Rousmaniere: Disrupting the PBMs, Part 2

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

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The conventional method of compensating the PBM by claims payers in workers’ compensation involves a method that is severely short on transparency.  As the first part of this column describes, the claims payer has no way of knowing how much profit the PBM makes, and is forced to rely on a pricing benchmark — average wholesale price (AWP) — which is inherently subject to manipulation.  In fact, a scandal broke out in the 2000s about benchmark manipulation, which triggered a federal investigation.

Earlier this year, Senator Ron Wyden proposed federal legislation that would require PBMs to disclose rebates and discounts they get from drug manufacturers.  He wants to use federal law to drive what he considers is excessive PBM profits.  “It is time to lift the veil of secrecy on a powerful industry that claims it is bringing down the price of medicine…” Wyden said.  

The Transparency Way 

What does this mean for workers’ comp claims payers who want to act now?

An alternative method of charging claims payers, in group health as well as workers’ compensation, is commonly called the “transparency” model.  It is called that because it typically involves disclosure to the claims payer of the transaction details.  And, the PBM is compensated entirely or mostly through an administrative fee or small markup over the actual cost of the drug.  The role of AWP may be entirely eliminated.

It is difficult to verify the extent to which transparency models are used in workers’ compensation and the degree to which they lower prices.  This is partly due, ironically, to the secrecy in which transparency model PBMs operate.  However, extensive sharing of information by one insurer that struggled for some months to successfully transition to such a PBM, and interviews with two dozen consultants, claims payers, researchers, and market participants build a profile of what can happen.

Under a transparency arrangement, the PBM still negotiates prices with the manufacturer or wholesaler.  It ensures that the network pharmacy is compensated at or close to the manufacturer or wholesale cost, plus a dispensing fee.  The PBM still ensures that only drugs approved by the formulary are distributed.

But it makes nothing off the spread, passes along rebates to the claims payer, and does not add on a premium to the dispensing fee.  Thus, it charges the client simply an administrative fee (“pass-through”) or small markup over cost (“cost plus”) plus the dispensing fee.

The net effect to the client is a lowering of the total cost of drugs by a large amount, typically 30% as reported by claims payers and consultants.

Where these savings come from is not the manufacturer or the pharmacy.  It’s from the conventional PBMs' spread, which is the difference between the AWP “minus X” and what it compensates the pharmacy.

One can reasonably guess where the conventional PBM makes large profits is within the mass of drug financial transactions.  The fat is in the generic drugs, which account for the great majority of individual drugs distributed and about half of the total drug bill.

The AWP for generic drugs, PBM insiders say, is upwards of 80% higher than then what the conventional PBM pays the pharmacist.

How One Insurer Found Transparency

A senior insurance executive, who knows the PBM business in workers’ comp well, describes a successful initiative to cut costs.  After several months, savings overall appear to be about 30%. 

“I began,” the executive said, “with the concept of leveraging buying power and wondered whether a buying cooperative could be formed.  I found out this is done in group health, among state and local governments.  Here the term ‘transparency’ first captured my attention.  I found online that the pricing structure in group health was sometimes based on other than AWP minus X.”

“I read various blogs and papers by PBM experts relating to transparency and pricing," the executive said.  "We hired a consultant to look at our data with tools that they had at their disposal to give us insight into how we could improve our drug program.  Our next step was to find PBMs that were willing to offer transparent pricing.  We did this by research, and word of mouth.  We knew some of the alternative PBMs as we had already gone outside of our then PBM to get better pricing on various drugs.” 

“We issued a request for proposal and began the due diligence process.  We obtained multiple proposals and obtained simulated pricing for a representative sample of prescriptions.  Our proposal review team included claims, an expert in data management and our IT team.  We eventually selected a transparency model PBM.  Our projected savings have been so far realized.”

As of August, several organizations are reportedly in the late stages of launching transparency model PBMs, thereby increasing the number currently in the market.  These new ventures are reportedly focusing on entering the workers’ compensation market within the next six months.

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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