Articles on Pharmacy Benefit Management

Experts Offer Advice to Payers on Comparing Transparent PBM Bids

Reprinted from the July 29, 2005, issue of DRUG BENEFIT NEWS, biweekly news, data and business strategies for health plans, PBMs and pharmaceutical companies.

The demand for transparency in pharmacy benefit contracts continues to escalate, with smaller employers, as well as many public-sector payers, now seeking "transparent" PBM pacts. This trend is not necessarily a symptom of mistrust of the PBM industry, but is just a natural reaction in the market to the fact that pharmacy costs take up an increasing share of employer health plan costs, according to experts at a recent AIS audioconference.

Transparency is not, in and of itself, a cost-containment tool, but rather it can help payers become educated about the impact of their decisions, and make sure that their goals are aligned with those of their vendors. "Unless it's part of a more inclusive business model, transparency can just be a Band-Aid," said Jack McClurg, CEO of HealthTrans, LLC, in a July 20 audioconference on "Transparency Strategies for Pharmacy Benefit Programs." Colorado-based HealthTrans is a pharmacy benefit administrator that processes 70 million scripts per year for 13 million covered lives, and has an annual drug spend of $3 billion.

HealthTrans COO Louis Hutchison, Jr. said that many common assumptions about transparency are not always true. For instance, many employers think that simply seeing what's going on will get them a better rate from their vendor or that they will automatically reap the benefits of the vendor's deals with manufacturers. Hutchison cautioned payers that full disclosure by itself is not even a guarantee that your vendor is working in your best interest.

For optimum cost control under a transparent contract, the bigger picture needs to include both benefit design strategies and alignment of interests, and it needs to start with the bidding process. Hutchison noted that "transparent bids are not always transparent. Partially transparent bids — or as we refer to them, 'translucent' bids" — will typically be included in responses to a request for proposals (RFP).

With so many different approaches to PBM contracts, payers are challenged to obtain an apples-to-apples comparison of bids, but a full understanding of PBM revenue streams can help. "If you distinguish between claim costs and administrative costs, you can make progress toward understanding transparency," said Kevin Waite, a pharmacy benefit consultant with Dallas-based Pharmaceutical Strategies Group.

Under traditional PBM contracts, administrative fees can represent 5% or even less of the total service cost, compared with a transparent revenue model in which administrative fees represent more than 75% of service costs. If the PBM is making money on a network spread, rebates or other means, that revenue is disclosed to the payer under a transparent contract.

Many traditional PBMs are willing to structure their bid in a transparent pricing model, but they are likely to seek the same level of revenue through administrative fees as they would anticipate under a contract driven by rebate revenue. This can lead to sticker shock and scare off clients from a transparent bid. "Rebates can become an overly attractive revenue opportunity both at the PBM level and the payer level," said Waite. "If you think of rebates as an average dollar amount per claim, you start losing sight of the bigger picture. I think rebates should be viewed as a percentage of ingredient costs."

"We have found that the greater the rebate yield, the greater the overall drug spend," said Hutchison. HealthTrans has observed that for every rebate dollar earned, the overall drug spend increases by $5. For instance, if you compare the payer's cost of over-the-counter (OTC) Prilosec at about $30 to a branded prescription proton pump inhibitor at $140, "you can see that you are just not going to make up the difference in rebate dollars," he said.

Payers that pursue transparent contracts should expect to pay significantly higher administrative fees than they have in the past, Hutchinson said. A transparent contract, in which the vendor's incentives are fully aligned with the payer's, will likely require significantly higher fees for claims processing and other components of the pharmacy benefit. The savings come from the fact that the vendor is incentivized to deliver value for the service.

One of the reasons for the current lack of transparency in pharmacy benefit contracting is that contracts have relied heavily on rebates in order to avoid up-front costs in administering a pharmacy benefit. PBMs have structured the contracts in this manner because "it's a whole lot easier to adopt a program or sell a program if there's little or no out-of-pocket costs associated with it," Waite explained, and claims processing fees "don't spreadsheet well on a bid."

HealthTrans' formulary, said Hutchison, is "evidence-based," and focuses on making appropriate choices based on demographics, adherence probabilities and other variables. The most cost-effective option is then determined by the lowest overall net cost within a therapeutic class, including generics and OTC options.

In responding to a participant question, speakers agreed that requiring a claims repricing analysis is useful for evaluating PBM bids. Claims repricing is a direct comparison of financial terms applied to an existing set of claims. But "you need to be pretty meticulous about the requirements for that repricing to eliminate opportunities for the bidding parties to get creative," cautioned Waite.

Claims Repricing Has Limited Utility

In a post-conference interview with DBN, Richard Bullard, a director with Phoenix-based PBM Partners Rx, warns that claims repricing is only one component of the cost structure. He does not favor claims repricing as an RFP comparison tool, asserting that it can be a misleading, misunderstood element in the computation of cost. That is because average wholesale price discounts, rebates and administrative fees represent such a small portion of plan sponsor cost.

Waite responds that the claims repricing exercise can validate that the appropriate discounts were taken across brand and generic drugs, but it can be easily misused. "It is a complicated process, and perception is not always reality," he asserts.

"When people make decisions on PBMs, in general they're looking at just the pricing components," Bullard says. A consultant-driven RFP process frequently overlooks opportunities from therapeutic interchange, generic substitution improvements, retail network changes, maximum allowable cost lists, mail-order utilization, changes in benefit design, and assumptions in drug trend, he contends. Bullard asserts that drug mix is the most important component of cost, and therefore should receive greater attention from payers. Partners Rx has designed an RFP comparison process that measures the impact of formulary management strategies on real claims, without relying on assumptions.

Transparency Can Have Financial Risks

Just as with traditional contracts, transparent contracts can potentially create a negative financial position for payers, asserted Waite. Those risks include:

• Up-front costs for administrative fees may not be offset by incremental supplier discounts.
• Potential for less competitive supplier contracting.
• More burdensome auditing procedures may be required to validate the contract.

In addition, he advised payers to get service guarantees and expectations written into the contract, partially because some of the vendors in this market are inexperienced and untested.

A CD of the July 20 audioconference can be purchased from AIS at www.aishealth.com/
Products/cptr_072005.html or by calling (800) 521-4323.

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