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.


The Affordable Care Act requires employers to notify their employees of the existence of health benefit Exchanges.  Originally, the notification was to be issued by March 1, 2013; however, last Thursday that requirement was postponed to late summer or fall of 2013 to coordinate with the open enrollment period for Exchanges.

The notice requirement was delayed for a couple of reasons.  First, the notice should be coordinated with the educational efforts of the departments of Health and Human Services (HHS) and the Internal Revenue Service (IRS) guidance on minimum value.

Second, the departments are committed to a smooth implementation process including providing employers with sufficient time to comply and selecting an applicability date that ensures that employees receive the information at a meaningful time.

The Department of Labor is considering providing model, generic language that could be used to satisfy the notice requirement.

U.S. Pharmacy Distribution & Reimbursement System

Are you able to spot the areas traditional Pharmacy Benefit Managers hide cash flow from third-party payers (i.e. employers)?
Click to Enlarge
Here are just three areas traditional PBMs hide cash flow from unsuspecting third-party payers.  A third-party payer may include an employer, insurer, HMO, union and others.
1.  Contractual Relationship – this is #1 because it permits or makes possible revenue to the PBM that is not transparent.  Fee-for-service, shared [risk] savings and capitated contracts often lead to excessive overpayments.
2.  Share of Rebates –  often times the share is too low.  Payers should receive 100% of all rebates and/or any incentives earned due to their prescription drug purchases. Typically, rebate payments amount to $2.00 – $3.00 per script.
3.  Ingredient Costs – in many cases the amount is too high.  A payer should always remunerate to the PBM the exact amount reimbursed to network pharmacies for the same dispensed prescription medication(s).  A difference in these payments is referred to as a spread.  It is not uncommon for traditional PBMs to realize spreads as high as $25 on a single prescription!
I won’t waste time discussing transparent and/or pass-through pharmacy benefit managers because all PBMs will communicate in one way or another that they’re fully transparent and pass-through.  Not that they’re wrong, but it depends upon how one defines transparency.  The definition is ambiguous at best.  However, there is no ambiguity in the definition for fiduciary.
For clarification purposes, I must distinguish between traditional and fiduciary pharmacy benefit managers.  It is simple; a fiduciary PBM must [legally] put its clients’ interest before their own and a traditional PBM does not.
If your PBM promises full transparency and pass-through yet has not agreed to a fiduciary role request they put the pen where their mouth is.  If your PBM resists ask yourself, “what are they hiding?”  You now know the answer…

Agencies Offer Guidance on PPACA Taxes, Fees

In regulations and other pronouncements issued toward the end of 2012, the government has provided further details on new taxes and fees introduced by the Patient Protection and Affordable Care Act.  Health plan sponsors will be particularly interested in the amounts that they will be assessed to fund various PPACA programs. This guidance includes:

The assessments to fund these programs will affect insurers, plan sponsors, and employees.

Premium Stabilization Programs

Beginning in 2014, PPACA requires insurers in the individual health insurance market to offer coverage regardless of an individual’s health status or pre-existing conditions, making coverage available to individuals who currently have none. This looming influx of newly insured individuals creates uncertainty for the risks that insurers will assume.
To reduce that uncertainty and its possible effect on health insurance premiums, PPACA establishes three specific programs. Building on guidance that it issued in 2011, the Department of Health and Human Services has issued proposed regulations governing these programs.
  • Risk Adjustment Program
    This permanent program provides increased payments to health insurers that enroll higher-risk individuals. The program applies state-by-state to health plans in both the individual and small group markets, with exceptions for plans that are grandfathered under ACA and certain types of benefit arrangements. The new regulations establish a process for approving a state risk-adjustment program and describe rules that HHS will follow to operate a program in the event that a state does not obtain federal approval or chooses not to operate its own program. The program is funded through a transfer of amounts from plans that enroll lower-risk individuals to plans with higher-risk enrollees.
  • Risk Corridors Program
    This temporary, federally administered program limits the extent of an insurer’s gains and losses from 2014 through 2016. The program applies to qualified health plans offered through an exchange in the individual and small group markets. A cost target is set for each plan, and an acceptable risk corridor is established around that target. Plans with unexpectedly low costs (below the risk corridor) will pay amounts to HHS. Plans with unexpectedly high costs (above the corridor) will receive funds from HHS. The new regulations make adjustments to prior guidance on the program, such as accounting for certain taxes and profits in establishing the corridors.
  • Transitional Reinsurance Program
    This temporary reinsurance program applies to commercial health insurance in the individual market. The program is funded through required contributions by insurers and self-funded group health plans. It will be in effect from 2014 through 2016.
    • The new regulations establish that HHS will operate the program, paying reinsurance amounts from the program and collecting contributions from insurers and self-funded plans to fund those reimbursements.
    • Under current guidance, it is expected that insurers and self-funded group health plans will be required to contribute $63 per covered life for 2014. That contribution may be reduced if HHS determines that certain contributions (the assessment includes contributions that are specifically directed set aside to pay for the Early Retiree Reinsurance Program) may be postponed to 2016. Even if that postponement occurs, contributions are expected to be less than $63 per covered life for 2015 and 2016.
    • Insurers and sponsors of self-funded plans (a third-party administrator may act on behalf of a plan sponsor) will need to report the number of covered lives (employees plus dependents) by Nov. 15 of each year. HHS will confirm the amount due by Dec.15, and payment will be due within 30 days of its confirmation notice. Employers and insurers will determine the number of covered lives in accordance with the approaches applicable to the PCORI fees (see below), but adjusted for the need to determine transitional reinsurance program fees before the end of the year.
    • In separate guidance, the Internal Revenue Service has confirmed the deductibility of contributions under this program.
Group health plan sponsors will need to be particularly mindful of the need to report data for and pay the transitional reinsurance contribution fees late in 2014 (or early in 2015).

The new rules address various details about each of the programs. These details include certain transitional rules for 2014 and guidance on how the programs will coordinate with each other and with the medical loss ratio requirements for insurers. The new rules also address a number of matters relating specifically to the MLR requirements and to state and federally operated insurance exchanges.

Patient-Centered Outcomes Research Institute

PPACA establishes the Patient-Centered Outcomes Research Institute to collect and disseminate research findings on clinical effectiveness that will help patients, providers, and others make better-informed medical decisions. The program is funded by a fee to be paid by group health plans and insurers for seven years. The fee is $1 per covered life for the first plan/policy year that ends on or after October 1, 2012, and $2 (indexed for inflation) per covered life for the remaining years. Payment, and the accompanying report, will be due July 31 of the year following the assessment. This means many plans will need to pay the fee by July 31, 2013.

The IRS recently issued regulations that finalize the rules on fees that it proposed last spring, with a few modest revisions. For example, those who follow the “snapshot” method of determining the number of covered lives by examining a sample day (or a few sample days) each quarter do not have to use days that are exactly aligned (e.g., January 3, April 3, July 3, October 3), but may choose days within three days of the date(s) chosen in the first quarter. With regard to the method that relies on data in the Form 5500, the sponsor of a plan that has both self-funded and insured options may ignore individuals who are covered only by the insured options. This “Form 5500” method will be available only if the form has already been filed for the year for which the fee is due.
Additional Medicare Tax
The IRS has issued proposed regulations and an expansive set of frequently asked questions and answers on the Additional Medicare Tax introduced by PPACA. These regulations and FAQs address a variety of situations that an employer may face in meeting its withholding obligations concerning this tax.
  • Beginning in 2013, high wage earners will need to pay an Additional Medicare Tax on wages. The 0.9% tax will apply to all wages subject to the existing Medicare wage tax above a specified income level that depends on an individual’s filing status. For example, the tax will apply to wages above $200,000 for a single individual and above $250,000 for a married couple filing jointly. Because an employer will not necessarily know an individual’s filing status, an employer will be required to withhold on wages above $200,000.
  • If an employee owes more than is withheld, the employee will be responsible for paying the tax. Guidance suggests that the employee make estimated tax payments or adjust his or her W-4 form to allow for additional withholding.
  • The Additional Medicare Tax also applies to self-employment income above the applicable threshold.
Given the 2013 effective date, employers should be making adjustments to their payroll systems now (if they have not done so already) to account for the Additional Medicare Tax.
Edward I. Leeds and Jean C. Hemphill focus on business law, employee benefits and health care at Ballard Spahr. Leeds is available at leeds@ballardspahr.com and  215-864-8419. Hemphill can be reached at hemphill@ballardspahr.com or  215-864-8539.

What are Affordable Care Organizations (ACOs)?

Affordable Care Organizations or ACOs are part of a larger effort by the federal government to move gradually away from the more expensive fee-for-service model, in which providers are rewarded for each additional treatment.  With ACOs, the goal is to replace the FFS model with an integrated system that uses evidence-based standards to coordinate care to avoid unnecessary expenses such as duplicated diagnostics and hospital readmission.

ACOs require that providers and insurers share both financial and quality data – something that each side has been highly reluctant to do in the past.  The reward will be that all will share in savings generated by the system.  Personally, I’m not sure there will be any savings to share or if this is the primary point in the first place (see my earlier post on Defragmentation).  While many healthcare theorists believe ACOs may be a major way for the nation to reduce its healthcare costs, it is not a simple fix.

In today’s competitive environment it is impractical, at best, to get hospitals, doctors and insurers to work together.  Unless of course these entities decide to become vertically integrated, which we’re already seeing.  Behemoth hospital networks around the country have been purchasing physician practices then hiring the staff as a prelude to setting up ACOs, and insurers, too, are starting to get involved.

Earlier this month Aetna announced a new partnership with Baycare in Tampa, Florida.  Another example, Florida Blue has set up a bundled payment system with the Mayo Clinic — paying for an episode of care rather than for each individual service.  More widespread is its move that has put more than 700,000 patients in medical homes — generally with a primary care physician coordinating their care, offering extended hour and other benefits — so that basic care is easily available, reducing the need for expensive emergency room trips.

Unlike the old HMO model, the new medical home involves the insurer paying PCPs more so they spend more time with patients.  The limited data available thus far offers encouraging results. Physicians make more money, but overall costs go down.  The idea is too invest more money upfront to get better outcomes in the long-run.  Medical homes and ACOs are now separate concepts, but they’re likely to dovetail in the near future.  Both concepts are emphasized in the Affordable Care Act.

The healthcare cost trend was unsustainable…now employers must weigh the impact of future trends and plan accordingly.

An Uncertain Future: Healthcare Reform Moves Forward

Believe it or not, like it or not, we are 2.5 years into the largest social and financial transition of our lifetimes. Of course, this refers to Healthcare Reform.  HCR will affect every person in the USA. Some rejoice and others lament but its implementation moves forward.  Not all is going according to plan; there have been many bumps in the road. Implementation has been trying but not traumatic up to now; however, the year 2014 will be a test for all.

In 2014, two big changes happen. First, community rating begins; carriers will no longer underwrite policies as they do now.  There will be little or no rate differentiation for the risk associated with your group compared to others.  In 2014, industry, sex and health conditions will have nothing to do with the specific rates charged.

There will be limited consideration given to age, smoking status, and geography.  If your group is historically a low risk, we expect your cost to increase, if high risk, you may get a breather from rate increases but we don’t expect them to decrease.  It is expected that community rating will place significant upward pressure on costs for all in the future.  The second and most significant change will be the introduction of healthcare exchanges or buying pools.  The path of implementation is not clear.


The availability of healthcare exchanges will mean the biggest changes yet.  Businesses will have decisions to make.  Do they stick with the old tried and true group model of providing benefits to their employees or do they drop existing health plans, give employees some cash, and send them to the health care exchange to buy coverage?  Will they do some combination of the two?

For some, the decision may be easy, but for most it will be complicated.  Lower paid employees will qualify for huge federal tax subsidies if they buy coverage from the type of exchange defined by the law. Higher paid employees may see their costs go up considerably.  This is especially true since benefits will be paid with after tax money rather than pre-tax dollars.

Some employees may get $1000’s in subsidy and others may pay $1000’s in tax because of reform.  This is all very complicated. The decisions made will affect every employee in your company.  Some may like the new way and some may be devastated.  Calculators available online allows you to check your cost: http://laborcenter.berkeley.edu/healthpolicy/calculator/.

Unfortunately, the results are hypothetical.  The actual implementation of exchanges is up in the air. The law places this responsibility in the hands of the state governments. Many states have pushed back and decided not to implement a healthcare exchange.  When states choose not to participate, the federal government is supposed to provide that state’s exchange.  A federal exchange isn’t close to being developed.

More importantly, the huge federal subsidies are only available if employees buy coverage from state exchanges.  Federal exchanges do not qualify.  Unless this changes, it will be difficult for businesses that had planned to off load their benefit plan to do so.

Businesses may find the cost for employees is just too great without those federal dollars to offset the initial sticker shock as employees pay the real cost of health coverage.  Without a qualified exchange, healthcare reform will grind to a tortuously slow pace if not be halted altogether.


So, the future of group health insurance is not clear.  Will the private market for group health insurance be dismantled?  If so when…3, 5, 10 years?  What will that mean for your employees? How do you, as a decision maker, capitalize on any opportunities that exist?

How do you prepare and explain to employees all the changes that will occur as the implementation begins to affect their paycheck? This is all very complicated.

Of course, there have been anxious moments at TransparentRx as this has unfolded.  The debate, the drama in congress, the signing by President Obama, the Supreme Court decision and now the decision by governors that many states will not have exchanges. It has been interesting.

What will the future hold….I’m not sure.  But it is crystal clear that employers will need help deciding what to do.  There are decisions to make and your employees’ moral and productivity will suffer if not done properly. Moral and productivity affect profit.