PBMs | All about the Benjamins

Thank goodness for all the dumb money littered around corporate offices.  If it weren’t for the clueless spending it the likes of CVS Caremark and Express Scripts wouldn’t be $50,000,000,000 and $100,000,000,000 cash cows, respectively, on the backs of some really good businesses.  

Contemplate this the next time you see some PBM product clearly aimed at the financially naive, like a disease management or mail-order program without any or very little audit privileges.

Sure the product in question takes care of the company’s overhead, but it’s also doing something else. It pays for the PBMs Gulfstream G650 so it is able to offer the “basic” services, such as claims adjudication, you need at a bargain price (i.e. low admin fees).  

This phenomenon applies to other vendors as well; banks, auto repair shops, and lawyers just to name a few. All it takes is a little discipline – do the best thing for your company or the one which employs you.  

Anyone with a major role in the PBM selection process should be the type of person who shops at Ross or TJ Maxx for designer clothing and not Neiman Marcus!

Mail-order.  The PBM mail-order industry is a strange blend of good and evil. With usurious spreads it victimizes clients who haven’t secured a fiduciary agreement or at the very least binding transparency. It gives the rest of its clients a deal — convenience plus a savings compared to the less fortunate or should I say least knowledgeable.

                                                          AIS quarterly survey of PBMs

Consider the price for Ranitidine 75 mg, the generic form of the popular anti-ulcer medication Zantac. One of our clients paid Express Scripts $36.22 for 90 pills mailed to a worker, who pays an additional $5 co-pay, bringing the total cost to $41.22, according to a re-pricing we completed.  

If this same employee had simply walked into their local pharmacy and bought the same Ranitidine prescription it would’ve cost as little as $10.00 for the same 90 pills. This is a 400% difference in cost!
Some, if not most, of this difference in cost is attributed to a PBMs repackaging operation.  Through the course of their mail-order operations, some PBMs obtain ‘repackager’ licensing from the Food and Drug Administration.  
These licenses allow a traditional PBM to purchase 10,000 tablets from a manufacturer, for example, then redistribute the order among 60 tablet bottles at a higher AWP.  If a PBM artificially inflates an AWP through its repackaging and pricing practices, it can then increase its market share by offering artificially large discounts to suckers.
Retail Pharmacy Networks.  Not all PBM retail pharmacy networks offer its clients the same level of pricing transparency.  There aren’t just drug spreads to worry about; network spreads are as ubiquitous.  
For instance, your company’s contract price with the PBM requires AWP minus 12% for brand drugs. However, the PBM could have a contract, with a pharmacy network in your geographical area, which stipulates pharmacy reimbursement at AWP minus 15%.
The smart buyer unveils this hidden cash flow in the negotiation process thus keeping the 3% difference for their organization.  It may not sound like a big difference, but trust me it is substantial particularly for companies with over a million dollar drug spend annually! 
Formulary Management.  Drug manufacturers seek to secure favorable placements on the PBMs’ formularies, for a favorable placement can determine a product’s commercial success.  Control over formularies endows PBMs with considerable influence over pharmaceutical companies.   
Manufacturers compete with each other through a combination of rebates and administrative fee structures (I’ve personally sat in on these meetings). Rebates and fees the payor is 100% entitled to receive, but often never realize because it wasn’t addressed in the contract language.  
Another problem, some decision-makers put their personal needs ahead of what is best for the corporation (payor). Consultants want to earn the big fees, sometimes directly from the PBM and employees want to pay as little out-of-pocket as the plan allows.  
Without doing any real due diligence, HR or the CFO simply complies with both parties unaware that these decisions help purchase yachts and do nothing to improve patient outcomes or lower costs. For the record, real due diligence does not include a 50 page RFP followed by a services agreement with more holes in it than a municipal golf course.  
I can’t stress this point enough. No self-insured organization, in an era when some PBMs are willing to agree to a fiduciary role, should be paying a single penny more than a fair admin fee ($6.00 – $12.00 per Rx) for its PBM services. Unfortunately, fully-insured entities are at the mercy of their insurer. Good luck with that.

State-by-State Health Insurance Exchange Decisions

Obamacare calls for the creation of state administered health insurance exchanges, where Americans without employer-provided coverage can shop for insurance policies.  Enrollment is scheduled to begin October 1, 2013 and coverage too take effect in 2014.
Those with incomes between 133% and 400% of the federal poverty level – up to $92,200 for a family of four – will qualify for federal subsidies.  Running an exchange could therefore get pricey.
States were given the choice of creating their own exchanges, partnering with the federal government, or permitting the federal government to completely run the state exchange.  Deductibles for all plans will be capped at $5,950 for individuals and $11,900 for families, with the limits adjusted over time for inflation.
Note:  under Obamacare prescription drugs are an essential health benefit, but with the high deductibles most patients will be paying out-of-pocket for prescription medications.  Depending upon the employer, this can be a good or bad thing.
The Department of Health and Human Services (HHS) dictates that all policies sold on the exchanges must meet one of four classifications:  platinum, gold, silver and bronze.  These categories indicate plan coverage for the average person as 90%, 80%, 70% and 60%, respectively.
The auditing firm KPMG recently found that Ohio can expect to spend $63 million to set up its exchange and another $43 million each year to run it.  States will also need to provide call centers, navigators (sales personnel) and coordinate computer systems brokers involved in selling coverage.
The federal law indicates that states with their own exchanges must devise a source of revenue for running the exchanges, independently, beginning in 2015.   Where will this revenue come from?

Why are Prescription Drugs so Darn Expensive?

Given that U.S. prescription drug sales continue to rise, I thought it a good idea to provide an explanation for this perpetual increase despite increasing generic dispensing rates.  There are two types of prescription drugs (outside the obvious brand and generic versions).  They are called single source and multi-source prescription drugs.

Multi-source prescription drugs are those which are manufactured by multiple companies; upon expiration of a marketing exclusivity period.  FDA approval of these companies is required, obviously. These approved companies generally manufacture only generic pharmaceuticals.  Some examples include Dr. Reddy’s, Watson, Actavis, Teva Pharmaceuticals, and others.

Since there are multiple companies competing against one another, prices are much lower for multi-source prescription drugs compared to single source prescription drugs.  This is not the case for single source prescription drugs.

Single source prescription drugs are those for which there is only one manufacturer.  In other words, there is not a generic medication available in the market thus the brand drug is the only option for physicians, patients and payors.  One exception to the single source methodology does exist.

An 180-day marketing exclusivity is offered by the Food and Drug Administration to the first company which successfully submits an application to manufacture a replica (a copy of the exact chemical ingredients] of a brand prescription drug after the initial patent has expired.  For all intent and purposes, the medication manufactured by a company granted a 180-day marketing exclusivity is considered single source.

The application process for the 180-day marketing exclusivity is very complicated.  If you like, read more about it here:  180-Day Generic Drug Exclusivity Under the Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic Act.  Prescription drug patents, for innovator drugs, typically expire after 17 years.

Generic Dispensing Rates continue to rise yet it defies logic that prescription drug sales revenue also continues to increase year after year.  This begs the question, “why do prescription drug sales continue to increase?”  The state of personal health and healthcare in our country notwithstanding there are two primary reasons:  brand and specialty pharmaceuticals.

Let me explain.  Drug manufacturers have an obligation first to their stakeholders and rightfully so. They’re keenly aware of the stiff competition from generic equivalents and the government’s (largest payor) desire to lower overall costs.  In turn, they find ways to plug revenue gaps.

To protect brand product revenue streams manufacturers go to great lengths.  They will fight to extend the patent expiration date, seek additional indications (often marketed under a different name), and even partner with competitors.

If you had a monopoly on a prescription drug or an entire disease state for 17 years what would you do to protect it?  More importantly, how much would you charge for the right to use the medication? Keep in mind you’re operating as a for profit business.  It’s not uncommon for a brand drug manufacturer to generate EBITDA margins of 70% or greater.

Almost every original manufacturer now has at least one specialty and/or biotech drug in its portfolio. It’s part of an overall strategy to help patients.  Coincidentally specialty drugs are more difficult, from a financial and scientific standpoint, to duplicate.  Nonetheless, biosimilars will play an increasingly important role in the near future.

Employers and other payors have a role, albeit small, in how the drug spend trend will play out.  Here is one thing all individuals and organizations can do to slow the trend:  don’t pay for any brand prescription drug when there is a generic equivalent in the pharmacies unless it is the last option.