Key Issues for Plan Sponsors
Pharmacy Benefit Managers (PBMs) claim to lower drug costs but often raise them with hidden pricing schemes. These common PBM practices can result in significant compliance risks and financial burdens for both plan sponsors and participants:
- Lack of Transparency: Opaque contracts hide true costs, making reasonableness and lowest net cost hard to assess. Discounts are meaningless as an indicator of a “good deal.” Drugs are often priced in aggregate rather than a price per drug.
Action: Trust but verify when a PBM describes themselves as “transparent.” Anyone can slap the term on their product. Demand full disclosure and audit rights allowing regular review of PBM pricing practices.
- Misaligned Incentives: The big three PBMs (OptumRx, CVS, Express Scripts) went out of their way in congressional testimony to indicate they weren’t fiduciaries. That means they prioritize their profits over all else and it’s up to plan sponsors to protect participants.
Action: There are some truly transparent PBMs willing to take on fiduciary responsibilities – it can be done by those willing to disrupt the status quo and prevailing opaque business model. Seek them out.
- Hidden Rebates: PBMs negotiate rebates from pharma companies but rarely pass all the savings to plans or participants. Rebates are often (mis)characterized as admin fees or have been paid to other affiliated organizations, often located offshore to avoid review. Rebates have been going down for the last decade whereas admin fees and PBM profits have been rising – a clear sign a shell game is underway.
Action: Getting “100% of the rebates” isn’t the flex you think it is. Demand full pricing disclosure in RFPs and contract negotiations. Ensure contract language explicitly defines terms like “rebates,” “fees,” and “spread pricing” to avoid ambiguity.
- Restrictive Formularies: PBMs create formularies favoring high-priced drugs over more affordable alternatives. There really is no such thing as a specialty generic drug other than as a PBM scheme to increase prices and limit distribution. A recent FTC report showed markups of hundreds and thousands of percent resulting in more than $1,000 per prescription on cancer, HIV, and other critical drugs. The end result is PBMs receive $7.3 billion of dispensing revenue in excess of national drug cost averages.
Action: Scrub your formularies to remove generics from a specialty tier and remove other forms of PBM-bias toward high-priced drugs.
- Spread Pricing: PBMs charge plans more than they pay pharmacies, keeping the difference. This amounts to roughly $1.4 billion in revenue. That’s far less than the specialty drug schemes but as they say, “A billion here, a billion there, and pretty soon you’re talking real money.” Never missing a trick, some payers have begun pulling this same spread pricing scheme on medical procedures too.
Action: Insist on “pass-through” pricing where the PBM charges the exact amount it reimburses the pharmacy.
- Cost Plus: Just like the term transparency, anyone can slap the term “cost plus” on their product. But that doesn’t mean they have the lowest cost by a long shot. This business model is a logistics game where volume and efficient operations are paramount. It’s not uncommon to see price variation of 50% or more between various cost plus pharmacies.
Action: Benchmark your costs against cost plus drug companies who typically post all their pricing online. Remember – someone selling you something at their cost doesn’t mean its the lowest cost.
Pro Tip: Your employees are already checking cost plus sources online. You are at serious risk of a fiduciary breach if i) any employee with an internet connection can find drug pricing 50% to 90% cheaper than they are getting from your chosen PBM and ii) you don’t take action to help them procure their drugs at closer to market rates.
Navigating the PBM Puzzle
There is simply no good reason for not acting now to take this risk and cost off the table. Plan sponsors need to be proactive in managing their contracts and relationship with PBMs. This includes:
- Benchmarking Prices: Compare prices you’re paying vs. the market. Don’t worry about discount %, etc. All that matters is comparing the lowest net price.
- Issuing RFPs: Test the market by issuing RFPs including sample contracts with protective language PBMs must agree with to be considered.
- Demanding Transparency: Plan sponsors are required by law to demand disclosure on compensation and must diligently review PBM responses to ensure its clear and complete.
- Scrutinizing Formularies: Review formularies for cost-effective and high-efficacy choices free from PBM bias.
- Implementing Choices: Develop plans for introducing new choices by population such as mail order generic drugs from cost plus sources for those taking 5+ drugs.
- Evaluating PBM Performance: Regularly evaluate PBMs to ensure they meet obligations and serve the participant’s interests.
These steps strengthen compliance and deliver substantial savings. In fact, enough to upgrade your benefit design to $0 deductible for common drugs and pay for many of the expensive new therapies treating serious chronic conditions.
Key Takeaways
- Take This Risk Off the Table: PBM mismanagement is a high-stakes liability, as recent lawsuits have shown. Addressing this issue now not only mitigates risk but also unlocks significant cost savings and compliance advantages.
- Demand Full Transparency: PBMs often hide true costs through complex pricing schemes. Insist on complete disclosure of fees, rebates, and pricing structures to protect your plan and participants.
- Evaluate and Benchmark: Regularly benchmark PBM pricing against transparent, fiduciary-aligned alternatives. Even a small effort can uncover significant savings and improve plan value.
- Prioritize Participant Interests: Align your PBM strategy with participant needs. A well-managed PBM relationship can reduce costs, improve access to essential medications, and strengthen your fiduciary compliance.
That’s what we call The Health Plan Compliance Advantage.
Don’t Wait For A Crisis
It’s essential Board Directors and Management understand and act on the risks and opportunities presented by PBMs and other overlooked health plan management risks.
Act now by scheduling a consultation to protect your organization and unlock the full value of your health plan.
