• According to insurers, prices for some commonly used generics have increased between 15 and 75 times their original prices.
• Insurers and others are concerned about rising generic drug prices, because of the reliance of these drugs in the U.S. (According to a recent report from the Generic Pharmaceutical Association, 88% of all prescriptions dispensed in the U.S. are generics.)
• Spending on prescription drugs is the fastest growing healthcare cost. In Massachusetts, spending on prescription drugs increased 13% in 2014, while overall healthcare spending increased by 4.8%.

Dive Insight:

Courtesy of American Action Forum

It’s true that some of the roughly 12,000 available generic drugs have increased in price within the last two years, including drugs such as amitriptyline, an antidepressant, which increased in price from four cents per pill in 2013 to $1.03 per pill in 2015, as well as captopril, a medication for hypertension, which increased from 11 cents for a 12.5-mg pill in 2013 to 91 cents for the same pill in 2015. And there are many other examples.

What’s driving the increases? According to experts, several factors, including increasing costs of chemical and other raw materials used to produce the drugs; lack of price regulation in the U.S.; and declining competition due to increased consolidation in the generics industry.

These factors need to be addressed—especially the issue related to lack of competition. But there is also another perspective: According to the 2014 Express Scripts Trend Report, since 2008 the cost of brand drugs has almost doubled, while generic drug prices have almost been cut in half. In a separate analysis, AARP reported that generic drug prices fell by 4% in 2013. According to that analysis, generic drug prices have declined steadily in the last 10 years.

One reason that payers are still feeling the pinch and complaining about price increases is that, while some of the hikes may be declining (or are modest in nature), use of these medications stretches so far across the market that winds up being a huge cost burden anyways.

By Nicole Gray

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 pharmacy cost 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.

Click to Enlarge

Much of the merger mania of the health care industry is driven by PBMs — those behind-the-scenes firms that handle prescription drug benefits for self-insured employers. They deal with drug claims information and processing and secure discounts and rebates by negotiating with retail pharmacies and pharmaceutical companies.

Tyrone’s comment:  PBMs also handle prescription drug benefits for fully-insured employers.

Usually, the larger the PBM, the more influence it wields in negotiating better prices and rebates and, in theory, passing those savings on to employer clients and plan members, experts say.

If the recent wave of consolidation is any indication, PBMs have taken the “bigger is better” mantra to heart.

In July, United Healthcare Inc.’s Optum Inc. closed its deal with Catamaran Corp., making Optum the third-largest PBM based on prescription volume. In August, CVS Health Corp., parent of second-largest PBM CVS/Caremark, bought Omnicare Inc. and in June, agreed to acquire Target Corp.’s nearly 1,700 pharmacies and 80 medical clinics.

More recently, Walgreens Boots Alliance Inc. announced plans in October to acquire Rite Aid Corp., effectively scooping up Rite Aid’s Envision Pharmaceutical Services, a small PBM doing business as EnvisionRx, in the process.

Consolidation among PBMs has been going on for years. Express Scripts Holding Co. secured its throne as the largest PBM after its 2012 acquisition of Medco Health Solutions Inc., and CVS bought Caremark L.L.C. in 2007.

Effects on employers

The implications for employer clients who work with a PBM that merges with or is acquired by another organization depends heavily on the type of deal, said Allan Zimmerman, national pharmacy practice leader at PricewaterhouseCoopers L.L.P. in Kansas City, Missouri.

A PBM that buys another PBM primarily gets scale and the potential for better deals with drugmakers, but improved service quality also is a possibility, Mr. Zimmerman said. For instance, the PBM being acquired may have a better technology platform that the parent PBM can utilize.

What’s most interesting to watch, however, is “when you see a PBM acquiring a vertical in their supply chain” or becoming a vertical component in another organization’s supply chain, he said.

“What that does is it really gives the PBM a unique opportunity to negotiate real aggressive discounts from their supply chain verticals beyond just the pharmaceutical companies,” such as at the retail stores, Mr. Zimmerman said. Those types of deals can “provide some leveragability for the PBMs to get the plan sponsor, the employer, greater discounts based on just a pure relationship of the entities.”

Examples include drugstore chain Walgreens buying Omnicare, which provides services to long-term care facilities, or Rite Aid buying EnvisionRx.

In such deals, cost savings for employers likely would be “incremental,” and employers should talk with their PBM about the possibility of a better deal, Mr. Zimmerman said.

For drugstore-owned PBMs, there’s also a chance that the retail stores could be an outlet for PBM services, enhancing convenience for plan members, said Craig Oberg, St. Paul, Minnesota-based managing consultant with pharmacy benefit consultant The Burchfield Group Inc.

If Walgreens chooses to invest in its newly acquired PBM, it could follow in CVS’ footsteps by allowing PBM members to pick up their 90-day supply of medication at their local store but still retain the mail-order discount.

With larger PBMs, there’s also the opportunity to push back against the pricing set by specialty drugmakers, said Josh Golden, practice leader of employer consulting at Pharmaceutical Strategies Group L.L.C. in Atlanta.

A major driver of health care costs, specialty drug spending increased 30.9% in 2014, according to Express Scripts.

“Size really does matter in this part of the pharmacy supply chain, and that’s because the pricing arrangements and the deals that are struck right now are really driven by targeted negotiation (by the PBM) with specific pharmaceutical companies … in particular in the specialty drugs space,” Mr. Golden said.

Much of the value is derived from rebates PBMs are able to secure, he said. Last year, for instance, Express Scripts led the charge to push back against the atmospheric pricing of hepatitis C drugs by choosing to cover only one hepatitis C treatment in exchange for a big discount. That pit drugmakers against each other and ultimately lowered costs for other payers.

Tyrone’s comment:  It’s always been the case PBMs negotiate better pricing from manufacturers. This is not the issue. The issue is the payers’ share of these savings which is only 10 cents on the dollar in many cases. The PBM “hides” the remaining 90% to increase their profit margin.

The same type of “formulary strategies” are occurring now with costly cholesterol drugs, called PCSK9 inhibitors, Mr. Golden said.

Of course, there are downsides to PBM consolidation. The more mergers and acquisitions that occur, the fewer PBM options employers have, Mr. Golden said.

Different PBMs have varying business models, whether traditional or transparent, so finding one to fit an employer’s philosophy might be more difficult.

Tyrone’s comment:  Despite what you’ve been told, traditional, transparent and pass-through business models are all the same. They are nothing more than a play on words. The only PBM business model which provides a client-comes-first standard of care is a fiduciary one.   

Experts say there often are service disruption and client experience issues while two firms integrate. When Express Scripts bought Medco, the disruptions “generated a lot of noise, and frankly it impacted Express Scripts’ retention rates for a period of time,” Mr. Golden said, adding that the industry is anxious to see if Optum and Catamaran can merge without some of those same issues.

On the other hand, Burchfield’s Mr. Oberg said his Optum clients have yet to notice any changes since the Catamaran merger, though “we’re still pretty young on that deal.”

Perhaps the M&A activity won’t significantly affect employers, said Randy Vogenberg, Greenville, South Carolina-based principal at the Institute for Integrated Healthcare and partner at Access Market Intelligence.

“When all is said and done, my sense is that it’s not going to make that much of a difference because we’re talking about drug pricing that’s controlled by the manufacturer and that hasn’t changed regardless of all the mergers and acquisitions,” Mr. Vogenberg said.

“As we continue to see more market consolidation, I think we’re going to have to really follow that to see which way it’s going to tip,” he said. “Would it end up being beneficial to an employer or have no impact or have a negative impact? It’s just too soon to tell right now.”

By Shelby Livingston

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 pharmacy cost 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.

Keys to Success: Click to Learn More

Pharmacy costs is one of the fastest-growing components of health care expense and is expected to increase by 15% per annum with no end in sight. It is estimated that 75% of employers plan to increase prescription drug spend year-over-year. Unfortunately, most organizations are unaware of their excessive remuneration for PBM services. While there is no magic pill to managing the pharmacy benefit, the following five key performance indicators can help to identify a path to lower pharmacy costs while still improving member outcomes.

Dump the Legacy RFP (Request for Proposal) Process. Employers must instead create their own airtight fiduciary contract and put it out for bid vis-à-vis reverse auction. How is it that a plan sponsor, regardless of size, can sign a deal which doesn’t hold its PBM accountable to a client-comes-first standard of care?

from Wikipedia…

“A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. A fiduciary duty is the highest standard of care at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom he owes the duty (the “principal”): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.”

Case closed.

Promote Limited (Preferred) Pharmacy Networks. Most plans offer access to more than 60,000 retail pharmacies nationwide. The reality is that at any given street intersection 3 of the 4 corners are filled with pharmacies including CVS, Rite-Aid, Walgreens or others. Instead of allowing access to countless options, an employer can save 2 percent or more by narrowing the number of network pharmacies.

After cost-sharing, establishing preferred pharmacy networks has been a popular approach to cost management. Limited pharmacy networks, not talked of much before 2010, are much more of a consideration after the contract dispute between Walgreens and Express Scripts.

Providing the broadest access to members may no longer trump the more favorable pricing of a narrowed pharmacy network. A large and growing supply of retail pharmacies makes the limited pharmacy network approach possible.

Caveat emptor. Ballooning is a black box tactic whereby one PBM profit center drives an unusual amount of fees when another is being squeezed. It turns out payers’ cost for mail pharmacy services may increase, when a limited pharmacy network is selected, to offset the negotiated retail pharmacy network.

Implement Specialty Therapy Management. We know specialty therapies improve outcomes but we also know patients do not take medications the way they should, or in the way it was studied to produce published results. Disease specific algorithms enable us to:

• Ensure standards of care are consistently followed thereby reducing waste
• Monitor therapy to detect and resolve problems; identify opportunities for referral to MTM, PFA or clinics
• Pro-actively identify opportunities to keep patients on therapy
• Help patients become better informed about their therapy so they can more actively take charge of it

All of these initiatives either improve outcomes, reduce re-admissions or prevent emergency room visits which in turn lowers overall medical costs.

Keep Two Sets of Eyes on Your PBM. A key strategy to controlling prescription drug benefit costs is to understand and better manage the relationship with your pharmacy benefits manager (PBM). Given the complexity of prescription drug benefit programs, it is an attractive option to simply turn over management of the employee prescription drug benefit to a consultant, ASO, PBM or TPA.

However, it is important to realize that while they are serving clients’ needs, PBMs and TPAs are also in business to make a profit. Therefore, the actions that they take may not always be in the best interest of an employer. For that reason and others, employers are increasingly attempting to better understand the prescription drug benefit in order to develop new strategies to control costs and to maintain an affordable, quality drug plan for their employees.

Because more benefit dollars are shifting from medical to prescription drugs every year, payers whom have internal expertise in pharmacy are in a better position to assume greater control of their prescription drug benefit thereby reducing costs while improving patient outcomes.

Utilization of Internal Pharmacies or Reference Pricing. To illustrate this point I use the story of Meridian Health Systems, a former customer of Express Scripts, to show the sometimes drastic difference in what PBMs charge payers to fill prescriptions and what they in turn pay pharmacies to dispense those same prescriptions. This difference often leads to greater profits for the PBM and increased costs for the employer.

Robert Schenk, who oversees Meridian’s spending on employee medications, dug through the employer’s bills to discover just how pervasive the practice was. One such example he found were charges for generic amoxicillin — Meridian was billed $92.53 when an employee filled the prescription, but Express Scripts paid only $26.91 to the pharmacy to fill the same prescription.

That amounts to a “spread” of $65.62 for only one prescription. In another instance, Meridian was billed $26.87 for a prescription of the antibiotic azithromycin. Express Scripts paid the pharmacy $5.19 to dispense the prescription, creating a spread of $21.68.

As this practice persisted, Meridian’s health benefits costs skyrocketed, all while Express Scripts continually promised savings. In the first year alone, Meridian’s prescription benefits costs increased by $1.3 million. It wasn’t long before Meridian switched to a more transparent PBM to handle their prescription benefits.

The only reason Meridian Health was able to identify the spread is due to the reference pricing or pharmacy it owned. In this case, Meridian Health acted as the middle man and was able to see both sides of the transaction. Imagine for a moment, as a payer, how powerful this tool can be. There are fiduciary PBMs willing to give clients access to the same information from which Meridian Health was able to benefit. I suggest you locate one.

To read more of Meridian Health System’s story click here.

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

[Click to Enlarge]

A brand name medication, also known as “pioneer” or “branded” medication, is made by one manufacturer (single source) under a patent issued by the United States Patent Office. The manufacturer of the branded medication has a 20-year exclusive patent during which no other manufacturer is allowed to produce the exact same product. Examples of brand name medications include Lipitor, Exubera, and Humira.

A generic medication, or multi-source medication, is a medication produced by multiple manufacturers. Generic products are allowed to be marketed after the brand-name medication loses patent protection. Generic manufacturers vie to be the first one on the market, as they are given a six-month exclusivity period to regain development costs.

After six months, any manufacturer may apply for a license to market a generic version of the pioneer product. Pricing discounts, which are typically 10 to 15 percent in the first six months, drop to 50 to 70 percent or more after the six-month exclusivity period.

Multi-source simply means that multiple manufacturers produce the same medication. Some payers refer to a multisource medication as the first generic on the market after the pioneering brand name medication loses patent protection. Within the industry, the terms generic medication and multi-source medication are used interchangeably.

Authorized generics are considered brand drugs under a generic label. Put simply, a brand drug manufacturer supplies its drug to a generic firm and allows the firm to market the product under a different label for royalties. Brand companies also can create their own companies or subsidiaries to manufacture these authorized generics.

By taking either route, these authorized generics can compete with the first generic drug maker during their 180-day exclusivity period. The implications of such actions create a price war that reduces the price of both generics in the 180-day period, thereby reducing the market share and profitability for the generic manufacturer.

The pharmaceutical industry may not face government price regulations, but it is subject to heavy safety regulations, which makes it difficult for competitors to enter the market. Because of regulations that are ofttimes correctly established for safety and efficacy, it results in extremely high barriers to entry. It could take four or five years for a generic manufacturer to develop a competing product.  A lack of competition inevitably leads to higher prices in a capitalist society.

In summary, there are at least five scenarios which lead to generic medications costing nearly as much as their brand name equivalents:

1.  Rent-Seeking
2.  Lack of Competition
3.  High Barriers to Entry
4.  Limited Distribution
5.  Intellectual Rights

In order to minimize the sting from rising drug costs, payers must do two things. First, require a fiduciary standard from their pharmacy benefit managers. It it the highest standard of care and leaves little open for interpretation or arbitrage.  Second, implement hyper-aggressive strategies to control drug costs. These include but are not limited to:  utilization management, step therapy, quantity limits, cost sharing, and carve-out.

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

As one of the largest employers in the healthcare industry, the challenges for hospitals are no different. More and more hospitals and health systems are considering building in-house outpatient pharmacies to combat rising costs, adherence issues and management issues surrounding their employee benefit programs while improving care, convenience and cost for employees as well. And while health systems are finding significant benefits when it comes to offering the ambulatory pharmacy benefit, success depends on proper planning in three important areas.

Cost/benefit analysis.
Building an in-house pharmacy is a big commitment with a potentially bigger payoff. Doing so could help hospitals save 8 to 12 percent on the buy side, and employees are more likely to adhere to therapy plans if they have a convenient and cost-effective place to fill their prescriptions. The health and wellness of employees correlates directly to how much employers spend on healthcare. Plus, less sick time means happier, more productive employees – and the indirect costs of decreased productivity due to illness can significantly impact a company’s bottom line.

Build strategy and benefits planning.
Of course, building an outpatient pharmacy isn’t easy. In addition to determining cost, location, size and profitability, hospitals and health systems will need to identify the patient populations they want to target and then develop a business plan to maximize opportunities. A critical component of that business plan should be the integration of the hospital’s employee benefits into pharmacy operations.

Pharmacy benefit managers (PBMs) can play a central role in administering pharmacy benefits on behalf of employer-sponsored plans. PBMs provide pharmacy benefits to about 200 million Americans.  Traditionally, PBMs are responsible for prescription processing, claims filling, benefit plan design, drug formulary management, rebate and reimbursement administration and more. Given the prevalence and unique role of PBMs, most hospitals have an existing relationship with a PBM to administer their pharmacy benefit. The health system’s pharmacy business plan should account for partnering with a PBM to drive formulary compliance while promoting medication adherence.

Delivering value for employees.
In order for a hospital to leverage its in-house pharmacy to gain the greatest value for its employees, it is important to establish the pharmacy as the provider of choice. Considerations for positioning the health system as a healthcare destination for its employees include:

• How will the qualified, professional staff of pharmacists and pharmacy technicians thrive as part of the hospital’s team and the employee’s healthcare team?
• What collaborative care initiatives will the in-house pharmacy pursue to differentiate it as a preferred offering?
• How will the health system highlight and promote the excellent customer service and convenience of the in-house pharmacy?
• What is the best way to combine existing expertise with new resources to improve employee wellness?
• What other services (on-site delivery, education, OTC products, etc.) will the pharmacy offer?
• How will the HR/benefits team and pharmacy staff partner to position the pharmacy for success? Which team has ownership of various strategic initiatives?

Health systems are uniquely positioned to leverage their knowledge and resources to improve the health of employees. And though employee benefit costs are on the rise, building an in-house pharmacy can pay off for both the hospital and its employees. Implementing an in-house pharmacy is a significant undertaking. But it’s also a strategic investment that can save precious healthcare dollars.

By Amy Flowers