Articles on Pharmacy Benefit Management

More PBM Transparency May Not Cut Costs, but Could Boost Trust

Reprinted from the Dec. 15, 2006, issue of DRUG BENEFIT NEWS, biweekly news, data and business strategies for health plans, PBMs and pharmaceutical companies.

Most players in the PBM industry have come to recognize the value of providing more financial transparency in their contracting — with once unthinkable fiduciary and pass-through pricing options now available from many large and established PBMs, according to industry observers.

But the biggest benefit for Rx payers may not come in the form of lower costs, experts add, but rather through enhanced trust and alignment of objectives in the business relationship.

The trend in PBM transparency appears to be moving back to the "old days," in which pharmaceutical payers were paying for PBM services via high administrative fees, and services were offered a la carte, explains Tim Watson, Pharm.D., president of consulting firm Pharmaceutical Strategies Group.

"It was easy to understand what you were paying for a certain basket of services — it was all line-itemed, and all relatively direct from a fee standpoint," he told a Nov. 30 AIS audioconference on developments in PBM transparency.

Part of today's confusion over transparency stems from the fact that PBMs have moved to a model in which revenues are generated from various sources, including manufacturer rebates, network spreads, and mail-order and specialty pharmacy services, he says. Other complicating factors include multiple sources of maximum allowable cost (MAC) pricing lists for generics, and confusion over average wholesale prices (AWPs), which can change depending on whether products are in bulk form or repackaged in smaller units.

"There is lots of misunderstanding and confusion about how much a purchaser is actually paying a PBM for a basket of services, because it is too hard to measure," Watson says. Many of the transparency initiatives being discussed center on "simplification of the process so that everyone can understand the amount of money changing hands."

Recent industry moves on transparency include steps to establish PBM accreditation standards taken by groups such as the HR Policy Association and URAC. Many business options that wouldn't have even been considered 12 to 18 months ago — like fiduciary and pass-through pricing - now are achievable through very credible and large PBM firms, Watson says. "So you don't have to sacrifice or take on potential risks from a small [PBM] entity just to have the convenience or desire for a different kind of contracting platform," he says.

Transparency Boosts Trust Factor

Health plans and employers want to know the bottom-line price of drugs, says Joseph Gifford, M.D., chief medical officer at Regence Blue Shield. "I can't get that now," he told the audioconference. Instead, what payers get is confusing pricing information based on factors such as AWP, MAC, prior-authorization fees and rebates. "It's tough to model these out, but I have to get to a bottom-line idea of what this product is going to cost me," Gifford says.

Gifford acknowledges that pass-through pricing may not actually lower overall pharmaceutical costs, especially with PBMs' expected higher administrative fees in such a system. "Even if it is no cheaper, it gets the trust relationship back on track, and that is the key," he says.

To establish trust, PBMs must be open to scrutiny, Gifford asserts. "You're going to have to show me your books, show me your margins; you have to be auditable," he says, advising Rx payers to insist on the right to audit PBM transactions. "At the furthest end of this, you're going to say, 'Sign on to be my fiduciary,'" he says.

Still, pass-through contracting brings its own set of challenges, Watson notes. Some observers had predicted pass-through pricing was going to strip out tremendous excess profit from PBMs, he says. "What we have seen from an underwriting standpoint is that that is not always the case," he adds, noting that PBMs are not necessarily particular where they earn their margins. For example, a PBM that seeks to earn $2 to $4 per script may achieve its target through four or five different mechanisms, Watson explains. "So if you're happy to pay a per-script fee that allows them to earn that amount, it really makes no difference to them."

Watson suggests that payers have realistic goals when entering a pass-through model contract. "It should achieve the goal of additional transparency, so at least you understand more clearly what you're paying for in the relationship," he says.

"On the one hand, it is 100% good to try and understand what you're paying," Watson says. "On the other, you may be faced with paying a very.high admin fee up front, without a whole lot of assurances on the back end that you're going to actually achieve the full supplier discounts, or how to actually construct what the relative value of those discounts would be, so you can make a fair economic trade-off comparison."

Another element that payers should consider before entering a deal with a PBM is its formulary, says David Clark, vice president of medical and pharmacy services at The Regence Group, which operates RegenceRx, a national PBM.

Historically, the use of high-cost brand-name drugs can improve the financial performance of PBMs, he says. "My recommendation is to look at formularies very carefully, because if there is an extensive number of brands, the formularies may not be evidence based, and it may be more revenue based," Clark says. Many national PBMs, for example, carry 87% of all brand drugs on their formularies, he explains. "Where [it's] an evidence-based formulary, that is going to be down to about 60% or less," Clark says.

Fewer than 20% — and possibly fewer than 10% — of the new products coming onto the market in the last four years add any value in terms of effectiveness or safety, he says of findings discovered using an evidence-based approach to the findings. "The other 80% to 90% being added to a formulary is more likely the product is more of a me-too that may provide revenue sources for the PBM," he adds.

To purchase a CD of AIS's Nov. 30 audioconference, "PBM Transparency: What Recent News Events Mean for Payers, PBMs and Other Stakeholders," please visit www.AISHealth.com or call (800) 521-4323.

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