Plan sponsors must evaluate their current PBM arrangements and decide whether they have a transparent arrangement that they trust or if there is a need to re-evaluate the PBM relationship.
This article was originally published by Benefits Pro on January 17, 2024.
Pharmacy benefit managers (PBMs) have been under fire the last few years both in the press and at the federal and state levels of government for non-transparent pricing and contracting, as well as overall business practices related to highly rebated drugs receiving preferred formulary tier status. Moreover, the “spread pricing” models used by most legacy PBMs make it nearly impossible for the average plan sponsor to run an audit without spending additional dollars, further escalating the cost of providing pharmacy benefits to plan members and their dependents.
Many self-funded plan sponsors struggle to manage the cost of pharmacy benefits and rely on non-transparent contract guarantees to hold PBMs accountable. Meanwhile, drug spend continues to compound at an eye-popping rate in defiance of the savings promised during the procurement process. As a former pharmacy program director for a plan covering more than 16,000 lives, I can tell you that it is possible to stop the “games” PBMs play, control costs, and ensure that all contractual guarantees are met, especially in scenarios where a PBM won’t guarantee an all-in per member per month (PMPM) cost for the year.
Understanding the problem is a part of the solution, but making meaningful changes to the way plan sponsors and brokers evaluate PBMs is where the real opportunity lies. In my experience, benefits brokers and consultants don’t always evaluate PBMs on an “apples to apples” basis, and most PBMs rely heavily on average wholesale price (AWP) and maximum allowable cost (MAC) lists in the contracts. It’s no wonder that plan sponsors are confused about the true price of medication.
So, how can plan sponsors better advocate for themselves during PBM procurement? Here are six things plan sponsors can do in 2024 to improve PBM procurement.
1. Interview PBMs with aligned, fee-based models and transparent pricing
To achieve the lowest all-in net cost, the first step is to look for a PBM that uses a drug price index such as National Average Drug Acquisition Cost (NADAC) as the cost basis for the medications members will be prescribed. NADAC covers 99% of all medications and is essentially a “cost plus” model for pricing drugs. Unlike AWP, which has no actual cost basis and is not well-defined, the NADAC price list is publicly available on the Medicaid.gov website.
PBMs should be paid to administer the plan, not make money on drug spend. And, there certainly should not be a benefit to your PBM vendor when more expensive medications are dispensed to plan members. Plan sponsors can ask for an all-in PMPM (per member per month) fee.
2. Focus on drug mix
Most plan sponsors have seen significant growth in GLP-1 use for Type 2 diabetes due to the potential increased weight loss benefit, but are brokers and PBMs highlighting the impact of rising utilization on a plan’s drug mix? Did patients who had good A1C control on generic metformin start taking Ozempic? Or has there been a shift from Humira to Stelara for inflammatory conditions instead of a shift to less expensive Humira biosimilars? These questions are worth considering.
New-to-market drugs will continue to be very expensive and will include gene therapies that have the potential to cure disease. We often hear the phrase, “There’s no money in a cure,” but rest assured that if and when these therapies are approved, they will cost plans and patients significant dollars and lead to more stop-loss arrangements.
During procurement conversations, don’t buy the increased total spend arguments of “higher brand or specialty drug use.” Push back and ask this question: “What about my drug mix?” The response plan sponsors need to hear is along the lines of: “We will implement measures to support your financial goals, put our profit at risk, and hold ourselves accountable.”
3. Leverage utilization management tools for specialty medication
PBMs generally categorize drugs as generic, brand, or specialty, with specialty being a way to account for the rise in biological medication use. The need to manage specialty drug utilization has never been greater. Even when utilization is low, specialty is a leading cost driver for plan sponsors. In fact, specialty drugs now account for more than 50% of overall spending, an increase of 60% since 2012.
The combination of rising utilization and higher costs, plus new-to-market specialty drugs, has led to enormous profits for legacy PBMs that make a “spread” based on the price of the drugs dispensed to plan members.
One way plan sponsors can manage specialty spend constructively is to implement a rigorous prior authorization (PA) process that does not auto-approve prescriptions based on formulary status, but that requires limits based on quantity dispensed, age or gender appropriateness, and prior use of alternate medications (i.e., step therapy). During the procurement process, plan sponsors should request data on the PA approval rates. Ideally, the rate is below 75%. Additionally, ask prospective PBM vendors how the pricing of non-specialty medications dispensed through a specialty pharmacy channel is handled and request measures be put in place to prevent over-inflated pricing in that scenario.
4. Control over-dispensing
Over-dispensing of medication is very common due to the pre-set plan designs that most PBMs offer. The average refill threshold is around 75%, meaning that members can refill their prescriptions when 75% of the supply has been exhausted. PBMs that own dispensing assets (e.g., mail order or retail pharmacies) profit from this at the expense of the plan and members.
Additionally, many pharmacies auto-enroll members in auto-refill programs, further escalating the oversupply issue. While auto refill does help some members who are prone to forget about filling their prescriptions or who are otherwise at risk of non-adherence, there’s an incentive to drive profits that cannot be ignored.
Plan sponsors can request control of plan design during the procurement process and during implementation. Moving from a 75% refill threshold to 90% means that at the end of the plan year, members would have approximately 30 days of excess supply (vs. over 80 days of excess medication), eliminating cost and waste. It’s also possible to request that auto-refill be turned off unless the member specifically requests access to an auto-refill program.
5. Control or customize the formulary
A plan sponsor does not have to be a pharmacy expert or develop a Pharmacy and Therapeutics (P&T) committee to control the PBM formulary. It is important to understand that when the FDA approves a medication, it is not an endorsement of the drug’s efficacy. Rather, it’s an assertion that the drug is safe for public use.
Not all drugs work for all people, and not all drugs have meaningful clinical value. Many manufacturers have created combination products or new formulations of medications, for example, which have much lower-cost alternatives. Plan sponsors can ask a PBM to adopt one of their standard formularies and implement a “high cost, low value” drug list. If the PBM refuses or claims that rebates are at risk, it’s time to find a new PBM.
6. Bonus idea: break the addiction to rebates
Rebates are great, right? Money that was spent months ago comes back to the plan in the form of a rebate. Unfortunately, the way rebates are negotiated and paid in the PBM space is neither simple nor transparent.
Most PBMs place fixed dollar rebate guarantees in their contracts, which become the tool to hold them accountable for passing those rebates back to plan sponsors. While this practice can be viewed as practical, it is not reflective of the full rebate revenue picture because it omits the additional rebate revenue received by the PBM beyond the plan’s contractual guarantee.
Also, most PBMs negotiate rebates directly with pharmaceutical manufacturers based on the prescription volume they drive on specific drugs. PBMs may receive additional revenue “boosts” when those same rebate-eligible drugs perform well. These “performance guarantees” generally lead to preferred placement on formularies and are not contracted to go back to plan sponsors. I believe those dollars should flow back to the plan to offset total costs as well.
To break the addiction to rebates, plan sponsors must be willing to use a “generics first” philosophy and understand that rebates won’t matter if a plan never pays for an expensive drug in the first place. The best thing for plan sponsors to do is to request 100% of all rebate revenue (less rebate aggregator fees) be paid to the plan sponsor, and when rebates are paid, request the claim level rebate detail.
Additionally, ensure that the contractual definition of rebate revenue includes all money paid to PBM, including any volume or performance guarantees.
To achieve a quality, transparent PBM contract, brokers, consultants, and plan sponsors must understand the historical games that have created confusion in this space. These games will continue until either lost business or regulatory pressure forces change. Plan sponsors must evaluate their current PBM arrangements and decide whether they have a transparent arrangement that they trust or if there is a need to re-evaluate the PBM relationship. Using the guidance above will help plan sponsors find a true partner who will share accountability for the performance of the pharmacy program.
Bridget Mulvenna is a Pharmacy Business Development professional with over 35 years of experience in a variety of pharmacy settings.
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