Workers’ compensation insurers, third-party administrators, and other payers rely on their pharmacy benefit managers (PBMs) to ensure the appropriate use of medications by patients at the lowest net cost. The rising cost of prescription drugs and negative publicity surrounding PBM overcharges along with a lack of transparency have caused payers to examine their PBMs’ practices.
A PBM’s most basic function is to adjudicate prescription claims per payer specifications. Some of the myriad services that PBMs offer are designed specifically to control costs. Primarily, PBMs deliver savings through contractually guaranteed discounts, usually structured as a percentage off the average wholesale price (AWP) of the drug. The AWP is an arbitrary price assigned by drug manufacturers that has evolved into the standard reference price used for prescription drug reimbursement.
Other methods PBMs use to deliver additional savings include, but are not limited to, discounts through their accessible pharmacy network and by providing a robust drug formulary. Implementation of utilization controls and other clinical management services along with securing rebates from drug manufacturers are other ways PBMs say they can contain costs for payers.
While most PBMS could—and some do—deliver savings through these functions, quantifying and retaining those savings over the life of the contract presents major challenges to many payers. Over the years, some PBMs have promised lucrative savings and then tacitly changed the rules to brazenly amass revenues at the expense of payers.
To be good stewards of their dollars, payers need to educate themselves on how PBMs operate. The following five concepts lay a framework for critically appraising PBM offerings and avoiding a loss of savings.
#1: Business Models
As mentioned earlier, the main way PBMs provide savings is through contractually guaranteed discounts to payers. The administrative fee for PBM services varies based on the type of pricing arrangement the PBM offers, i.e., pass-through or traditional spread models. Considerations such as age, disease state, prescription utilization, the mix of drugs used, payer size, and other factors also influence the administrative fee.
Under pass-through pricing, the PBM charges an administrative fee on a per-fill or per-active prescription card-fill basis. With this model, the PBM’s sole revenue comes from administrative fees.
Under the traditional spread model that is so prevalent in workers’ compensation, the PBM collects revenue on the difference between what the payer is charged for the medication (typically higher) and the lower amount the PBM reimburses the pharmacy for the drugs. There is typically no administrative fee under this model.
Each practice has its own limitations and benefits. However, the spread model is more troubling, especially if the payer is not attentive, because it is not transparent by design. Further complicating this model is the way some PBMs bundle “cost-saving” initiatives and roll them up into spread pricing. Since these are not standalone services, their fees are buried and can obscure financial impact to payers.
As a result, spread pricing can erode a payer’s savings and produce higher revenue for the PBM. Therefore, payers should be leery of bundled fees and triple check any vague methodologies used by PBMs to calculate their return on investment on these programs.
#2: Maximum Allowable Cost
Maximum allowable cost (MAC) represents the maximum amount that a PBM will reimburse a pharmacy for drug products. It’s important to know that PBMs create and manage their own MAC lists.
The AWP for a single generic drug can vary significantly among generic manufacturers and sometimes even for the same manufacturer over a specific period. There was a time when some pharmacies were filling scripts with the highest AWP drugs to improve their bottom lines. To combat this, PBMs instituted MAC lists to cap the amount of reimbursement at the best market rate.
However, some PBMs have played fast and loose with MAC lists, creating multiple lists for payers and pharmacies. The payer sees a different list (typically higher cost) than the pharmacy has, and this enables PBMs to generate significant revenue from the spread. MAC transparency has become a contentious issue, and several states now have statutes regarding MAC transparency and appeals.
While state regulators have been addressing MAC issues, most payers have not. If a PBM touts MAC transparency, demand clear explanations of its MAC policy and management. Of course, the simple solution is to require the PBM to publish and maintain a single MAC list for each payer’s pharmacy program.
#3: Contract Language
Many PBMs use loopholes in their contracts to obscure practices and evade contractual guarantees and limitations. Some deliberately use vague definitions for contractual terms, giving the PBM enough wiggle room to interpret terms however it chooses.
These terms may allow the PBM to blur the definition of key terms like brand and generic to adjust the pool of claims during reconciliation and offset any discount the payer is owed.
For instance, a PBM may choose to shift a “single source generic drug,” with a high discount of AWP-55% to the brand pool, which is reimbursed at AWP-19%. This simple switch artificially increases the PBM’s brand discount performance. The shift is likely to occur when the PBM is not achieving its brand discount guarantees.
This manipulation—all covered in the contract language—can erode millions of dollars in savings from the payer. Even payers who are cognizant of these tactics and invest the time and resources to analyze contracts and performance can miss this trick.
Understanding contract language is the most important step that payers can take. A single line of fuzzy verbiage can eliminate savings and remove the payer’s ability to hold the PBM accountable. There are companies that represent payers in creating fair contracts. Paying for contract consultation may be worth the expense.
#4: Reeling in Rebates
Yes, we are still talking about drug rebates. PBM contracts usually contain rebate guarantees and terms about sharing rebate savings. (Notably, large payers with a broad base of patients tend to receive better rebate guarantees, while smaller payers get no such consideration.)
Terms may allow the PBM to take all the rebates collected from drug manufacturers. Even when it shares rebates, the PBM may reduce the pool of rebate dollars disbursed to the payer by excluding certain claims from the rebate calculation.
Rebates are typically higher for specialty drugs than traditional brands. They are also higher for home delivery than for drugs dispensed in a retail pharmacy. Still, some PBMs argue that rebates are immaterial in workers’ compensation because of the relatively high generic utilization rate (over 90%, in some cases).
This is misleading because the pool or brand drugs tend to be quite expensive and yield a significant rebate. Depending on the payer’s drug mix and program setup, rebates can deliver average savings ranging between 5-10% of a payer’s total drug cost. In addition, there is a strong pipeline of drugs awaiting FDA approval that are likely to expand the basket of rebatable drugs, even in workers’ compensation. Therefore, payers should not summarily write rebates off as immaterial.
Payers should also be wary of a PBM’s use of multiple layers of rebate aggregators. Aggregators pool prescription records from multiple, usually midsize and small PBMs to negotiate and accurately collect rebates from manufacturers. They typically charge a fee of eight to 10% of the total rebates collected. By using several aggregators that each collect their own fees, PBMs dilute the net rebate amount going to the payer. Additionally, there are cases where PBMs actually own the aggregators and fail to disclose this.
Payers should ask how rebates are aggregated and collected and expect to receive information about the number of aggregators and the amount of their fees, along with disclosure of any financial relationship between the PBM and aggregator. If one exists, payers should find out how it impacts them. Payers should also negotiate minimum rebate guarantees for each brand and specialty drug that is rebate eligible.
Regulatory pressures have led to more disclosures around rebates, but some PBMs have found ways to circumvent these requirements through separate proprietary and confidential deals with pharmaceutical manufacturers. These deals can involve rebate administrative fees, purchase money discounts, health management fees, and data access fees, all of which siphon savings from payers into revenues for PBMs.
PBMs also make similar arrangements with drug wholesalers and distributors. These third-party contracts are proprietary and confidential, and PBM contract language precludes disclosure or audits that could uncover these practices. As a result, PBMs make more money at the expense of payers, and payers may be losing millions of dollars.
# 5 Mail Order
Over the years, PBMs have expanded their roles from pharmacy benefit managers into pharmacy dispensers. Nearly every major PBM—and even some smaller ones—own and operate a mail-order pharmacy. They promote these as an avenue for payers to receive deeper discounts and better manage drug spending. And, when properly managed, home delivery service can increase patient access, improve care, and provide savings. However, this is not always the case.
In fact, mail-order pharmacies can seriously undermine a payer’s ability to control costs. Some facilities have become prescription mills, defaulting patients to automatic refills. In some cases, they dispense a large volume of prescriptions that patients do not need.
Several studies conducted during the past decade on the impact of mail-order facilities on medication waste reached similar conclusions. Most telling is one that shows that mail-order pharmacies generate over three times more waste than programs that allow patients to fill scripts at community pharmacies. Mail orders can essentially become revenue generators for PBMs at the expense of payers.
Making the Selection
As PBMs expanded services beyond benefit administration and management by offering mail-order dispensing, utilization management, and rebate administration, they have generated record profits. If payers are not better informed, PBMs will continue to operate under the cloak of non-disclosure and convoluted contracts.
Until payers demand contractual and basic business deal transparency, this broken system will continue. Under the status quo, which is already proving to be unsustainable, outcomes will be far less optimal than the financial value payers should receive, and the quality services workers’ compensation patients deserve.
Payers should regularly evaluate their PBMs’ business models using these concepts. Then select a PBM that is open and honest about how it operates and provides transparency so overall performance can be evaluated.