Hidden Profits In the Prescription Drug Supply Chain

Depending on how you look at them, pharmacy-benefit managers are either low-margin middlemen that fight to reduce drug costs, or highly profitable intermediaries that take a cut of every prescription and earn more when drug prices rise.

Pharmacy-benefit managers are hired by businesses such as insurers that pay for drugs to negotiate lower prices with pharmaceutical companies. When the largest pharmacy-benefits manager, Express Scripts Holding, reports fourth quarter earnings on Tuesday, analysts expect a profit margin of just 4.7%, according to FactSet. Rival companies owned by CVS Health CVS -0.07% and UnitedHealth Group UNH +1.39% report similarly low margins.

But a closer look shows the business is far more attractive than those low margins would suggest. Included in Express Scripts’ revenue is the cost of the underlying drugs they sell. Thus Express Scripts generated gross profit of just $1.8 billion on total sales of $24.7 billion in the third quarter. Gross profit is revenue minus the cost of goods sold, but nothing else.

Tyrone’s Commentary:

The pharmacy benefit version of the “fee-only financial adviser” has emerged in response to a desire among certain pharmacy stakeholders to bring radical transparency to the drug pricing process. Although all PBM contracts with clients are viewable by both parties, PBMs operating under a non-fiduciary model often employ contractual wording that allows for pricing and reimbursement mechanisms that render clarity of expenditure and actual cost drivers to be elusive, and are designed to maximize the overall margin for the PBM. Under a fiduciary model, contracts negotiated between PBMs, clients, and pharmacies are designed to be as understandable and transparent as possible which, ostensibly, is meant to encourage the best therapeutic outcomes and financial interests for both plan sponsors and plan participants.

In general, however, the pharmacy-benefits manager doesn’t actually take delivery of the drug. That means these companies don’t spend much on fixed assets, which keeps selling and administrative costs, as well as depreciation and amortization charges, very low.

7 techniques to blunt specialty drug costs hardly any self-insured employer is doing right or at all

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Biologic or specialty drugs cost, on average, 10 times more than a small molecule or non-biologic prescription drug. At an average monthly cost of $3,000 and change, it’s only expected to get more expensive for plan sponsors. In fact, CVS Caremark estimates that specialty drugs could account for about half of the total pharmacy spend in 2018, which is up from one-third just two years earlier!

These recommendations are for plan sponsors who take their pharmacy benefits seriously; meaning they don’t rely too much on the advice of advisers or PBM account managers and are active participants in the management of the pharmacy benefit plan throughout the year.

Because these recommendations cut into your PBM’s bank account, you will get all sorts of push back why they don’t or can’t work. Cut through the noise and do your own due diligence by learning the business. You will see I’m writing this for your benefit not mine. Here are six techniques to blunt specialty drug costs and what has become the single largest driver of pharmacy cost trend.

1) Carve-Out Specialty Pharmacy

A carved-out program may provide better cost control, transparency and technology as well as information and reporting. Health insurers may bundle the two programs and subsidize some of the pricing from one service with that of another (cost-shifting). For companies with a carved in program, there may be concerns about changing to a carved out program due to a perception that additional time and resources will be needed, but I have seen that on a day to day basis, there is little difference in having a separate specialty pharmacy program. The functions are the same and among the advantages are the following:

  • Better Contract Terms – Carved-in plans are based on a single, pre-determined contract that does not allow a plan sponsor or its advisor to negotiate non-pricing terms critical to managing cost trends. For example, carved-in Rx plans seldom have audit rights and, if they do, they are frequently toothless. Detailed clinical programs are also usually missing. Conversely, a carved-out specialty pharmacy contract, if correctly negotiated by the plan sponsor or an advisor specializing in pharmacy benefit contracting, will clearly outline all of the important non-pricing terms.
  • Customized Clinical Programs – Better data management and detailed analytics enable clinical licensed pharmacists, whether at the PBM or within a specialized advisory firm, to recommend, implement, and manage customized clinical programs based on the plan sponsors unique population. Examples of this include RA management, Hep C management, and oncology programs.
  • Lower Specialty Pharmacy Costs – A carved-out specialty pharmacy contract allows for aggressive price negotiations and more competitive Request for Proposals (RFPs). A direct specialty pharmacy contract will also include the critical terms that govern pricing, including discounts, rebates and soft dollar programs.

There are significant advantages to pursuing a carve-out strategy, both for the plan sponsor and plan participants.

2) Carve-Out Manufacturer Revenue

That’s right I said it! Bring manufacturer contracting and rebate management in-house. The time has come and gone to only be talking about rebates or more specifically formulary rebates. On May 16, 2017 Express Scripts filed a complaint against drugmaker kaleo. The complaint revolves around the opioid overdose treatment, Evzio, which kaleo manufactures. Express Scripts’ attorneys redacted the complaint, but did not redact some information that Express Scripts has long regarded as proprietary thus not typically made available to the public.

According to Express Scripts, it entered into rebate agreements with kaleo for Evzio that required kaleo to pay Express Scripts not just for rebates but also administrative fees. The complaint reveals that in four of its invoices to kaleo, Express Scripts billed kaleo $26,812 in total for “formulary rebates” and $363,160 in total for “administrative fees.” That’s right, administrative fees amounted to almost 15 times more than the formulary rebates!

Source: Express Scripts, Inc vs. kaleo, Inc.

While plan sponsors believe they retain as much as 95% of rebate dollars (non-fiduciary PBM theoretically retains only the 5% difference), the truth is plan sponsors are retaining far less than 50% of rebates or earned manufacturer revenue. Don’t believe what so called transparent or pass-through PBMs tell you about how they make money – almost all of them are lying to you plain and simple.

How do you know if a PBM is offering radical transparency? The contract will tell you so that’s how.  Of course, it requires a trained eye (someone entrenched in the business of pharmacy benefits management) to interpret it on your behalf. Not even an attorney from the top of his or her class can help in this regard if they don’t know the business of pharmacy benefits management.

The point is to address all manufacturer revenue paid to the PBM not just formulary rebates. If your PBM is unwilling to provide access to manufacturer contracts or explanation of payments, then as a plan sponsor you should be exploring a carve-out option or aligning with a fiduciary PBM. To do nothing and accept little or no transparency is a losing proposition.

3) Partial-Fill Program(1)

Some say that a partial fill is really a reduction-of-waste program, while others have pointed out the potential for impact on quality of care. A third group sees a partial fill as a medication-support and education tool. The reality is that depending on the services that surround the partial-fill plan design, it can be any or all 3. The best of the partial-fill programs have aspects that include:

  • Clinical evaluation of potential side effects and efficacy prior to completing the secondary-portion fill of the medication.
  • Ensuring that a patient still needs the medication. This may include issues such as admission to an inpatient facility in the interim or a change in circumstances, such as diagnostics, clinical goals, or death.
  • Addressing medication adherence issues associated with the medication.
  • Reviewing additional clinical information regarding a patient’s condition or the medication.
  • A complete medication reconciliation to identify potential complications or issues associated with drug-drug interactions.
  • Communicating with the prescribing physician if he or she is not the evaluating clinician.
  • Helping to identify alternative treatments if there are clinical (side effect or efficacy) issues with the initial medication.

There is one area of concern associated with partial fill that has been identified and that is when there is little or no clinical interaction between the partial fill and the completion of the fill. The partial-fill model can reduce unnecessary fill completion and, therefore, reduce costs; however, this misses an opportunity to potentially improve clinical outcomes, and support patients regarding medical conditions that often need significant clinical support.

Source (1): http://www.ajpb.com/journals/ajpb/2016/ajpb_julyaugust2016/partialfill-programs–good-practice-or-barrier-to-care

4) Contracts

RFP burnout is something I attribute to what happens from the time a PBM request for proposal (RFP) begins and the countersigning of the resulting pharmacy services agreement concludes. RFPs can be quite lengthy and the selection process doubly so. By the time the selection committee or consultant evaluates the contract, they’re so exhausted and ready for the process to be over they don’t realize [or care] that much of what they were told or read doesn’t hold up in the contract language. It is at this point an expert in PBM contracts comes in handy and is worth their weight in gold. Forget what you’ve been told if the PBM doesn’t offer one of two business models; radical transparency or fiduciary standard it is hiding cash flows from you. These hidden cash flows lead to overpayments in your specialty drug cost. Period.

5) Outsource Prior Authorization

I’ve been fortunate enough to be a “fly on the wall” listening to the leadership teams of several national specialty pharmacies. And while they preach case management and patient care as the priority if you listen carefully what they really want first and foremost is volume or more prescriptions. I am asking self-funded employers a simple yet very important question. Does it make sense to have the same entity manage and approve specialty Rx claims when that entity stands to benefit when these claims are approved? If 90% or more of PAs are getting approved you might be a victim of rubber-stamping which leads to what? You guessed it – higher costs. 

6) Restrict Access

A formulary is a list of medications for which a plan will provide reimbursement. When considering a formulary, access defines the basic aspects of a specialty pharmacy benefit design which includes but is not limited to:

  • The products that will be covered
  • The products that will not be covered
  • The products that need prior approval
  • Plan cap or maximum dollar amount a plan will pay for outpatient specialty drug benefits
  • Mail service benefits, if any
  • Specialty pharmacy network make up

Managing a formulary and improving its efficiency involves an ongoing assessment of the drugs on the formulary as well as any new potential drug therapy treatments. Again, do not leave this responsibility solely in the hands of the PBM unless it has agreed to accept fiduciary responsibility.

7) Medication Adherence

Medication adherence is a large and growing issue that has an impact not only on patients’ health, but also on employer finances. Non-adherence to medications has been linked to 30-50% of treatment failures and 125,000 deaths each year, according to statistics gathered by the American College of Preventive Medicine. 
Figure 1. Gap Between a Written Prescription and Actual Medication Use
[Source: National Association of Chain Drug Stores, Pharmacies: Improving Health, Reducing Costs, July 2010. Based on IMS Health data]

In addition, non-adherence results in $290 billion in annual healthcare spending, $100 billion of which is due to hospitalization and rehospitalization that could have been avoided if medications were taken as prescribed. Simply put, even the most perfectly designed plan in the world can’t make up for poor adherence. Monitor adherence plan-wide and take corrective action for patients whose adherence is average or worse. A robust MTM program will address this issue and lower overall healthcare costs.

In summary, most plan sponsors don’t know what they don’t know. You should seek out only the best outside PBM expertise or better yet develop it in-house. Otherwise, you will leave tens of thousands of dollars on the table – this my friends is undeniable.

What might the Amazon, Berkshire and JP Morgan health care joint venture actually do?

Amazon, Berkshire and JP Morgan (ABJ) recently announced that they are creating of “an independent company free from profit-making incentives and constraints…to address healthcare for their U.S. employees” generated a lot of publicity. ABJ said that the initial focus of the joint venture will be on “technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost.”

Source: Health Transformation Alliance

A report on CNBC indicates that JP Morgan would like the effort to reduce the $1.5 billion they spend on employee health care by 20%. What will ABJ actually do and will they be successful?

Before answering the previous question, it is essential to understand both the nature and magnitude of the health care problems that exist today in the United States. Warren Buffett frames the core problem with US health care system succinctly: “In almost every field of American business, it pays to bring down costs. There’s … no incentive to bring down costs.”

Charlie Munger has described many times how perverse incentives can create a horrific result: “If the incentives are wrong, the behavior will be wrong. I guarantee it. Not by everybody, but by enough of a percentage that you won’t like the system.” “Show me the incentive and I will show you the outcome.” “I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. Never a year passes that I don’t get some surprise that pushes my limit a little farther.”

[Read More]

Reference Pricing: “Gross” Invoice Cost for Popular Generic and Brand Prescription Drugs (Volume 207)

This document is updated weekly, but why is it important? Healthcare marketers are aggressively pursuing new revenue streams to augment lower reimbursements provided under PPACA. Prescription drugs, particularly specialty, are key drivers in the growth strategies of PBMs, TPAs and MCOs pursuant to health care reform.

The costs shared here are what the pharmacy actually pays; not AWP, MAC or WAC. The bottom line; payers must have access to actual acquisition costs or AAC. Apply this knowledge to hold PBMs accountable and lower plan expenditures for stakeholders.



How to Determine if Your Company [or Client] is Overpaying

Step #1:  Obtain a price list for generic prescription drugs from your broker, TPA, ASO or PBM every month.

Step #2:  In addition, request an electronic copy of all your prescription transactions (claims) for the billing cycle which coincides with the date of your price list.

Step #3:  Compare approximately 10 to 20 prescription claims against the price list to confirm contract agreement.  It’s impractical to verify all claims, but 10 is a sample size large enough to extract some good assumptions.

Step #4:  Now take it one step further. Check what your organization has paid, for prescription drugs, against our acquisition costs then determine if a problem exists. When there is a 5% or more price differential (paid versus actual cost) we consider this a problem.

Multiple price differential discoveries means that your organization or client is likely overpaying. REPEAT these steps once per month.

— Tip —


Always include a semi-annual market check in your PBM contract language. Market checks provide each payer the ability, during the contract, to determine if better pricing is available in the marketplace compared to what the client is currently receiving.


When better pricing is discovered the contract language should stipulate the client be indemnified. Do not allow the PBM to limit the market check language to a similar size client, benefit design and/or drug utilization. In this case, the market check language is effectually meaningless.

Prescription Drug Coupons: A One-Size-Fits-All Policy Approach Doesn’t Fit The Evidence

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Drug manufacturer coupons used by consumers to reduce the size of their prescription copayments are increasingly under fire by federal and state policy makers, as well as by insurers and pharmacy benefit managers (PBMs). Medicare and Medicaid consider them kickbacks and completely ban their use.

Critics contend that the coupons force insurers to cover more expensive brand drugs and cause overall costs to rise. The counterpoint is also simple. With rising drug copayments, especially for innovative branded medicines, coupons reduce patients’ out-of-pocket costs and provide access to needed therapies.

But the truth is more complex, lying somewhere between these simple arguments. Using data collected from coupon aggregators and commercial insurance claims from 2014, we find that these two sides represent extreme ends of the debate, overlooking key clinical and economic forces. Most importantly, the results of the analysis point to a need for more nuanced policy responses to ensure that patients who currently rely on coupons are not harmed.

Tyrone’s Commentary: 

I’m not one of those individuals who dislikes drug coupons that would be selfish and myopic. However, I do agree that patients should not be rewarded by having coupon amounts applied to their deductible or MOOP. Let’s be honest, non-fiduciary PBMs and health plans don’t like coupons because typically the products with coupons available won’t pay rebates or steers patients away from those that do which reduces the revenue a non-fiduciary PBM would have earned from those products otherwise. Plan sponsors follow suit because their PBM or carrier says it’s a bad thing. If a patient is unable to start or complete specialty drug therapy, due to cost which a coupon may have alleviated, the resulting hospital bill will cost more in the long run. Is it about the patient or not? 

Policy Implications

Manufacturers may offer coupons for a variety of reasons: to induce patients to fill the drug prescribed by their physician rather than a substitute preferred by their PBM or plan; to respond to other manufacturers’ competitive tactics; or simply to improve access for patients who face high copays.

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Biosimilars Are Not “Generic” Versions Of Expensive Biologic Medicines

Cick to Enlarge
Biologics are complex molecules, modifying our immune responses to specific chronic inflammatory conditions like rheumatoid arthritis, psoriatic arthritis, or irritable bowel disease. They are manufactured by placing genes into host cells who through transcription and translation provide the core protein. Biosimilars are biologics “generic” equivalents, except they are not.
The reverse engineering of the DNA, choice of a host cell and the subsequent isolation and purification of the core protein make them similar but not identical. In the lock and key world of drugs, where a drug, the key, must fit into another structure, the lock, to be effective, the shape of that key may mean the lock opens, or doesn’t, or even require a bit of twisting and finagling. Biosimilars have an identical primary structure as their biologic but other factors, influencing shape may and do differ

Tyrone’s Commentary:

Biosimilars aren’t just similar but are in fact highly similar. While the FDA is not perfect it wouldn’t approve a biosimilar that is simply “similar” to a biologic. This same skepticism surrounded generic drugs in the early 2000s before they eventually took off and now account for 89% of all drugs being dispensed in the USA compared to 60% in 2005. In some cases, the plan sponsor would be wise to forgo the rebates for biologics and instead opt for the lower net cost biosimilars provide. Of course, non-fiduciary PBMs will not push for this if they’re generating revenue from biologic manufacturers for the dispensation of their products. 
How the FDA approves these slightly different keys and their impact on the care of our patients, that is the first concern of the rheumatologists; the second is the cost and economics.

Reference Pricing: “Gross” Invoice Cost for Popular Generic and Brand Prescription Drugs (Volume 206)

This document is updated weekly, but why is it important? Healthcare marketers are aggressively pursuing new revenue streams to augment lower reimbursements provided under PPACA. Prescription drugs, particularly specialty, are key drivers in the growth strategies of PBMs, TPAs and MCOs pursuant to health care reform.

The costs shared here are what the pharmacy actually pays; not AWP, MAC or WAC. The bottom line; payers must have access to actual acquisition costs or AAC. Apply this knowledge to hold PBMs accountable and lower plan expenditures for stakeholders.



How to Determine if Your Company [or Client] is Overpaying

Step #1:  Obtain a price list for generic prescription drugs from your broker, TPA, ASO or PBM every month.

Step #2:  In addition, request an electronic copy of all your prescription transactions (claims) for the billing cycle which coincides with the date of your price list.

Step #3:  Compare approximately 10 to 20 prescription claims against the price list to confirm contract agreement.  It’s impractical to verify all claims, but 10 is a sample size large enough to extract some good assumptions.

Step #4:  Now take it one step further. Check what your organization has paid, for prescription drugs, against our acquisition costs then determine if a problem exists. When there is a 5% or more price differential (paid versus actual cost) we consider this a problem.

Multiple price differential discoveries means that your organization or client is likely overpaying. REPEAT these steps once per month.

— Tip —


Always include a semi-annual market check in your PBM contract language. Market checks provide each payer the ability, during the contract, to determine if better pricing is available in the marketplace compared to what the client is currently receiving.


When better pricing is discovered the contract language should stipulate the client be indemnified. Do not allow the PBM to limit the market check language to a similar size client, benefit design and/or drug utilization. In this case, the market check language is effectually meaningless.

Reference Pricing: “Gross” Invoice Cost for Popular Generic and Brand Prescription Drugs (Volume 205)

This document is updated weekly, but why is it important? Healthcare marketers are aggressively pursuing new revenue streams to augment lower reimbursements provided under PPACA. Prescription drugs, particularly specialty, are key drivers in the growth strategies of PBMs, TPAs and MCOs pursuant to health care reform.

The costs shared here are what the pharmacy actually pays; not AWP, MAC or WAC. The bottom line; payers must have access to actual acquisition costs or AAC. Apply this knowledge to hold PBMs accountable and lower plan expenditures for stakeholders.

How to Determine if Your Company [or Client] is Overpaying

Step #1:  Obtain a price list for generic prescription drugs from your broker, TPA, ASO or PBM every month.

Step #2:  In addition, request an electronic copy of all your prescription transactions (claims) for the billing cycle which coincides with the date of your price list.

Step #3:  Compare approximately 10 to 20 prescription claims against the price list to confirm contract agreement.  It’s impractical to verify all claims, but 10 is a sample size large enough to extract some good assumptions.

Step #4:  Now take it one step further. Check what your organization has paid, for prescription drugs, against our acquisition costs then determine if a problem exists. When there is a 5% or more price differential (paid versus actual cost) we consider this a problem.

Multiple price differential discoveries means that your organization or client is likely overpaying. REPEAT these steps once per month.

— Tip —


Always include a semi-annual market check in your PBM contract language. Market checks provide each payer the ability, during the contract, to determine if better pricing is available in the marketplace compared to what the client is currently receiving.


When better pricing is discovered the contract language should stipulate the client be indemnified. Do not allow the PBM to limit the market check language to a similar size client, benefit design and/or drug utilization. In this case, the market check language is effectually meaningless.

“Don’t Miss” Webinar: How to Slash PBM Service Costs, up to 50%, Without Changing Vendors or Benefit Levels

How many businesses do you know want to cut their revenues in half? That’s why traditional pharmacy benefit managers don’t offer radical transparency and instead opt for hidden cash flow opportunities such as rebate masking. Want to learn more?


Here is what some participants have said about the webinar.

“Thank you Tyrone. Nice job, good information.” David Stoots, AVP

“Thank you! Awesome presentation.” Mallory Nelson, PharmD

“Thank you Tyrone for this informative meeting.” David Wachtel, VP

“…Great presentation! I had our two partners on the presentation as well. Very informative.” Nolan Waterfall, Agent/Benefits Specialist


A snapshot of what you will learn during this 30 minute webinar:

  • Hidden cash flows in the PBM Industry such as formulary steering, rebate masking and differential pricing 
  • How to calculate cost of pharmacy benefit manager services or CPBMS
  • Specialty pharmacy cost-containment strategies
  • The financial impact of actual acquisition cost (AAC) vs. effective acquisition cost (EAC)
  • Why mail-order and preferred pharmacy networks may not be the great deal you were sold
Sincerely,
TransparentRx
Tyrone D. Squires, MBA  
3960 Howard Hughes Pkwy., Suite 500  
Las Vegas, NV 89169  
866-499-1940 Ext. 201


P.S.  Yes, it’s recorded. I know you’re busy … so register now and we’ll send you the link to the session recording as soon as it’s ready.

Top 8 Specialty Drug Categories Driving Spending in 2018

Image result for specialty drug classes 2018It is well-known that specialty products are a major driver of prescription drug spending, a trend that is projected to continue well into the future. The new Vizient Drug Price Forecast suggests that although drug costs are projected to increase by 7.35%, specialty pharmacies can help bring spending down even further. Here’s a look at how much these specialty drug categories are estimated to increase by in 2018, according to the report.

1. Antineoplastic Drugs
The report found that the cost of these drugs, which are commonly used to treat patients with cancer, will increase 4.96% in the next year.

2. Disease-Modifying Anti-Rheumatic Drugs (DMARDs)
The authors said that DMARDs will be the largest driver of cost increases in 2018. This drug class is projected to skyrocket 11.95%. Due to the prevalence of DMARD use, this uptick in costs may have a significant impact on overall spending.

3. Immunomodulatory Agents
This class of drugs is used to treat patients with serious and debilitating conditions, such as Crohn’s disease and multiple sclerosis. The cost of immunomodulatory drugs is projected to increase 8.93% in 2018, according to the study.

4. Hepatitis C Virus (HCV)
Although HCV antiviral drugs have driven a majority of specialty spending over the past few years, it may not be the case in 2018. The cost of these treatments is only projected to increase by 2.02%, likely due to the emergence of competitors and lower cost options.

[Read More]