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December 27, 2012
Savings available by holding PBMs to a higher standard

Gazing at a glassy-smooth river brings home the point that you can’t always tell what’s happening under the surface. While it may appear from your perspective that the river is lazy and calm, throw in a stick, and you’ll see how fast it is really moving.

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The same can be said of other things, too. For example, your Pharmacy Benefit Management (PBM) program. You pay the bill, and you don’t hear employees complaining about their $10-a-month prescription copayments. The program is flowing along smoothly.
We’re about to throw a stick into it.

We recently spoke with Scott Haas, CLU, RHU, vice president of Wells Fargo Pharmacy Consulting ( and his colleagues spend their days analyzing risks and other metrics in conjunction with healthcare plans and managed care organizations. They have peered beneath the surface and didn’t like what they found.

From purely transactional to management organizations

PBMs started out in a purely administrative role, Haas says, helping to process retail pharmacy transactions and manage prices of prescription drugs through pricing negotiations. “They have evolved into clinical management organizations for pharmaceuticals, basically overseeing people’s utilization of drugs.”

In the early days of PBMs, the majority of prescribed drugs were brand drugs -- as opposed to generic drugs-- those that have been around long enough for their patents to expire. Once that occurs, other manufacturers are free to make their own version of the drug, and the price for these now-generic formulas drops significantly. Haas believes it could be more.

“As the market has evolved and more and more drugs have come off patent and moved to generic status, what has happened is the PBMs have created tremendous revenue streams for themselves by using what’s known as spread pricing. Spread pricing is a part of the pricing metrics used in the PBM industry,” Haas says.

“The key component is Average Wholesale Price, referred to as AWP. AWP prices of brand drugs and of specialty drugs are published, so you can easily get that information. These are drugs that are still patent protected, and they are basically manufactured by a single source because they are protected under their patents. Generic drugs, when the drugs go off patent and move into a generic status, then have multiple manufacturers of that chemical compound that can compete in the marketplace.”

AWP ‘fictional’ when applied to generic drugs

The problem, according to Haas, occurs when AWP is applied to generic drugs. “In the 80s and 90s, the majority of drugs were brand rather than generic,” he says. The PBMs would negotiate pricing with the pharmacies, based on AWP, then charge the plan sponsor or member a higher figure and keep the difference. “For example, they might pay a pharmacy AWP minus 8%, then charge the plan sponsor or the member AWP minus 10%, and keep that 2% spread as revenue. But what has evolved as more and more drugs have moved to generic is that PBMs saw the opportunity to create revenue by applying the same methodology to generic drugs.

“And this is the basis of what we do to save plan sponsors and participants money,” Haas says. “We subscribe to the premise that AWP for generic drugs is a fictitious number that doesn’t exist. It’s a number created by PBMs. So what’s going on is that these AWP schemes that are employed by PBMs on generic drugs are creating one price schedule that is charged to the plan sponsor and to the consumer, while the pricing schedules they use to pay the pharmacies are based on a different methodology. So you’ve got pharmacies being paid on one schedule and plan sponsors and consumers being charged and billed on another fee schedule.”

Haas compares the situation to one with which we’re all familiar: a trip to the grocery store. “Let’s say we used a PBM to purchase Froot Loops® from a grocery store,” he says. “You go to the store and buy a box of Froot Loops for $3. We’ll say the PBM is Visa® and you use your Visa card to pay for that box of cereal. When you get your bill 30 days later, it shows you were charged $9 for the box of Froot Loops, because Visa added $6 to the transaction and didn’t disclose it to anyone. That’s basically what the PBM industry is doing.

“So in reality, what occurs is that under an AWP scheme for generic drugs, the consumer and the plan sponsor for a particular generic drug may be charged 50 cents per pill when in fact the pharmacy for that exact same pill and that exact same transaction is getting paid 5 cents per pill. Then that 45 cents per pill difference is the spread revenue that is generated and retained by the PBM, and it’s very rarely disclosed to the marketplace.”

Here’s what we’re willing to pay…

To attack the problem, Haas and his team at Wells Fargo created a unique procurement strategy. “About 4 years ago, we listed every generic drug – and there are about 2,750 of them – by their specific identifying codes. We went through an RFP process. We said to the marketplace, ‘Here’s what our customer looks like and is willing to pay for generic drugs. We also want to know what your AWP is for brand and specialty drugs.’ Then we said, ‘Are you able to meet these price points?’

“We began seeing a separation of the market; a number of the more traditional PBMs said, ‘No, we choose not to participate.’ But then we had a number of PBMs step up and say ‘absolutely, we’ll play, and we’ll meet these price points.’ So immediately we began seeing competition in the marketplace. We are able to have multiple PBMs competing for the right to serve our customers by meeting the procurement strategy requirements.”

These days, the RFPs are done a little differently, Haas reports. “When we put our RFP out to the market now, we don’t include the pricing that our client is willing to pay; we just leave it blank and request the PBM respond with the price they’re able to guarantee as the maximum allowable charge for these pills. So now when we put an RFP out on the street, we’re continually seeing the competition driving the price points down.”

Substantial savings

How far down? Haas says their typical client enjoys substantial savings. “As a rule, what we’re seeing is anywhere from about $100 to as high as $150 per employee per year onetime savings,” he says. In addition, he says this approach mitigates trend cost increases, typically resulting in a negative or zero trend for an extended period of time.

Ongoing savings are substantial, too. He illustrates the point using an employee who has type 2 diabetes, high blood pressure, and high cholesterol.  “During the course of a year under a normal PBM contract structure, this person’s medications will cost about $3,000 a year. But when you fix the mechanics and the underlying pricing, it lowers that cost, on an annual basis, from $3,000 down to $300. That’s how much potential savings exist.”

The savings are both for the plan and for the employees, who may become more adherent to their doctor’s orders, simply because they can now afford to pay for the medications. This is especially true when companies are using high deductible health plans as a means of containing costs.

Sound good? Haas suggests that you take a look at your PBM contract. “Look at how the cost basis of generic drugs is defined, and if it says ‘AWP,’ you need to take action.” And don’t think you have to be big to take advantage of this new methodology.

“It doesn’t matter how big you are as an employer,” he says. “What matters is how big the PBM is that we can align you with, because the pricing will depend on their size, not the employer’s. We have clients of 100 employees who have better overall PBM pricing than many of the large purchasing coalitions that represent in excess of 1,000,000 members.”

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