Pharmacy Benefit Procurement: How to Ensure That Savings Materialize

March 18, 2024

Health plan sponsors have a duty to ensure they have a fair and competitive contract with their PBMs. Asking the right questions during the RFP process can help ensure more predictable and favorable prescription drug pricing.

This article was originally published in the International Foundation's March/April 2024 Benefits Magazine (Vol. 61, No. 2).

Health plan sponsors and other stakeholders responsible for pharmacy benefit programs have several new responsibilities under the Consolidated Appropriations Act of 2021, including a duty to ensure that the selection of vendors and other service providers is process-driven. But what about pharmacy benefit manager (PBM) selection? How can plan sponsors be sure they have a fair and competitive contract for the most-accessed health care benefit: prescription drugs?  

Truthfully, many buyers find it difficult to determine what they pay their PBM for services or whether their vendor is saving them money or driving costs up. This lack of clarity leads to several questions about the process of requesting and evaluating bids (also known as procurement) from PBMs, including:

This article will shed light on the critical evaluation components that the typical spreadsheet often misses and how some actuarial expertise can help. It will also walk through key RFP-related questions that can aid plan sponsors in capturing items to achieve predictable drug pricing in their next RFP.  

Procurement Challenges

One of the primary challenges that plan sponsors and consultants face during the procurement process is that PBMs often have more of the most important information, which can give them the upper hand. For example, PBMs often guarantee discounts and rebates off a future price point most accurately forecasted and influenced by the PBM, as detailed later in the article.

Second, the consultants who help plans select a PBM during the RFP process typically do not take on financial risk and thus may lack accountability. They may even evaluate PBMs by comparing them with their partner PBMs or coalition arrangements, which can lead to bias. Of greater concern, historically, PBMs truly have limited financial risk since most bids today are structured so that PBMs can meet “guarantees” even if total costs continue to rise for plan sponsors.

Ultimately, when plan sponsors fail to see promised savings that have historically ranged from 10% to 20%, plus or minus, PBMs and consultants typically point to increased use of expensive new-to-market drugs as the reason, and there’s no recourse. The truth is that drug prices are going down for both generics and brands in the United States when full rebate value is subtracted from the gross cost, so it pharmacy spend shouldn’t be increasing at the rate it has been year after year.  

To offset these issues, plan sponsors should consider including actuarial oversight by engaging third parties that are accountable for their work during the RFP process. It may be an added cost, but in status quo, legacy PBM arrangements, a consulting actuary will likely tell you to expect a positive mid-single-digit trend (e.g., 5%) for the traditional PBM model and a stop-loss vendor will be even more conservative and forecast a positive 9%-10% trend.

The Source of Disparities in Results  

The devil is in the details of these complex procurement processes. One of the key factors is misalignment between a payer’s goals and how PBMs make money. Table I provides a snapshot of PBM profit sources and methods.

Understanding how a lot of PBMs make money may help plan sponsors recognize areas of potential conflict (e.g., if a PBM partner is retaining some portion of any revenue stream associated with the fulfillment of drugs for plan members, then that value is not accruing to payers and their members).

Cost Drivers

The reality is that there’s no “true price” in most PBM deals. PBMs generally provide guarantees for discounts, dispensing and administrative fees, and rebates, but these are based on a future mix of drugs that varies between PBMs and is rarely measured.  

Creating accountability on key cost drivers is essential when comparing PBMs’ formularies, clinical program rigor, auto-refill protocols, and accounting for medication repackaged with new PBM-managed labels that have different starting prices. The two cost drivers that matter most in calculating total drug costs are (Figure 1):

Drug Mix

Plans have primarily focused on measuring unit costs and ignored drug mix differences between PBMs in the past. Even determining an accurate unit cost has proved difficult because plan sponsors rarely have information on factors such as patent expirations, new drugs to market, or formulary and clinical program changes and criteria variances between PBMs. As an example, the patent for Humira® expired in 2023, and several generic biosimilars hit the market. The expectation was that competition would help reduce the overall cost of therapy for treating inflammatory conditions; however, the manufacturer increased rebates, leading PBMs to keep Humira at “preferred status” and not immediately add the biosimilars to formularies, and PBMs won’t generally share the net cost (after rebate) of these products with their customers.

Formulary and clinical program differences between PBMs can easily add up to 12% to 23% of a plan’s total spend (net of rebates), but most spreadsheet models do not assess this. Also, considering that specialty drugs are consumed by only 2% of the average plan’s population, but they represent 50% or more of the plan’s total drug costs, it would make sense to spend more time and attention on evaluating the specialty drug list, formulary placement, and clinical program controls that ultimately drive the total costs for sponsors.

Lastly, payers often anchor their selection of a PBM on the rebate value presented in the spreadsheet. However, most large rebates come from the most expensive brand and specialty drugs, incentivizing the PBM to dispense those drugs, yielding a more expensive drug mix, to meet the guarantees instead of trying lower cost alternatives. Plan sponsors must understand that larger rebates don’t necessarily help the plan’s economics in the long run.

Consider Table II, which shows the impact of drug mix and rebates against total costs for a plan sponsor. The table assumes that drug costs will increase at 7%, but the plan in the first column receives a higher dollar amount in rebates. The total costs are higher despite an advantage on rebates because more specialty drugs are approved. The plan in the second column realizes the lowest costs due to a managed shift toward appropriate lower-cost alternatives instead of higher-cost specialty drugs.

In addition, plan sponsors must pay attention to other factors that can influence total costs, such as newly repackaged drugs and auto-refill protocols. Newly repackaged medication can add another 3% to 5% to a payer’s cost, and the procurement process should consider and evaluate whether a vendor promotes 15 months of therapy for chronic conditions versus a more reasonable 13 months.

Unit Costs

PBMs have been able to guarantee discounts and rebates off a baseline that has trended slightly up because of inflation on average wholesale price (AWP), which is like a “sticker price” similar to the manufacturer’s suggested retail price (MSRP) on a car (i.e., a suggested undiscounted retail price). AWP has not experienced the deflation seen with acquisition cost-based indexes, as represented by the national average drug acquisition cost (NADAC) index, a survey established by the government to gauge what retail pharmacies pay wholesalers for drugs.

Plan sponsors must consider what price index a PBM uses when it quotes guaranteed discounts and whether it is inflationary or deflationary, as illustrated in Figure 2. Indexes like NADAC are not perfect, but they offer an improvement over AWP-based pricing, which is why most state Medicaid programs leverage NADAC-based pricing. In addition to its deflationary characteristics, NADAC is freely available, which saves plan sponsors time and money if they’d like to audit the data.

An Alternate Approach

Plan sponsors looking for an approach that would lead to more predictable costs should consider asking the PBM to quote a per member per month (PMPM) cost because it captures not only discounts and rebates but also the impact of drug mix (ratio of brands, specialty, and generics) influenced by the PBM through their formulary and clinical programs. If a plan sponsor requires a PMPM deal instead of the status quo discount and rebate guarantees, it would hold a PBM partner accountable to net cost and mitigate the risk of misaligned behavior, such as driving greater utilization to more expensive and heavily rebated drugs or auto-refills unnecessarily as described earlier.  

Requesting a PMPM Guarantee

Plan sponsors with a large enough population—typically 4,000 lives or more—that require all PBMs to bid PMPM guarantees will simplify the procurement process. This approach allows the payer’s chief financial officer, chief human resource officer, or chief executive officer to quickly do the math, know what’s being spent per member or employee year-over-year, and evaluate it next to what they’ll be paying next year.

To request a PMPM bid from a PBM, payers should be able to provide the following information:  

It’s important to note that plan sponsors should not let their PBMs separate PMPM costs for traditional (generic and brand) and specialty drugs, and clear targets should be defined with fees at risk for missing the mark. If the PMPM target is missed within the plan year, and the cost is above the target, the PBM’s fees – i.e., penalty – should be dollar-for-dollar up to a certain threshold.  

Predictability and Cost Savings Are Achievable

A number of employers that offer employer group waiver plans (EGWPs) to their retirees have achieved savings with PMPM programs.

For plans that have smaller populations and cannot request a PMPM guarantee or others that don’t want to pursue it, additions in the following areas can help better measure and hold PBMs accountable in a standard procurement process:

  1. Drug mix: Include financial value on PBMs’ different formularies and clinical programs, especially prior authorization (PA) and PA approval rates.
  1. Unit cost: Include a financial factor for inflation or deflation depending on whether the PBM uses AWP or NADAC as a price index. Check the financial valuation and assessment of the units of drugs filled per year (auto-refill programs on chronic medication) and look for unusual NDCs (repackaging by PBM-affiliated manufacturers, for example).  
  1. Formulary and plan design control: Ensure the plan’s ability to limit the dispensing of high-cost, low-value drugs and manage exclusions. Plan sponsors must demand control over formulary and plan design.  
  1. Rebates: Consider having rebates provided across all drugs – i.e., ensure there are no exclusions that could allow a PBM to retain rebate dollars. This also helps mitigate the risk of missing rebate exclusions during the procurement or contracting process - there is no room for interpretation at the end of the year when total dollars paid to the sponsor are divided by all claims filled.  

Equipped with the knowledge of what to look for and why, plan sponsors can ask better questions and demand more of the PBMs they’re considering partnering with to provide an essential benefit to their members.  

Source: International Foundation of Employee Benefit Plans, March/April 2024 Benefits Magazine, Vol. 61, No. 2 (March 18, 2024)

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