UpClose with Ken Dowell, Evergreen Rx Practice Leader

PBM Contracts: Traditional vs Transparent

Negotiating the best PBM contract in today’s environment can be difficult if there is not a clear understanding of the various pricing scenarios being offered in today’s marketplace.

Which one is best for your plan depends on many factors. In fact, for some plan sponsors, the traditional model may be the better solution to manage pharmacy spend, rather than the new models promising transparency and full disclosure.

Traditionally, PBMs have been constantly under pressure to provide plans low administrative fees, deep guaranteed rebates and low pharmacy network rates, but these may not always be the measuring stick in determining what program works best for an individual plan sponsor. Today, most PBMs offer a range of pricing options, from the traditional to the transparent and the transparent with a pass through offering full disclosure.

In the traditional model, a PBM charges a minimal administrative fee and makes its money on non-disclosed “spread” – or the difference between what a plan pays them and what they receive from the pharmaceutical companies and pay the pharmacies. The advantage here is they charge a low administrative fee and provide consistent discount levels, while the disadvantage is the non-disclosed revenue can provide misaligned incentives.

The transparent model works the same way, except the PBM discloses the revenue to the plan sponsor. The advantages are a moderate administrative fee and again predictable discount levels; the disadvantage is you can see, but not touch the arrangements with the PBM’s partners, and again the potential for misaligned incentives.

In the “Transparent Pass Through” contract, the PBM charges an administrative fee that fully pays for all services. In turn, the PBM fully discloses the contracts they have with their partners and all monies are passed through to the plan sponsor. The advantage here is full access to the PBM’s contracts and the ability to manage programs without limitations. On the other hand, the plan sponsor pays a high administrative fee and may be hampered by the contracts the PBMs have in place. Many of the PBMs offering this alternative contract are smaller and do not have the purchasing power of the larger ones. The lack of leverage for these vendors can often lead to a scenario whereby the Plan Sponsor is paying a significantly higher administrative fee and not receiving discounts that offset the higher administrative fee.

So which is better? The reality is any of the three can be the best deal for you if well negotiated. Some of the factors to consider in analyzing a PBM contract should include a real understanding of your generic strategy, as well as the percentage of brand discounts, generic discounts as well as rebates.

It is also important to negotiate parameters that can be audited and the contract should allow you to shift with the market, including having the ability to make changes in formulary, generics, bio-tech and network activity.

Be careful of the fine print. Know what’s included and not included in your brand and generic discount guarantees. Your contract should clearly spell out how rebates are paid and how you can make sure you are getting what you signed up to get.

At the end of the day, programs and service, not a specific discount level, should differentiate PBMs. Managing drug trend is primarily contingent upon hard decisions plan sponsors have to make about drug coverage. The difference in contract types is important, but a distant second to the savings potential in managing the process.

Beyond the process of negotiating the best contract, the work does not stop there. Plan sponsors need to constantly monitor the accuracy of claims payment versus the contract they signed to insure they are receiving what they negotiated.