• John DiMartino

Asymmetric Information: PBMs


"The drug-pricing system is completely broken"

- Linda Cahn

WHAT IS A PBM?

Per PCMA, Pharmacy Benefit Managers (PBMs) administer prescription drug plans for more than 266 million Americans who have health insurance from a variety of sponsors including: commercial health plans, self-insured employer plans, union plans, Medicare Part D plans, the FEHBP, state government employee plans, Medicaid, and others.

In short, drug manufacturers set prices and PBMs are a third party that negotiates with them to provide "discounts" for your prescription drugs.

You are probably familiar with some of them: Express Scripts, CVS/Caremark, Optum Rx, and Benecard.

NEGOTIATING DISCOUNTS

When a middleman is negotiating a discount on your behalf in the health care industry, you can bet that there are hidden fees and perverse incentives. The first question to ask is, how are the drug prices set? If you guessed "there are no rules governing the price of prescription drug costs," then you would be correct. One of the most public instances of this taking place was when Martin Shkreli raised the cost of Daraprim, an HIV and Cancer drug, from $13.50 per pill to $750 per pill. Totally legal. If you google Martin Shkreli you will find that he was in court for securities fraud - unrelated to the Draprim scandal.

PBM CONTRACTS

In an article on PBM Contracts, Linda Cahn states that "a plan sponsor must view its PBM contract as if it is a balloon filled with money that the PBM is obtaining from multiple contract deficiencies: If the plan sponsor squeezes the balloon to eliminate some - or even most - contract deficiencies, the PBM will take just as much of the plan's money - or perhaps even more...a plan sponsor that wants to decrease and thereafter control its costs must pop the balloon entirely and eliminate all contract deficiencies."

Here's some of the ways that PBMs build profit into your contract:

Spread Pricing: PBMs can charge clients more for some drugs than they pay the pharmacy.

Rebate Retention: PBMs can keep a portion of a drugmaker's rebate, around 10%, as compensation.

In-House Specialty: PBMs often steer patients to their own specialty or mail-order pharmacies.

Clawbacks: PBMs have taken back the difference between a patient's flat copay and the actual price of a drug when the copay is higher.

5 KEY TAKEAWAYS

  1. Any ambiguities or loopholes in a contract may end up costing a plan sponsor more than it should be paying.

  2. Every significant contract term needs to be clearly defined and not open to interpretation.

  3. Many contracts that include price guarantees allow a PBM to classify the same drugs differently for various purposes.

  4. A transparent contract should allow a plan sponsor to choose its own auditor and not prevent the audotr from reviewing what should be reviewed.

  5. The plan can save more money by implementing savings programs such as mandatory generic, prior authorization, step therapy, and quantity limit programs and a highly tiered formulary.

NEXT STEPS

Have a conversation with your broker or consultant about your PBM contract. Are you with one of the big 5 PBMs? If so, have you ever reviewed the contract? When is the last time you shopped your PBM? Have you ever looked into one of the boutique, transparent PBMs that exist in the marketplace?

I leave you with this last example. In 2012, American Casino & Entertainment Properties, LLC, claims its costs plummeted 28% after dropping a big PBM in favor of a smaller, more transparent PBM.

What would 28% savings do for your organization?

Legal Disclaimer

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