Five Concepts Every Payer Should Understand About PBMs
Currently Pharmacy Benefit Management (PBM) programs are structured to provide a myriad of services on behalf of payers and benefit administrators. These services can vary but are predicated on effectively administering the pharmacy benefit in accordance with payers’ specifications. In exchange, PBMs typically receive a pre-negotiated administrative fee for basic services.
As the cost of prescription drugs continue to increase, the role of the PBM in controlling payers’ drug spend has become crucial. Payers are relying more on their PBM to implement the right controls, negotiate the best prices, and deliver the best clinical programs to patients, without incurring unnecessary medical expenses.
If payers are to be good stewards of their healthcare dollars, understanding how PBMs operate and how to critically appraise PBM offerings is invaluable. Therefore, payers must educate themselves to better understand PBM offerings and ask the right questions to help sort through the noise of the PBM selection process. Below is a short discussion on a few factors that can be impactful on a payers’ pharmacy program.
Pricing Model. The administrative fee for PBM services varies tremendously based on the type of pricing arrangement offered by the PBM – “pass through” vs. “traditional spread,” and other actuarial considerations such as prescription utilization, mix of drugs used by patients in the plan, age mix, disease states, payer size, and more. Under pass through pricing, the PBM charges an administrative fee on a per prescription or per basis. In this case, the only revenue source for the PBM is the administrative fee. The traditional spread model, however, allows the PBM to collect revenue on a percentage of the differential between what is the payer is charged (typically higher) vs. what the pharmacy is paid (typically lower). While there are limitations to each pricing model the spread model, commonly used in workers’ compensation is most troubling if the payer is not attentive. For example, some PBMs pitch creative programs and bundled fees for “cost-savings” initiatives that are rolled up into the spread model. Since they are not standalone, these fees are buried to confuse or disguise the financial impact to payers. Consequently, these practices erode savings away from payers into higher revenues for PBMs. Therefore, payers must be leery of bundled fees for programs offered by their PBM sand triple check the vague methodologies used by PBMs to calculate their Return of Investment (ROI) for such programs.
Maximum Allowable Cost (MAC). This is perhaps one of the most controversial issues that most State Regulators have addressed but payers have not. MAC represents the maximum amount that a PBM will reimburse a pharmacy for drug products. PBMs create and manage the MAC list, which has become a lucrative revenue stream for them. PBMs typically publish multiple MAC lists (typically of lower reimbursement) to pharmacies and a different MAC list (typically with a higher reimbursement) to the payer. This practice allows the PBM to adjust the two separate MAC lists and generate significant revenues from the spread. MAC transparency has been a contentious issue, which is why several States now have statutes regarding MAC transparency and appeals.[1] While most PBMs tout price transparency, payers must demand and seek better understanding of their PBM’s MAC policy and management. A simple solution is to require your PBM to publish and maintain a single MAC list for each payer’s pharmacy program.
Contract Language. PBMs use several loopholes in their contracts to confuse and evade contractual guarantees and limitations. Even for payers who are cognizant of some PBMs’ tactics in this area and invest the time and resources to hold their PBMs accountable this effort is mostly futile. Traditional PBMs deliberately use vague definitions on contractual terms with enough wiggle room allowing the PBM to interpret contract terms however it chooses. For example, PBMs terms may allow them to take all the rebates collected from drug manufacturers and even if shared, reduce the pool of rebate dollars disbursed to the payer by excluding certain claims from the rebate calculation. PBMs typically complicate the definitions of simple terms like “brand” vs. “generic” drugs to adjust the pool of claims during reconciliation and help them achieve contractual guarantees which would otherwise not be achieved. PBMs may use this tactic when they failed to achieve generic or brand discount guarantees. For instance, a PBM may choose to shift a “single source generic” drug (reimbursed at higher discount, e.g., AWP-55%) from the generic pool to the brand pool (reimbursed at a lower discount, e.g., AWP-19%), artificially increasing the brand discount performance and thereby achieving its contractual brand discount guarantee. By this simple manipulation, a PBM can effectively erode millions of savings from its payer. Understanding the contract language is the most important step for payers. A single line of fuzzy language can eliminate all the savings and remove a payer’s ability to hold the PBM accountable.
Mail Order/Home Delivery. Over the years, PBMs have expanded their reach from benefits management into the actual pharmacy dispensing role. If unmanaged this practice can seriously undermine a payer’s ability to control cost. Almost every major PBM (even smaller PBMs) own and operate a mail order pharmacy. These mail order facilities are presented to payers as a mechanism to provide deeper discounts and better management of drug spend. Properly managed, home delivery services can deliver more savings to payers and better access to patients. However, this is sometimes not the case. Mail order facilities have become prescription mills, defaulting patients to automatic-refills and in some cases, dispensing a large volume of prescriptions which patients may not need. Mail order pharmacies have essentially become revenue generating centers for PBMs at the expense of payers. In the last decade, several studies have been conducted on the impact of mail order facilities on medication waste. These studies have reached similar conclusions. The most telling of which is that mail order pharmacies generate over three times more waste than programs allowing patients the autonomy to purchase their prescription drugs at a community pharmacy.[2]’[3]’[4] Home delivery is an effective tool to improve patient care, but left unmanaged, can become a serious cost center and lead to wasteful spend.
Drug Rebates. Included in each PBM contract are rebate guarantees and terms on rebate savings sharing. Most large payers with a broad base of patients typically receive better rebate guarantees. Small payers, however, receive no such consideration. While regulatory pressures and broad awareness about rebate sharing arrangements have led to more PBM disclosures around rebates, PBMs have used alternative methods to circumvent these guarantees. When this occurs, the result is an increase in the PBM’s revenues at the expense of payers through separate “proprietary” and “confidential” deals with pharmaceutical manufacturers. These alternative revenue streams include but are not limited to rebate administrative fees, purchase money discounts, health management fees, data access fees, and more. PBMs also make similar arrangements with drug wholesalers and distributors. These third-party contracts are proprietary, confidential and PBMs include language in their contracts with payers precluding disclosure or audits to uncover this practice. As a result, payers may be losing millions of dollars, while premiums and out-of-pocket costs to patients continue to rise.
Over the years PBM services have expanded beyond the core function of benefits administration and management, to include more services such as mail order dispensing, utilization management programs, rebate administration, and more. In the process, PBMs have generated record profits. If payers are not better informed, PBMs will continue to operate under the cloak of non-disclosure and convoluted contracts. Payers will continue to see their savings eroded while employers pay higher premiums. Unless payers advocate for themselves and require contractual and basic business deal transparency, the broken system will continue. Outcomes will be far less optimal than the financial value payers deserve, and the quality services injured workers need. To prevent this demise, payers should re-evaluate their PBM’s business model based on these five concepts. Having done so then focus on working with a PBM willing to be open and honest about how it operates with these concepts as a basic framework, offering transparency for payers to validate their overall performance.
Contributor(s):
Falguni Maisuria, PharmD Candidate
References:
http://www.ncpanet.org/pdf/leg/jan14/2013-ncpa-legislative-updates.pdf
Daniel Halberg, Erin Smith, and Kevin Sedlacek. “Effect of Mail - Order Pharmacy Incentives on Prescription Plan Costs”, University of Arkansas for Medical Sciences College of Pharmacy, October 2000.
http://www.ncpanet.org/pdf/leg/falsesavingsofmailorder.pdf
http://drugtopics.modernmedicine.com/drug-topics/news/modernmedicine/modern-medicine-feature-articles/mail-order-pharmacy-waste-rampant?page=full