Rousmaniere: Disrupting the PBMs, Part 1

The following is the first piece in a two-part series written by industry expert Peter Rousmaniere on Pharmacy Benefit Management (PBMs). Part two is now available here.

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There is growing evidence that if workers’ compensation claims payers arranged for pharmacy benefit management differently, their drug bills would drop by a lot. Some say by 30%.

Claims payers have become accustomed to standard pharmacy benefit management arrangements to negotiate drug prices.  The PBMs typically have broad discretion over how they negotiate prices and what they charge their clients. 

To be sure state drug fee schedules can reduce costs, such as in California, Delaware, Massachusetts, Minnesota, and New York, which have relatively hard-hitting schedules. But most states have either no fee schedule or ones that fail to reduce costs, as reported by the National Council on Compensation Insurance (NCCI) in January of this year.

What about changing the basic PBM relationship?  At least one claims payer brought the functions of the PBM in-house.  That strategy gives the claims payer direct control of the design of a formulary, the list of approved drugs, and other services such as monitoring drug usage.  Another approach is to join a multi-player consortium, a kind of buyer’s club.  Oregon’s state fund, SAIF (State Accident Insurance Fund), is a member of such a consortium with group health insurers to negotiate down drug prices.

The most practical alternative for most claims payers is to seek out a “transparency” model PBM to radically change the terms of how they pay their PBM.  One insurer that has pursued this strategy says its drugs dropped on average by over one quarter, within weeks of the start of the new arrangement.

How PBMs Make Money

To see this saving potential, consider how drugs get from manufacturer to the local pharmacy, then into the hands of the injured worker. 

Drug manufacturers commonly produce thousands of products, with an amazingly wide range of sales potential, product life cycle and competitive factors.  The manufacturers engage in price competition, promotion to consumers, and direct marketing to doctors.

The drug companies take the largest single share of the retail cost to the final payer. Wholesale distributors, whom the manufacturers sell through, and the pharmacists take their share.  But here comes the PBM.  It's a kind of purchasing agent for the claims payer.  It negotiates pricing at every step in the distribution chain (manufacturer, wholesaler, and pharmacy).  It creates a formulary of approved drugs.  It provides clinical oversight.  It processes the financial transaction, and submits bills to the claims payer for each drug actually delivered to the end user.

Price negotiation with manufacturer and wholesaler by the PBM is complex.  Some drugs are resistant to price negotiation.  These generally are those brand drugs that are much valued by prescribing doctors or patients and for which there are no viable substitutes.  For workers’ comp claims payers, these drugs typically account for about a fifth of prescriptions but represent half of the total drug bill.  Then there are generic drugs for which there are substitutes, sometimes up to or over five.  Price negotiation can be fierce over generic drugs.

The PBM does not actually purchase the drugs except for its mail order pharmacy service.  Rather, it creates a retail pharmacy network.  The PBM arranges for the pharmacy to fill prescriptions for the injured worker.  Knowing what the pharmacies paid for the drug, the PBM reimburses the pharmacist at a pre-specified amount plus a dispensing fee.  

Further features claims payers get from PBMs are a formulary, noted above, an analytics service and a staff to communicate with prescribing physicians.

Pricing in the Dark

We do not get to learn the details behind the pricing of drugs along the distributions chain. The PBM does not disclose what it paid the pharmacy.  PBMs typically charge their clients using a reference benchmark called “average wholesale price” or AWP.  Their charge to their clients is a percentage of AWP, such as “AWP minus 15%.”   The AWP, however, is an artifact, like other often-cited indexes, such as the sticker price of an auto, or factory price for household appliances.

The PBM earns its profit from the “spread” between its charge to the claims payer and the lower amount it reimburses the pharmacies.  Again, the claims payer does not know the spread, for typically PBMs refuse to share that information.  Moreover, the PBM likely keeps any rebates paid by the manufacturer, without disclosure.  And it might also tack on an extra amount to what it pays in dispensing fees and folds that without disclosure into its charges to the client.  In sum, PBMs, enabled by lack of transparency, can make big profits.

One note: PBMs, like pharmacies, aim to make their profit on the entire array of drugs they handle.  They may, in fact, lose money on some drugs and make it up on other drugs.  Any handful of drug prices will most likely misrepresent the bottom line to the PBM.

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The second part of this series, available here, describes how “transparency” model PBM contracting may reduce the costs of drugs by 30% or more.

ABOUT THE AUTHOR

Peter Rousmaniere is widely known throughout the workers’ compensation industry, both for his writing and consulting experience. Based in the picture perfect New England town of Woodstock, VT, he is a regular on the conference circuit, and is deeply in tune with trends and developments within the industry. His passion is writing and presenting on issues largely related to immigration, and he maintains a blog on the subject at www.workingimmigrants.com.

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