How Employers Can Easily Bend the Rx Cost Curve
Pharmacy benefits management has long been a critical strategy for “bending the cost curve” for employers that offer health benefits to their workers. But over the years, PBMs have become mired in complexity, confusion and controversy.
The primary issues challenging plan sponsors are pricing (often ill-defined), clinical integrity and formulary composition, and rebates (assuring they are not secured in exchange for low-value products).
Congress is considering several bills that would ban common industry practices that critics say contribute to higher costs for employers and bigger profits for the PBMs. They would require PBMs to be more forthcoming about the fees they charge and the deals they strike with drug makers. Those proposals, which have broad bipartisan support despite intense industry opposition and lobbying, have advanced through various committees but haven’t been enacted yet. The bills’ sponsors and congressional leaders say they hope the legislation will be approved by the end of this year.
Industry experts Scott Haas, and Terrance Killilea, Pharm.D., who helped construct one of the first large PBMs, told me in a recent interview that while the legislation is well-intended and would bring needed transparency to this murky corner of U.S. health care, there are steps employers can and should take now that can significantly reduce their pharmacy spend and reduce out-of-pocket costs for their employees.
They say there already is a simple solution employers can implement that addresses key financial concerns. This solution has been used by their group for more than 15 years and, they add, has been effective in every prescription program where it was deployed.
Haas and Killilea are now senior executives at USI Insurance Services, a large insurance and employee benefits consulting firm, but they’ve known each other for decades. Thirty years ago, over lunch at an Italian restaurant, they began talking about what an optimal PBM would look like. Intrigued, Killilea grabbed a couple of crayons and proceeded to draw his grand vision on a paper tablecloth.
That led to the development of what they contend is an ironclad procurement strategy and discipline focused on clinical integrity and ensuring that the pharmacy buyer always pays the lowest optimal price (both in specific terms and in a given market basket of PBM utilization context).
In their view, optimized pharmacy benefits management keeps a laser focus on what the plan sponsor and members pay. It requires different and tough contracting terms, diligent “data warehousing,” and an ability to influence clinical or formulary programs.
It’s quite elementary
The Killilea and Haas model involves rudimentary steps to establish low costs for both the plan sponsor and participant based on aggressive competition to drive down pricing. To succeed, they say employers and their consultants need a strong data warehouse, detailed analytics, and the will not to be diverted from actual cost metrics. (More on that below). And they encourage plan sponsors to take advantage of competition in the PBM marketplace. They tell them that while they can achieve significant savings working with the big players in this space, there are plenty of reasons to consider smaller, less well-known PBMs (if they adhere to the rigid pricing requirements). They implore employers to put everything out to bid and not allow a consortium, coalition or established brokered arrangement to skirt this process or allow a PBM to withhold client data. This is particularly important in the Consolidated Appropriations Act era.
For this to work, employers must require pricing with objective, measurable metrics for what Killilea and Haas say are the only key significant components of claims cost:
Generic drugs
Brand-name scripts
Specialty brands (true generic specialty drugs are priced as any other generic)
Administration fees
Dispensing fees
Generics are first on the list because that’s where much of the potential cost excess exists (90% of prescription drugs Americans take are generics). To quickly get to the heart of the issue, Killilea and Haas ask each prospective client right off the bat if their PBM contract stipulates an average wholesale price (AWP- X%, such as AWP-85%) for the pricing of generics. If the answer is yes, the employer is probably paying too much. That’s because the AWP for generic drugs is highly variable and often leads to prices for generic drugs, both individually and collectively, being much higher than necessary. (AWP- X% is allowed only for brands because there’s only one manufacturer of those products.) AWP is inapplicable to generic pricing and cannot be validated on a line item, objective basis. However, it is used in almost all PBM contracts for generic pricing, even ones that are transparent and/or pass-through.
The strategy is essentially twofold: create a dependable model using a pre-established price schedule for generics and provide a framework to validate savings. Even though they account for 20%-30% of the pharmacy budget, generics often involve large cost excess – an issue that will only intensify as more specialty generics come off patent, particularly oral cancer generics.
There are several public sources to find competitive prices for generics, including the National Average Drug Acquisition Cost dataset, but Killilea and Scott prefer to create an “open schedule” (spreadsheet) that requires pricing all 2,900 generics in the marketplace.
What employers need to do, they say, is secure a contractual guarantee from the PBM stating that the plan sponsor and/or consumer will not be charged more than $0.10 per unit (for example) for a particular medication at the point of sale – and have this price apply to ALL distribution channels (including both brick-and-mortar and online pharmacies). They say this strategy yields several significant benefits:
Adherence to the contract is verifiable on a weekly or monthly basis.
Cost impact projections can be validated (rare in the current marketplace).
Prices can be competitively improved as the market cost for a given generic decreases, and
Cost excess of generic drugs is reduced or eliminated, thus removing subjective variability, which dilutes overall cost impact modeling.
Killilea and Haas say the last point is especially important. Often high rebate yields are provided in situations where there is a large cost excess for the generic drugs. Objective metrics for all pricing eliminate this possibility.
The larger point is to encourage employers to stop worrying about what a PBM makes as profit (which is likely to take some time to be addressed legislatively anyway) and instead focus on what they (the employer) are paying. From a market standpoint, the aim is to control pharmacy contract metrics by not allowing any subjective elements to creep in. Every script should be on a schedule that the employer can count on moving forward, down to the last penny. The fiscal model is built from the ground up.
The results of this approach can be significant in terms of savings, access and patient outcomes, regardless of group size. Killilea and Haas say savings usually range from $100 to $150 per employee per year (and in one recent case, more than $320), right out of the gate. This is all done without reducing the pharmacy network, allowing the promotion of low-value medications, or minimizing the formulary.
Mandatory online/mail-order programs are not allowed in this strategy. Killilea and Haas believe health plan enrollees should have access to all eligible pharmacies and say any projected fiscal advantage of mandatory online/mail order is often found to be nonexistent when actual claims are analyzed (the concept was sold on a promise of a higher AWP-X% discount).
They’ve found that their approach has a real and positive impact on patient outcomes. One example they cite is a plan member with a high-deductible health plan tied to a health savings account who now pays $7 instead of $42 per script for a generic statin. Reducing out-of-pocket costs has been shown through medical research to be one of the most effective ways to increase adherence to drug therapy. The savings for plan members are often even bigger. In one instance, the cost of a claim went from more than $4,000 a month for a specialty generic in an uncontrolled AWP-X% environment to $125 a month.
Other pricing elements are also managed and controlled using the objective metrics Killilea and Haas have developed. Competitive bids minimize the net cost of the program. While a general AWP-X% discount is allowed for brands, a pricing schedule delineating a specific AWP discount for each brand specialty product is mandated because the market discounts for these products vary widely. Administrative fees, which Killilea and Haas say are exorbitantly high in some PBM proposals, must also be identified and included in fiscal projections.
“The key for each of these metrics, and the fiscal impact analyses in total, is competitive bidding,” says Killilea. “Unfortunately, what we observe in a non-competitive RFP process is a PBM’s use of subjective pricing metrics that contribute to higher costs (and the broker/consultant supporting the presumed value).”
In addition, he says, a broker or consultant with absolutely zero allegiance to or income from PBMs is essential. “Potential conflicts of interest must be disclosed, both on a client-specific basis and on a global organization relationship basis,” says Killilea. “This critical assessment must be part of an employer’s process of choosing an advisor. It requires much more than the rote answer, ‘I am not making any money on your business.’”
Revisiting rebates
Formulary rebates are an integral and often contentious element of the current PBM fiscal environment. They’ve been shown (in poorly managed environments) to increase the costs of non-generic medications, and policymakers have set their sights on them. For now, though, they are a reality. Established with the coordination of fiscal and clinical strategies, plan sponsors can avoid leaving money on the table when contracting with PBMs. The cure, say Killilea and Haas, is to change how formulary and clinical composition is assessed relative to rebates. Clinical management is vital.
“Assuring a formulary contains no low-value or superfluous medications – and that effective clinical controls are in place – is the first essential component of this strategy,” says Killilea, who acknowledges that many employers prefer not to maximize clinical controls due to provider-patient relationships. “In these situations,” he says, “managing formulary composition is essential.”
Once optimal clinical management is assured, he says, competitive bidding of rebates is incorporated into the global cost model. “This is the opposite of how much of the current discussion examines this challenge,” Killilea says. “A common assumption is that high rebates mean a formulary is laden with low-value medications. This is not true in situations where the formulary/clinical programs have been optimized first and then rebates bid as a component of the overall fiscal picture.”
He says the effectiveness of this process can be verified by concurrent examination of topline costs and topline growth in the cost of medications, using cost and other information from claims analysis. This data warehouse-driven process runs concurrently with an assessment of generic pricing and other growth factors in Killiea’s and Haas’s approach. Global and specific management of each factor and driver is achievable.
When done right, they say, approximately 30% of a plan’s total ingredient cost can be offset by formulary rebates. “The key is to secure high yield without allowing low-value medications to be included on the formulary and best-in-class clinical controls are being applied,” says Killilea.
So what about the call in Washington and state capitals for greater “transparency” in the PBM world?
Killilea and Haas believe the transparency movement is a valuable and essential evolution in the PBM marketplace, but they’re quick to add that transparency alone won’t reduce the need for exact, objective metrics modeled to produce projections that can be directly validated.
“Transparent contracts using subjective pricing arrangements – or simply, pricing that is too high – do not lead to low costs for the plan or member,” says Haas. “The same is true for pass-through; if high costs are being passed through, they are still costly. Comprehensive cost modeling, using only objective metrics, is essential.”
This confusion is designed by insurance lobbyists.
I want PBMs gone, and then single payer. PERIOD.