PBM Consulting Blog - As WBC's It

PBM Consulting -Trends in Pharmacy Benefit Management

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Plan sponsors are requiring more from their PBMs.... more service, more transparency, more cost reduction. What are the industry trends that will influence the PBM industry's ability and willingness to deliver?  WBC, along with our subsidiary PharmaSeer, gazes into our crystal ball to predict what you can expect....

Top 10 Trends for 2010/2011 and Beyond:

1. Value-Based Plan Design. For all Wellness and Population Health Management programs, compliance is the name of the game. Helping members stay compliant with drug therapies through the removal of potential barriers is how it's done. Benefit designs that reduce or eliminate co-pays that may serve as a financial deterrent, as well as creative home delivery incentives and maintenance-at-retail options will prevail. Also, 4th and 5th tier plan designs will become commonplace.

2. Generic Utilization. Still the big enchilada of Rx cost-containment strategies. Profitable for the PBM, lowers cost to the plan sponsor and member.  What's not to like?  Keep in mind that a plan sponsor needs to check to make sure that the PBMs efforts to drive home delivery generics do not create a higher net cost to the sponsor when compared to retail for certain drugs. Requiring the broadest MAC list, without allowing the PBM to switch lists at its discretion, and having it apply at both retail and mail is the way to slay.

3. Right-Sized Networks. A WBC-term that sounds so much better than "restricted."  Do we really need 57,000+ stores to meet the needs of our members? In a word, no. Most groups will do just fine with a 30,000 store option and many can work with only 18,000 stores in the network. Plan sponsors can reduce their cost through better discounts and reduced net cost pricing by creating steerage to a directed network using a Walmart or Walgreen's, as examples.

4. Restricted Formularies. Let's call it "select formularies." These are closed formularies that have been crafted based on a true net cost objective and evidence-based value, not for the purpose of generating rebates.

5. New Pricing Methodologies. The bell tolls for AWP! Let's not lose the opportunity to create more transparent pricing as we move toward actual acquisition cost basis. In the interim, we'll see more  AMP or WAC alternatives. This extends to pricing requirements for an all-inclusive generics option, so that the gaming of adjudicating at brand or non-MAC discounts is eliminated. Specialty will move toward ASP pricing.

6. Specialty Integration. Specialty continues to grow as a significant piece of the drug spend. Too often, a PBM account manager can't answer client questions regarding specialty utilization due to lack of communication between operating groups. Cost savings can only occur through better unit cost discounts and therapy management. A recent study indicated that only 50% of self-funded employers have adopted a specialty drug strategy.

7. Personalized Medicine. Genetic testing to determine which medication therapies have the best chance at improving a patient's health status or controlling their disease state. Several PBMs are investing heavily is this arena.

8. Comparative Effectiveness Research. Does a new drug really work better or does it just cost a whole lot more?  This is the question to which  plan sponsors will demand an answer. Evaluating NNT ("Numbers Needed to Treat") will make a resurgence amongst epidemiologists and will be introduced to employer plan sponsors.

9. "Follow-On" Biologics. Generic versions of expensive specialty drugs, sometimes referred to as "Biosimilars" or "Follow-On" Biologics, will push forward, at least as long as Rep. Henry Waxman stays in office. The EU has approved 10 biosimilars for use in Europe. The FDA will need to sign-off on a pathway for the approval process in the U.S.  Waxman's H.R. 1427 will be resurrected this year.

10. Drug Importation. Another political football that seems to have public support. A trade-off of pharma's endorsement for healthcare reform was for Washington to kibosh the importation initiative. We don't expect it this year, but bet it will come to pass prior to 2012 election.

The Okra Effect - Reducing Pharmacy Benefit Costs

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Diabetes as a consequence of American lifestyles continues to rage in epidemic proportions. According to statistics from the American Diabetes Association (www.diabetes.org), 23.8 million people have diabetes (10.7% of the population over Age 20 and an additional 57 million people who are in a pre-diabetes stage). If current trends continue, 1 out of 3 children born in the year 2000 will develop diabetes by 2050! Throw in the complications of diabetes including heart disease, kidney disease, high blood pressure, nervous system disease, stroke and blindness and the total healthcare costs are staggering.

This healthcare crisis has not gone unnoticed by some influential folks. Of course, one of the biggest names in "cause awareness" is Oprah. It was recently announced that she is helping raise diabetes awareness by promoting free blood glucose screenings at Walgreen's (Free-Blood-Glucose-Screening-at-Walgreens).

Hopefully people will hear the message and respond. Many in the media refer to it as "The Oprah Effect" and the need is huge. There are 5.7 million that have diabetes and have not yet been diagnosed.

While this is a great effort and getting folks in to be tested will save lives, it may not have much of an immediate effect on reducing pharmacy benefit costs.  In fact, short-term costs will escalate while potentially reducing  the overall costs of healthcare over a more mid-term period. 

In addition to screening, we would like to see Americans get serious about their dietary and exercise habits in order to turn the tide on this deadly trend. We're thinking of it as "The Okra Effect", one which incorporates fresh fruits and vegetables as a bigger component of our menu. The fact is that okra (as just one example) is great for you, and  that the mucilage and fiber in okra helps adjust blood sugar by regulating its absorption in the small intestine.

So this should be an easy recipe: more fruits and vegetables; mix in a heaping portion of moderate exercise (like walking); yields better glucose control with reduced dependency on manufactured pharmaceutical products; and equals less pharmacy benefit spend!

PBM Consulting - Restricted Networks

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2010 is in full-swing and PBM trends for the year are beginning to take shape. One trend that will gain momentum this year is the use of restricted pharmacy networks.

At one time, the larger networks were considered a competitive advantage, providing maximum convenience to enrolled populations.  The realtiy is that very few plans need the "convenience" of 57,000+ participating pharmacies.  In some metropolitan areas, there are literally pharmacy options on every corner. Most plans can meet the needs of their employee/members with a 15,000-18,000 store network, and in some cases, substantially less. The benefit of losing this excess baggage are better discounts and lower net pricing.

It has been interesting to listen to the dialogue that has evolved between finance and human resources within organizations that are considering more aggressive cost-reduction proposals for controlling their benefit costs. We have heard from several CFOs who were willing to disregard any anticipated employee disruption as a result of making this move. 

 Walmart and Walgreen's are two chains that are being very aggressive in their promotion of creating a more "exclusive" retail alternative. Plan sponsors can achieve better net cost by steering employee/members to the stores of choice. The Caterpillar experience and the associated publicity will provide ground-breaking evidence (or not) that this strategy is one to be emulated by other sponsors.

Another alternative to consider for those sponsors who want to maximize their prescription drug cost savings while providing employees with more-than-ample choices for script fulfillment is to contract with a PBM that embraces full pass-through or acquisition cost pricing. This business model utilizes  an administrative fee as the primary or, in some cases, the only revenue source to the PBM. All discounts, rebates and purchasing incentives are passed-through to the plan sponsor without the creation of pricing spreads, thereby reducing the size of the invoice that gets presented to the plan sponsor for payment.

All-in-all, the aftermath of AWP pricing adjustments has created an environment where plan sponsors are questioning the discounting methodology typically deployed and are searching for better value. Restricted networks may be a useful alternative.

PBM Consulting - The Big Three?

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Ask most pharmacy benefit plan sponsors to name 5 PBMs and most come up shy at around three. Not surprisingly, this market dominance has earned the exalted stratification of becoming known as "The Big Three." Repositioning the aforementioned question to "Name the Big Three" and most plan sponsors fill in the blanks,not with Bird, Parish and McHale, but with Medco, CVS/Caremark and Express Scripts.  They are shocked to learn that there are actually over 60 PBMs currently competing for their business.  What's more shocking is when the data shows that the PBM troika they thought they knew turns out to be the wrong answer. Here's the facts regarding market share by covered members and total scripts: 

Top 25 Pharmacy Benefit Management Companies and Market Share
By Membership, as of 1st Quarter 2009

Atlantic Information Services compiles these data from pharmacy benefit management companies and other publicly available information sources. Published by PBMI.

Reducing Healthcare Costs - Wasted Dollars

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A somewhat surprising report was released by Thomson Reuters regarding the wasteful spending practices within the American healthcare system. Not that system inefficiencies, unnecessary testing and good old-fashioned fraud should come as any surprise to those who follow this stuff, but it was the degree that caught my eye.

Their conclusion is that big dollars fly out the window to the tune of an estimated $700 billion annually.  That's about 1/3 of our nations' annual healthcare tab!

Here's what they found:

Fraud, which finds a happy home in many Medicare and Medicaid billing fiascoes, accounts for between $125 billion to $175 billion each year.

Administrative Inefficiency accounts for between $100 billion - $150 billion.  This is the endless stream of paperwork that an EMR is suppose to help.

Provider Errors create mistakes that chalk up another $75 billion to $100 billion.

Unnecessary Care is my favorite and one that made me look twice.  This is the one that providers will over-prescribe or over-test in order to limit their malpractice risk. Contrary to what the tort lawyers say, this study pegged this expense at a whopping $250 billion to $325 billion annually! This is by far the highest estimate attributed to this practice that I've seen.

Preventable Conditions is the second category that caught my attention. Long reported as representing anywhere from 25 - 50% of total medical spending, this study allocated a much more modest $25 billion to $50 billion. Let's hear from the Wellness industry on this one.

Lack of Care Coordination was identified as the last major category. This is characterized by inefficient communications between providers that result in duplicating tests and less than "best practices" treatment. The price tag: another $25 billion to $50 billion per year.

Audit Your PBM

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Now, more than ever, plan sponsors should look to evaluate their pharmacy benefit manager's performance.

Plan sponsors go through the time and expense to try and maintain a competitive vendor contract. Here's the drill: decide that you want to solicit new bids from vendors who want to compete for your pharmacy benefit management business; go through the procurement process of writing, scoring and evaluating an RFP and selecting a finalist; negotiate the terms and pricing of your new contract, and finally, execute the deal and implement the new program.

The problems occur when there is no practical way to validate the performance of your PBM.  What good is negotiating the best contract if there is no accountability. For too many years, plan sponsors have depended on their PBM to let them know how they are doing! Strong audit rights negotiated in your PBM contract are necessary in order to safeguard your position.

PBMs have been reluctant to volunteer real transparency as it relates to their pricing, guarantees and rebates.  They cite confidentiality concerns and competitive trade secrets as their rationale. Plan sponsors have not only a right, but an obligation, on the part of their plan and its members to validate and verify their vendor's performance.

Here are some of the major restrictions that can typically be found in a standard PBM contract and that should be addressed under your audit rights:

• Giving the PBM the ability to "co-select" your auditors;
• Limiting the type of information that the auditor can review;
• Restricting the auditor from sharing their findings or pertinent information from the plan sponsor;
• Prohibiting the auditor from copying any information or data that would be necessary for the plan sponsor to review;
• Preventing the recovery of funds that are due the plan sponsor.

PBMs typically want to include language that requires a "mutually acceptable" auditor.  Many times they want the auditor to be a "Big 4 accounting firm." This can lead to more expense than is necessary and the plan sponsor may have to settle with an auditor that is not as specialized as could be. We believe that eliminating some of the most experienced an effective auditors that specialize in PBM audits is unacceptable. If the auditor has demonstrated appropriate expertise, professional experience, adequate insurance, willingness to abide by a reasonable confidentiality agreement then that auditor selection should be at the discretion of the plan sponsor.

PBM Contracting - Big Gorilla in the Room

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Reviewing pharmacy benefit management ("PBM") contracts has become just as much art as science. Sure, you can create a checklist of contractual definitions and provisions, and you can negotiate the financial and legal issues, but sometimes it boils down to how much does the vendor really want your business? That's where the "art" comes into play.

The consultant must be able to present the client opportunity as the kind of account that the PBM wants and needs. Some are obvious to the vendor, while some other smaller accounts need some finesse.  The "Big 3" remain only three because of their ability to accept risk that many of their smaller competitors refuse to assume. It really can put them in the position of the 800-pound gorilla.  As consultant "artists" we need to read beyond the standard checklist and get to the heart of the matter, i.e., will the vendor provide our client with not only great pricing, but provide adequate protection in the event of things going south for the plan and its members as the result of PBM error, negligence or malfeasance.

For example, one of our recent clients had us negotiate their PBM contract with a new vendor. The pricing was substantially better than any of their competitors and we negotiated all of the significant contractual provisions that can wreck havoc on finalizing a deal. It came down to how much risk did the vendor want to assume. The answer was not enough to give the client comfort.

The trade-offs remain. The large public PBMs have scale and will usually acquiesce to provide greater contractual protections. Yet, by being public, they must operate in a much higher net profit margin-per- script environment in order to meet their expected quarterly earnings reports for Wall Street. As a result, their pricing and net costs presented to clients are usually not as competitive as some of their smaller rivals.  Private PBMs, on the other hand, can operate on much smaller margins and are more likely to offer true pass-through or acquisition cost pricing as their competitive difference. However, they generally don't want to expose themselves to liability that outweighs the value of the account. Why go on the hook for millions if they are only earning $150K for providing services? Additionally, some of them are controlled by a few shareholders who can accept or reject business based on their own personal whims or bias.  And there lies the rub.

Plan sponsors need to have their consultants understand that price alone or protection alone does not provide a "one size fits all" solution. Striking an artful balance usually wins the day. At least until market forces or regulation drives all of the PBMs to follow one business model and market conduct for servicing their clients.

Reducing Healthcare Costs - Bad Behavior

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Controlling healthcare costs has never seemed so far away, yet so near at hand. Politicians tell us we need to insure more people, invest in technology and launch new prevention services in order to reel in costs, despite any empirical evidence that it's true.  In fact, several studies have shown the opposite effect, where these techniques raise utilization and overall costs.

One postulate that does hold water is that bad behavior drives healthcare costs: smoking, diet, exercise, alcohol consumption, medication compliance and seat belt usage are the primary culprits.   Many studies indicate that 50% or more of healthcare costs are associated with these behaviors and should be an integral component of a structured "demand management" program. The logical question is what can be done to get people to actually modify their risk?

No big surprise when I say there is no simple or single answer that will control why people make the choices they make. The solutions are also deeper than the proverbial carrot or stick. Plus, many healthcare ethicists ponder whether it's equitable to assess penalties on those behaviors that, while avoidable in theory, may be manifested due to genetic predisposition.

One area of great interest for WBC is medication compliance. Why do patients take their meds or not? Why do scripts remain unfilled? How can we better monitor and intervene with patients that need assistance, particularly seniors. A recent study conducted by researchers at the University of Missouri found that applying behavior changing strategies, such as using pill boxes, reducing the number of daily doses, or timing of meds so they can be taken simultaneously, can improve patients' abilities to take their medications as required. While physical ailments, such as failing eyesight or arthritis can impede medication compliance with seniors, an additional significant reason is just failure to remember.

It has been estimated that over $100 billion a year is spent on preventable healthcare costs due to medication non-compliance. We will continue to investigate the underlying behavior triggers as well as the supportive intervention strategies to improve outcomes and reduce costs.

Controlling Drug Costs - Pharma Good Guys

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Healthcare reform debates in Washington are fascinating spectator sports. In order to advance one's agenda, the best strategy seems to be to find someone to demonize. It goes something like this: create a crisis fervor, point the finger of blame at some straw dog, and try and steer public opinion for doing something!

No group has caught the heat over the years more than the pharmaceutical industry. "Big Pharma" is an easy target. Everyone complains about the high cost of healthcare and more pointedly, the high cost of prescription drugs. We then hear a background chorus chime in about "excessive profits."  They fail to mention the number of high paying jobs, research grant funding and philanthropic donations.

We sometimes hear from  industry spokespeople  regarding the cost of R&D and the price of innovation.  What we don't hear enough about is the value that many therapeutic regimens represents, both in terms of reducing overall healthcare expense (better chronic disease control) and quality of life. In fact, extending life itself to many patients.

Certainly there is room for improvement in the way the pharma industry manages certain business practices. For example, it's hard to justify extending patent protection and creating different indications for older drugs.  And let's not neglect to mention the folly of a  drug company that introduces a new, much more expensive drug that has no evidence of improved patient outcome.

But where the drug industry really falls short, is the lack of self promotion when it comes to assisting needy patients. Pharma supports over 270 Prescription Assistance Programs ("PAPs")  and Co-Pay Foundations representing approximately 450 different programs. These are the programs that coordinate assistance for those patients that cannot afford their medications and are funded to a large extent by pharma. The phama industry donates multiple millions of dollars in free drugs annually as well as over $300 million in cash annually to help insured patients meet their co-pay requirements. 

Patients in need (including Seniors with Med D coverage) can contact a third-party agency for help or go directly to the pharmaceutical manufacturer of the drugs they need. In the vast majority of cases, pharma comes through for these patients. 

Three cheers for pharma on this count!

AWP Settlement - Who Pays?

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As most pharmacy benefit plan sponsors know, the new change in AWP became effective on September 26, 2009. On that date and in response to the associated court settlement, First DataBank and Medi-Span adjusted the AWP mark-up over the wholesale acquisition cost ("WAC") to no more than 20%. This represents an approximate 4% reduction in AWP for 1,440 NDCs included in the settlement and an additional 21,500 NDCs that are being voluntarily included. Many PBMs have proffered adjustments to their contracts with plan sponsors to address this situation.  The underlying question, however, is "Who pays?"

The Plan sponsor should be expecting to hear good news. "Guess what, your costs for providing prescription drugs have gone down." But in the PBM world, this is not what happens. There are several approaches  that the PBMs are using to respond, with no universal answer. The vast majority of PBMs have presented an alternative that they claim is "cost-neutral" and maintains the "original economic intent" of the contract for PBM services. This means that none of the parties in the PBM contract are expected to change their relative economic positions that were in effect prior to September 26th.

Most of the PBMs have asked their plan sponsor clients to accept a reduction in the contractual discounts designated in their current PBM contract. An AWP-15% discount will become AWP-12.75% under the new pricing arrangement. While this approach may create equity when compared to pre-September 26th pricing, is that really the fair approach? And more importantly, should it be "sold" to the sponsor as a "no one pays more" solution.

Here's an example: old AWP is $100 with a 15% discount = $85. Now, the new AWP will be $96. This should be good news to the sponsor. But the PBMs know that if they honor the 15% discount, one of two things happens: one, the PBM has to eat the reduction in their profit margin because they are obligated to pay the pharmacies in their retail network a contracted price; or two, the pharmacy has to accept reduced margin for their transaction.

From the view of the pharmacy, when AWP for our example drug was $100 with a 15% discount, the pharmacy was paid $85. If their cost is $80, they received the $5 spread plus a dispensing fee of say, $2.00, so their total earned was $7 on this Rx.

Now, the new AWP will be $96 and the plan sponsor's 15% discount creates a cost to the sponsor of $81.60, not $85. The pharmacy would see their spread on the script reduced to $1.60 ($81.60 minus $80 cost). The $2.00 dispensing fee is added to the  $1.60 for a total earned of $3.60. This cuts their "profit" almost in half! Who pays?

Well, the answer under this "cost neutral" approach is the plan sponsor. Back to our example: In order to keep the pharmacy and the PBM whole, the PBM asks the sponsor to reduce the contracted discounts. The $100 AWP that becomes $96 now has a discount of 12.75% in order to create a "cost-neutral" invoice of $85, the same as pre-September 26th. The PBM doesn't have to subsidize the pharmacy and the pharmacy doesn't have to cut their margins.

While it's true that this approach won't require the sponsor to pay more than they are currently paying, they are not paying less. Some would argue that paying less is the objective when hiring a PBM to manage pharmacy costs.

That being said, is this solution acceptable? It depends on the view of the sponsor. The threat from not accepting this option is a potential loss of pharmacies in your network. Most PBMs have protected themselves by included language in their contract for services with the plan sponsor that reserves the right to alter pricing in the event of this AWP change. The plan sponsor may decide to find a PBM that is more aligned with the sponsor's interest. The PBMs, of course, prefer to present it as a "painless" adjustment, in an attempt to not alienate their clients. You must keep in mind, however, that someone always pays!