Articles on Pharmacy Benefit Management

Why the Plans of a Major Drug Purchasing Coalition Did Not Work

Reprinted from the October 25, 2005, issue of DRUG BENEFIT NEWS, biweekly news, data and business strategies for health plans, PBMs and pharmaceutical companies.

When a group of more than 50 FORTUNE 500 companies embarked on a widely publicized mission to remove the pharmacy benefit manager's (PBM)'s rebate-driven "profit motive" and directly contract with pharmaceutical manufacturers, drug makers responded to their proposal with a "resounding 'no.'" That's according to Matthew Gibbs, national pharmacy practice leader at Hewitt Associates, which worked with the HR Policy Association on the initiative. There are many reasons why their idea just wasn't feasible, says Gibbs, but one of the primary reasons was manufacturers' unwillingness to offer net-of-rebate pricing.

In December 2004, the coalition, which is comprised of 53 FORTUNE 500 member companies including Apple Computer, IBM Corp. and Starbucks Corp., solicited 18 brand-drug manufacturers for information on the feasibility of the proposal, and received six completed responses. The mission of their "direct pharmaceutical purchasing coalition" was to "focus the supply chain on service, not product," says Gibbs, by contracting directly with drug makers for net price while paying PBMs a "full and fair administrative fee for administrative services rendered." In other words, if a drug costs $100 and the manufacturer would normally offer a $20 rebate, the coalition was asking to pay $80 right off the bat. But because of best-pricing requirements for Medicaid and other programs, manufacturers wouldn't lower their prices for the coalition. "If they did that, they would have to lower it for everybody," explains Gibbs.

However, manufacturers did "pretty unanimously" agree that they would directly contract rebates with employers, "which was an encouraging thing to member companies because they were glad to see the door wasn't completely closed on that," says Gibbs.

The coalition had also met with members' PBMs and health plans to advise them of their plan, and there was a pretty "general consensus" from them and the manufacturers that such a proposal would have caused an "administrative nightmare," he says. That's because with 53 member companies, totaling 5 million lives with $3.7 billion in annual drug spend (2003), there are about 800 different plan designs, and it would have been very challenging to come up with a "pretty compromised, across the board, universal formulary," says Gibbs. Moreover, "it would have been a plan-design challenge to decide what buckets to put [the drugs] in."

Group Settled on Transparent PBM Deal

After the group realized its initial proposal wasn't going to work, its next option was to pursue a transparent PBM arrangement. The coalition held a bidders' conference in March that was attended by about 30 health plans and PBMs to explain its demands for transparency, or the disclosure of all PBM revenue streams. The group then issued a request for proposals, and out of 26 vendors that requested the RFP, 19 submitted responses, says Gibbs. On Aug. 2, the HR Policy Association said it selected Aetna Pharmacy Management, MedImpact Healthcare Systems, Inc. and Walgreens Health Initiatives to be "certified vendors" of the coalition. Similar to other coalition/PBM arrangements, the coalition does not directly contract with the vendors or pay them, and employer members can voluntarily switch vendors when their current contracts expire.

The vendors agreed to meet seven "principles of transparency," including commitments to charge employers the exact same amount that the PBM pays the dispensing retail pharmacy for brand and generic drugs, provide the acquisition cost of brand and generic drugs delivered via mail order, pass through any and all manufacturer revenues associated with an employer's drug utilization, and allow an audit of contracts to verify compliance.

None of the member companies, however, are making vendor switches for the 2006 benefit year because of time constraints, says Gibbs. "Usually [they need] mostly anywhere from nine to 10 months before the end of the year [to make sweeping changes]," explains Gibbs. He says Hewitt expects an influx of interest from companies wanting to do some analysis around the value of switching contracts for 2007. "The individual companies will have a chance to basically take these three offerings and look at it against their current contracts. So many are going to wait until February or March because Jan. 1, 2006, is too close, and to consider [changes for] Jan. 1, 2007, we really need a full calendar year of their data."

The HR Policy Association estimates that coalition members could save up to 9% on their drug spending by using the participating vendors. Ultimately, the HR Policy Association and Hewitt believe the coalition ended up with the "best of both worlds," says Gibbs.

"None of the employers have to do universal plan-design changes, and we've got the full rebates coming back and we can audit those contracts. We're getting transparency, allowing members to retain their flexibility and have a vendor choice."

"I think it points out that PBMs have an absolute role. There's a reason they're around and administrate a part of it, but we just want to make sure people are making honest dollars out there," he adds.

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