, use multiple rebate aggregators and apply fuzzy math to justify the ROI for their clinical programs. These practices have been observed under both traditional and pass through PBM contracts alike. Although pass through pricing offers more transparency and protection, payers are still susceptible.
Conclusion
Over the years, PBMs have provided different metrics on the overall ROI of PBM services. In a 2020 report, PCMA, a PBM trade organization estimated that PBMs reduce drug cost by $10 for every $1 spent by payers on PBM services.[3] Yet over the same period, payers have reported increasing drug cost and called for more PBM transparency.[4] There is a clear disconnect between PBM vs. payer perception on the value of PBM services.
Contributor(s):
Falguni Maisuria, PharmD Candidate
References:
[1] How to Bring Transparency to Your PBM Program — Prodigy Rx
[2] Five Concepts Every Payer Should Understand About PBMs — Prodigy Rx
[3] https://www.pcmanet.org/wp-content/uploads/2020/02/ROI-on-PBM-Services-FINAL_.pdf
[4] Elizabeth Seeley and Aaron S. Kesselheim, Pharmacy Benefit Managers: Practices, Controversies, and What Lies Ahead (Commonwealth Fund, Mar. 2019). https://doi.org/10.26099/n60j-0886