It is often stated that understanding prescription benefits — and pharmacy benefits management contracting — is difficult, but the opposite is in fact true.
What confounds many organizations and industry professionals are the various subjective elements and concepts that are considered standard. Among these are average wholesale price (AWP) discounts for generic drugs, 100% pass-through for rebates and the essential claim of transparency.
The solution is to assess and contract for PBM services using traditional procurement processes and tenets. The important ones are:
- All pricing (and rebate) terms and schedule must be in objective terms, subject to line-item verification.
- If any element of pricing or rebates is not defined objectively, then any cost projections, savings claims or other fiscal assessment are not valid.
- Competition is essential. A vendor that feels no pressure will not offer fair pricing or continue to improve pricing.
The problem is that current common methods, be it from large brokers or smaller consultant services, allow several factors that violate these tenets. The plan sponsor incurs higher claim cost and members pay more than necessary at the point of sale.
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Often, a plan sponsor is wowed by the savings potential of a new offer that is heavily dependent on rebates. This is presented while still allowing generic drugs to be priced AWP-X%. In essence, if a PBM is allowed to price generic drugs at AWP-X%, any amount of rebates can be offered (they will just make it up in high generic unit costs).
High yield rebates can also make an offer appear to be high value, but when the contract is signed, there are numerous exclusions. The model presented in order to win the business has not reduced projections due to the exclusions. However, when the contract is signed and rebates are to be collected, yield is far lower than projected. Because a multi-year contract is in effect and transition of PBM is always a challenge, the plan sponsor has few options except to balk.
Additionally, transparency and pass-through are great concepts, but keep in mind that these terms provide no guarantee of competitive low pricing. If a secondary entity — small PBM, health plan, consortium organization — assures that pass-through is occurring but the pricing is poor, that is still poor pricing. They are only ensuring pass-through of the poor pricing they are provided, often without accounting for other funds exchanged.
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The solution is very simple. Require every pricing or rebate metric to be in objective terms subject to direct modeling. This provides a complete model of purely objective analysis. As a contrast, how does one compare various AWP discounts for generic drugs when AWP fluctuates massively (both in percentages and net dollars)? If a plan sponsor requires and builds a model of each pricing component from the ground up and then applies objectively defined rebate projections, a true comparison can be performed.
Inherent to this process is competition. Third-party intermediary PBM engagements are inherently non-competitive. If a vendor knows they are the PBM preferred by the intermediary, there is little need for true competitive pricing or terms. However, they assist the broker or consultant to portray a situation or proposal as low cost using the subjective elements outlined above (rebates that provoke wow).
In reviewing many of these arrangements over 14 years, they are often very poorly priced. There has been no objective assessment to determine if the financial assumptions presented in selling the business were even correct. The numbers appear complex, the terms are foreign and the client assumes they have a good arrangement. After all, it is secured via a large consortium or coalition. But line-item assessment of claims reveals poor pricing.
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Value can only be determined through basic procurement mathematics using objective terms. For example, we commonly see plans with AWP-88% generic pricing that have much worse unit cost than a similar plan sponsor with AWP-77% in their contract. AWP discount is not an objective value, and it should never be used to price generic drugs in a contract. Competition is non-existent where subjective terms are being used to determine value. It is common to observe relationships where savings are implied by moving from AWP-79% to 86%, and $/unit increased.
A method requiring objective terms for all pricing elements has been used by our group for more than 14 years. Every client has secured cost reduction meeting or exceeding our projections using accepted accounting practices. All claims are fully verified as adherent to the contract monthly because all pricing uses objective terms.
This is not a small matter. Cost excess in generics is massive and only becoming larger due to generic oral specialty drugs. Even worse, when generic drugs are allowed to be priced at AWP-X%, a PBM and its related broker or consultant can offer the plan as much rebates as needed to close the deal. If one element in a pricing arrangement is in subjective terms, any cost savings statement is invalid.
The bottom line: Choose the alternative, use basic procurement math to assess and improve PBM relationships. It’s easier than you think.
