How the PBM Industry Can Simplify the Procurement Process for Its Buyers

Ever try evaluating multiple financial proposals from different pharmacy benefits managers (PBMs)? This is done thousands of times each year. In many cases, buyers don’t understand the value being conveyed by the proposals and they frequently focus on the wrong set of numbers.

Understanding the financial proposal

A PBM financial quote is one area where we could simplify via standardization. When evaluating rebates, $3.50 might be more than $8, but equal to $5. How can this be? PBMs quote their rebates differently. If the differences are identified, they can still be hard to understand. To illustrate this, imagine the following:

1. PBM #1 quotes $3.50 per every retail paid prescription. This applies to every prescription that is not an adjustment or denied claim. This is the most direct way to quote a rebate.
2. PBM #2 quotes $8 per prescription, but the proposal states that this is per brand prescription. If only 36% of the retail prescriptions are for brand-name drugs, then this actually equates to only $2.88 per every paid prescription.
3. PBM #3 quotes $5 per prescription. This might only apply to retail prescriptions with a 30-day supply. Prescriptions for less than a 30-day supply do not receive a rebate. This means that antibiotics and pain medications, for example, do not receive the rebate, cosmetically increasing the value of the rebate by about 30%.

As you can see from the examples above, how the PBM defines the financials in its quote makes a tremendous difference. The same issue is found on mail-order prescriptions. Is the guaranteed rebate payable on all mail-order prescriptions or only prescriptions for a 45-day supply? Many consultants and brokers try to define the standards for how PBMs quote; yet they are left to normalize the quotes when differences persist.

Other issues can be found with how dispensing fees are illustrated, how discounts are calculated and how guarantees are administered. All of these are very complex for the buyer to understand, but all can be corrected!

A “traditional” PBM arrangement is one in which the PBM guarantees discounts, dispensing fees and rebates and retains savings generated above and beyond the guarantee. Moving to a true passthrough model removes the margin component for these financial measures. Therefore, the employer and consumer receive the same deals that the PBM negotiates and there is no margin made by the PBM. In addition, an industry-adopted standard for how these values are to be measured and reported would add consistency and allow buyers to truly understand the value of the various offers.

If this were done, the remaining source of revenue for the PBM would be the fee it charges. You may find that these fees are applied inconsistently. Some of them include:

• A charge per prior authorization, including a charge of varying levels based on whether the review involved a pharmacist or other clinical staff member
• A charge for each ERISA appeal
• A charge for different, granular levels of a PBM’s clinical program
• While not technically a charge, some PBMs retain a portion of savings from pharmacy audits

Simplifying how these fees are applied and charging for services on a per employee per month (PEPM) basis would make evaluating various proposals simpler and more accurate. Moving to a full passthrough arrangement where the PBM’s revenue is based on its administrative fee would provide complete transparency around the cost the buyer would pay. Strict standards around discounts, rebates, etc. would provide an easier way for buyers to understand the value they receive for that cost.

Evaluating the right numbers

Currently, financial analysis of a PBM’s financial quote focuses on discounts, dispensing fees, administrative fees and rebates. However, these numbers can be displayed in multiple formats. Some plans may maximize rebates, which may also maximize the buyer’s cost.

Examples include the following:

• Branded products are placed on a middle tier because of their rebate vs. anticipated net cost (after rebate). Every PBM has a pharmacy and therapeutics (P&T) committee consisting of doctors and pharmacists. These individuals are charged with creating a drug list that does not restrict access to medically necessary medications. “Do no harm” is their motto. However, in many instances, the clinical efficacy of a number of drugs is similar. In these cases, the discussion around tier placement may center on the potential rebates of the drugs vs. the net cost (cost after rebate) of the drug. When this occurs, the very nature and construction of the drug list incents members to purchase more expensive brand drugs over less expensive alternatives.
• Generic alternatives are removed for a given therapeutic class from the drug list because alternatives are available over the counter. Of course, the same argument could be made for removing the more expensive, and more highly rebated, branded products from the drug list. The result is the removal of a generic and more steerage to high cost, rebatable brand drugs.
• Expensive brand-drug alternatives might be placed in tier 2 instead of tier 3 when all clinical evidence indicates that these drugs are no more effective than tier 1 generic alternatives. In these instances, the branded products should be placed in tier 3 to more heavily incent generic usage. Consumers and physicians are not always aware of the cost/efficacy comparison between various drug therapies. It therefore becomes a critical role of the PBM to help enable optimal clinical outcomes, while managing health care dollars.
• Letters are written to doctors who prescribe generic drugs for a given disease state, suggesting that they consider adding a brand-name drug. While this may not do medical harm to the member (in the given situation), it may not be necessary. Additionally, these practices may drive up utilization of the brand-name drug when the same results could have been achieved by trying a cheaper alternative first.
• Members are switched from non-preferred drugs at mail order to preferred alternatives when they could be switched to lower cost generic alternatives. Not only is an opportunity for savings potentially missed, this could lead to higher costs depending on which brand drugs were favored.

Net cost on a per member per month (PMPM) basis is ultimately the best way to measure and compare the effectiveness of PBMs. Measuring this is generally simple and for larger groups the plan’s performance is more credible and stable and can thus be predicted more easily.

It is incumbent upon everyone to understand how their pharmacy plan is administered and how the underlying drug list and clinical edits were developed. Plan management matters! It is when this is understood and PBM proposals are presented in an easy to understand and comparable fashion that the buyer can feel confident in their evaluation and selection.