Negotiating Price Transparency with PBMs Pays Off

The right contract terms with pharmacy benefit managers can make drug costs easier to bear

By Greg Goth Jan 5, 2017
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The surging cost of Mylan's EpiPen—a portable auto-injection device with a measured dose of epinephrine to treat allergic reactions—shocked many U.S. families, including parents who refilled their child's prescription last August before the 2016-17 school year.

Due to a price spike of about 500 percent, many EpiPen purchasers suddenly found themselves paying about $600 when they went to the pharmacy.

Public outrage followed, as did a response from Mylan's CEO, Heather Bresch. She said that the drug's distribution channel, which includes pharmacy benefit management (PBM) firms—intermediaries who process prescription claims and negotiate prices with drug makers, including rebates and discounts—took more than half of the drug's list price as it wended its way to the consumer.  

Bresch's contentions were met with plenty of skepticism but one lesson emerged clearly from the EpiPen notoriety: The changing health insurance economy has exposed many more people to staggeringly high, and often unexpected, prescription drug costs. Adam Fein, president of pharmacy economics consultancy Pembroke Consulting in Philadelphia, wrote in his Drug Channels blog that the percentage of employer-sponsored health plans with pharmacy benefit deductibles has doubled, from 23 percent in 2012 to 46 percent in 2015.

"As most employers have begun to offer a consumer-driven, high-deductible health plan as an option, their employees have been exposed to these shocking price increases—probably for the first time," said Steve Wojcik, vice president for public policy at the National Business Group on Health in Washington, D.C. "There is no real clear explanation for a lot of these price hikes, and unless it's a preventive medicine, purchasers are on the hook for the whole cost in a consumer-driven plan."

When negotiating their 2018 pharmaceutical benefits, employers should ask for more transparency in their PBM contracts so they can keep track of hidden costs, experts advise. Armed with more complete information on pharmaceutical spending, employers can educate workers on how to get the best deal available on their prescriptions.

Really Follow the Money

As third-party administrators of prescription drug programs, PBMs develop and maintain the formulary that lists drugs covered by the plan and the amount of coverage provided—often specified by tiers for generic, formulary brand, nonformulary brand and specialty drugs—contract with pharmacies, negotiate discounts and rebates with drug manufacturers, and process and pay prescription drug claims. 

In recent press coverage, PBMs have often been portrayed as the crafty "man in the middle," making substantial profits off of sophisticated contract language and opacity. The expected overall rise in all pharmaceutical spending, and the extreme increases in high-cost specialty drugs—which include biologics, injectables and other pharmaceutical innovations—are pressuring HR managers to educate themselves on the complex relationships between drug manufacturers, pharmacies and health care providers.

Drug benefit advisors highlighted two elements to look for when negotiating with PBMs:

  • Transparency in contract terms. Fein cited the 2016 Pharmacy Benefit Management Institute's Customer Satisfaction Report, which showed that plan sponsors were more satisfied with PBMs that were more transparent. Sponsors using PBMs that were "not at all transparent" gave a satisfaction rating that averaged 5.8 (out of 10). That compares with an 8.7 rating for plan sponsors with a "completely transparent" relationship. Insisting the PBM disclose all revenue sources and eliminate hidden cash flows is a good place to start.

  • Models that discourage "spread" pricing. A spread is the difference between what a plan is billed and the amount the pharmacy is reimbursed for the same prescription; the PBM retains the difference. Tyrone D. Squires, managing director of boutique PBM TransparentRx in Henderson, Nev., writes that spreads are generally in the $2 to $4 range per prescription but that it is not uncommon to see them as high as $200 for a single medication.

Plan sponsors should start with a contract that has enough transparency so that they can have access to the PBM's data; the contract also should give them comprehensive audit rights over claims and fees, said Keith Bruhnsen, the assistant director of benefits for the University of Michigan in Ann Harbor. One possible approach is to audit data on nonspecialty drugs on an annual basis and specialty drugs on a quarterly basis. Otherwise, he said, what should be a partnership can turn adversarial.

[SHRM members-only toolkit: Conducting Effective Business Negotiations]

Pass-Through Pricing

"Ideally, in a transparent arrangement, the plan pays exactly what the pharmacy benefit manager pays its network of retail pharmacies for a drug," as in a pass-through pricing model, said Edward Kaplan, senior vice president and national health practice leader at consultancy Segal Co.'s New York City office.

Pass-through pricing takes into account all drug-formulary rebates and network-dispensing fees that the PBM receives from pharmaceutical companies, which are then passed through to the client—that is, the plan sponsor. In such arrangements, the plan pays the PBM an administrative fee rather than allowing the PBM to earn the spread or keep other payments from drug makers.

Steve Ritter, president of St. Paul, Minn.-based pass-through PBM ClearScript, agreed that spread pricing might be the most egregious contract practice, but he also warned about "zero balance due" terms, under which a plan member is compelled to pay the plan's stipulated co-payment for a generic prescription even if the retail cost of the drug is less than the contractually agreed-upon price.

In essence, Ritter said, one needs an attitude of "every word matters" when entering PBM contract talks: For example: "What's the definition of a generic? Depending on how you define it, when you go to reconcile your pricing terms, it matters dramatically in terms of paying a discounted amount or achieving the financial objectives a plan thinks it's going to achieve. A word or two is all it takes, but it's hard to find these words if you don't have time and don't have help."

When bringing in a consultancy to negotiate with a PBM, Ritter said to be aware that "some of these third parties have relationships with a particular PBM, so it isn't always as transparent as you might think."

Educating Employees

Bruhnsen has found a possible approach to patient education and cost management. In 2015, University of Michigan plan members spent $12.98 per prescription on average, well below the national average. Keeping plan enrollees informed and empowered helps to control spending and costs, Bruhnsen said.

"As soon as the first prescription is filled at the pharmacy, our members get a letter that tells them what their alternatives are that are lower cost," he noted. "Every time we make a change in the formulary that will have negative impact on members, we give them 60 days' advance notice so they can talk to their doctors about the alternatives. We communicate with the doctors and pharmacies to talk about these changes and the preferred products they want people to use."

A coverage program should include "a fair appeal process, too, so doctors can outline medical necessity appeals. We probably see several dozen every month, and probably 20 percent of [the denials] are overturned and members are allowed to get access to those medications because their circumstances require it."

The Rebate Question

PBMs use factors such as customer volume or the availability of competing drugs to negotiate lower costs through rebates or discounts, which are incentives to include their drugs on the PBMs' formulariesBut according to the Pharmacy Benefit Management Institute's 2015-2016 Prescription Drug Benefit Cost and Plan Design Reportonly three-quarters of employers directly receive any portion of these manufacturer rebates.

If a PBM is receiving a manufacturer's rebate, plan sponsors should know how much the rebate is for and whether it's being passed along, in whole or in part, to them. For instance, there are scenarios where insurers can share rebates with plan enrollees at the point of sale to help make prescriptions more affordable.

However, the University of Michigan's Keith Bruhnsen said rebates only amount to a few percentage points of plan sponsors' total spending on pharmacy benefits on an annual basis.

"There have been some programs to try to capitalize on them at the point of sale, but they've not worked very well," he said. Most plan sponsors that receive manufacturer's rebates that are passed along by their PBMs use them to reduce the premiums charged to employees for the following year, he noted.


Related SHRM Online Articles:

Employers Prepare for 2017 Drug Price Hikes, SHRM Online Benefits, October 2016

Rx Drug Plans Shift Costs to Employees, SHRM Online Benefits, July 2016

Related Resource:

Value-based Purchasing: Pharmaceutical Management, National Business Coalition on Health, August 2014


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