Rx Trend: Be Aware of PBMs’ Moving Parts

By Ken Dowell, Pharmacy Practice Leader, Evergreen Rx.

Pharmacy Benefit Management companies (PBMs) now control more than 70% of all consumer prescription drug purchases. In dollar terms, over $100 billion is being managed by PBMs.

With the rise of PBMs, it is important that financial and other executives understand how they operate.

Drug costs are a key factor in the overall rise in healthcare costs. On an annual basis, the impact of trend on pm/pm drug expense is significant. When viewed from a longer time perspective, the leveraging impact of successive years of double digit trend on total medical costs is staggering. For example, a health plan with annual Rx trend at 14% will see a compounded increase of 48% over a three-year time period and a 92% increase in Rx costs over five years.

The Segal Company’s 2004 Health Plan Trend Survey projects prescription drug benefit costs will continue to increase at a rate of 18.1% for retail drugs and 17.4% for mail-order prescription drugs. For retirees age 65 and older, the projected increases are 16% and 17% for retail and mail-order prescription drugs respectively.

For many health plans, the gross Rx trend exceeds 14%. Most have “attacked the problem” by instituting multi-tiered co-payments, coinsurance, or through consumer-driven models with a high Rx deductible. These strategies mitigate the impact of trend on their costs—on a net basis. However, this is at best like trying to close a gaping wound with a band-aid. Once the effect of what is essentially cost shifting is fully realized the trend will return, and the problem compounded in subsequent years.

The pressures created by pharmaceutical expenses and the resulting media coverage of the problem have spawned a plethora of “Rx-perts.” Most focus on plan design and audits. While recovering monies due from past utilization is important, doing so is far more difficult than usually represented, and unless the audit information is used to negotiate a different PBM contract structure, nothing is gained toward managing future expenses. Further, pharmacy claims are probably the most difficult benefit to successfully audit due to the huge volume of claims, complex nature of the adjudication systems, multiple formularies and pricing formulas to account for. Most audit approaches identify what are largely subjective areas that are not directly actionable.

Where the Dollars Are

Health plans are now seeing their PBM administration fees reduced upon renewal with their PBM, in many cases to $0. Yet at the same time, (gross) Rx trend continues unabated and PBMs continue to record significant revenue growth. This “phenomenon” is well depicted with an iceberg analogy; i.e. what is visible accounts for only 10- 20% of the overall Rx costs to a health plan. The business model of the PBM industry is built largely on keeping payors focused on the “above the waterline” costs.

“Above the waterline” costs include: pharmacy discounts, rebate sharing and administrative fees.

“Below the waterline” (less visible) costs include: formulary switching programs, network shaving, the rest of the rebates, pharma relationships, mail service arrangements and pharma-funded DM programs.

Unfortunately, it is below the surface where 80 - 90% of the invisible revenue streams between the Prescription Benefit Managers and their vendors (pharmaceutical manufacturers and Pharmacies) lurk. It is these machinations, including claim fees, rebates, network spread, educational grants, administration fees (charged to drug manufacturers), and payments for the sale of data, where PBMs make most of their money.

PBMs have developed effective strategies and techniques for controlling costs. However, due to the competitive nature of their industry these specific cost saving techniques are used to enable them to compete while maintaining margins, and are usually not volunteered.

Managing the Moving Parts

Most plans do an excellent job of managing the clinical side of Rx benefits. With clinical considerations not in the equation, the focus turns to the “moving parts” of the PBM relationship, which alone account for 5-9% of overall trend. Under a “transparent” PBM model, for example, the “moving parts” are eliminated, incentives between the payor and PBM are aligned, manufacturer revenue flows to the payor, and fixed administration and pharmacy network fees are paid to the PBM. There are a total of 17 different factors to be addressed in effectively contracting (or re-contracting) with a PBM beginning with the building blocks of the benefit such as preferred drug list, MAC list, AWP origin.

Due to the nature of the industry, the PBM contract that could be negotiated today is far better than what was available two years ago. Every year, in addition to the introduction of new pharmaceuticals and biologics, PBMs also introduce new schemes to augment their revenue. A well informed payor organization will be much better able to manage the situation.