10 Questions to Ask your Pharmacy Benefit Manager

Pharmacy Benefit Managers are often known simply as “PBMs.” While they are largely unrecognized by most employees — and even by many benefit managers — they have a tremendous impact on US health care decision-making because they influence more than 80 percent of prescription drug coverage. The sector is dominated by a handful of very large national players, but there are smaller and regional PBMs as well.

PBMs commonly operate on behalf of employers, insurance companies, and unions; they are also sometimes referred to as “third-party payors.” The original purpose of PBMs was straightforward: issue drug cards for easy ID and account tracking and offer their customer groups cost-effective services as well as reliable claims information.

Over time, however, PBMs have evolved into much more complex organizations. PBMs now take advantage of various strategies associated with rapid growth, including large-scale “block purchases” of drugs and medical products that dramatically lower their wholesale costs — even as PBM fees have consistently increased for customers. Some PBM practices are, in fact, the subject of lawsuits or federal and state regulatory investigations.

So how can you, as a benefit manager, make the best pharmacy decision for your employees?  How can you have confidence that your company is receiving optimum PBM value and service?  What key questions should you ask your current or potential PBM—or your health insurer contracting with a PBM?  The following 10 questions are designed to help you and other Benefit Managers select the best PBM for your organizations.

1) Do you use the same average wholesale price (AWP) and maximum allowable cost (MAC) in calculating price to clients and payments to pharmacies?

Some PBMs realize hidden profits by employing a practice known as “differential or spread pricing.” Differential pricing is when a PBM establishes a discount off the average wholesale price (AWP) for the individual employee filling a prescription, but establishes a different AWP discount for retailers.

Here’s an example of differential pricing in action:

Your employee or group member pays AWP minus 15%
PBM pays retailer AWP minus 18%
PBM pockets the 3% differential

Although PBM revenues derived from differential pricing can run between $5 and $8 depending on the type of program served, typical PBM disclosed fees hover at $1 per prescription. While differential pricing is a common business practice, PBMs should disclose the differential to you or your health insurer.

If you have a plan governed by ERISA, you should keep in mind that the U.S. Department of Labor requires full disclosure of all compensation, fees, and income from a PBM that acts in a fiduciary capacity as an administrator and/or claims payor for an employer with a benefits plan.

Recommendation: Ask to see your PBM’s contract with network pharmacies (including large chains) and compare to the PBM’s contract with your organization. The reimbursement rates should be the same on both contracts for both AWP and MAC.

2) Do you participate in rebates from drug manufacturers?

PBMs often receive rebates from drug manufacturers in return for placing products on formularies and for working to increase sales volume for these drugs (rebates can range from $.50 to $2.50 per claim). Some employers permit PBMs to keep 100 percent of rebates in exchange for lower administrative fees. Alternatively, some employers have agreed to a sharing arrangement, typically 50/50.

Recommendation: Require your PBM to disclose the total amount of rebate dollars collected as a result of the business you represent to the PBM—and ask for supporting documentation that explains how rebate revenue is calculated.  Some PBMs reclassify rebates using categories such as education grants, research, advertising, promotion, access fees, formulary management fees, and data collection fees.  You are entitled to 100% of all rebates, regardless of reclassification, so be sure to get every penny and to spell this out in your contract.

3) Does your PBM offer full transparency and 100% pass-through?

Many PBMs offer “transparency” and they will even tell you how they make money by collecting network spread, mail order operations, or in rebates, but unless you are very experienced in the industry; it is difficult to ascertain the real amounts of money involved.

“Transparency and PASS THROUGH” means a PBM will collect an administrative fee for processing and managing the pharmacy benefit, but that is the only source of revenue.  Rebates are passed back 100 percent to the payor and there is no network spread. (These can be audited and validated very easily.)

In many cases, these newer model PBMs are not as big as the major players in the industry, but because of the type of model they operate, they can actually save the client money compared to a traditional model PBM due to the increased transparency and reduced alternate revenue sources other PBMs maintain.  Even the fact that they are smaller and have less perceived buying power is offset by the model design

Recommendation: Hire a consultant to help manage the PBM jungle, make sure that consultant is also transparent. That is, ask them if they have any ties to any particular PBM and ask them their philosophy regarding transparency in PBM operations.

4) Are your mail-order and retail MAC lists identical?

PBM operations have a lot of moving parts, and many processes that can be manipulated either intentionally or not.  For example, a PBM may agree to use a MAC (Maximum Allowable Cost) program for generic drugs, but neglect to tell the payer that they have multiple MACs that allow for additional margin to the PBM that may not be in the best interest of the payer.  The PBM may also use the MAC for their retail network, but not for their mail order operations.

Recommendation: Ask for a copy of the PBMs price lists (pharmacy and sponsor) and get regular updates.  Conduct periodic comparisons of actual claims cost to the PBMs price list.  If there is a difference in price then spreads or other hidden costs are likely the issues. It is red flag when a PBM does not offer full audit rights or access to all price lists.

5) Does your formulary limit drugs that will be covered?

A formulary is a list of “preferred drugs that pharmaceutical manufacturers discount to employers and other groups in exchange for volume usage.” The most effective formularies optimize and balance quality, effectiveness, and costs.

Check to see if your health plan has to pre-approve a medication before plan members can get their prescription filled. Many plans require physicians to get prior authorization of medications before the plan will cover the drug. That means physicians or pharmacists must call the health plan or PBM for permission to write or fill certain prescriptions.  Some plans also require members to try a less expensive medicine first, before they will cover the one recommended by the member’s physician.

Recommendation: Make sure that any switching of drugs is constructed to save you money and
not the PBM. Check with your plan to understand its authorization process so members are not
surprised when they arrive at the pharmacy. And, be sure to learn how to appeal requirements
and decisions when your members have complaints.

6) How often do you change your formulary?

In most states, even though medications may be covered when the health plan is selected, a PBM may change its list (both prices and availability) of approved medicines at any time throughout the year. If a medication is removed from the formulary without prior notice, the individual patient must either pay out-of-pocket or accept a medication that the PBM prefers.

Recommendation: Check with your PBM for policies related to formulary changes. Will you receive notice of formulary changes in writing?  If not, ask for notification.

7) How are co-payments set?

Most health plans require a co-payment for each prescription. Some plans have a single co-payment — for example, $10 for any prescription. Other plans have different levels of copayments for different medications, a system known as “tiered co-pay.” A PBM can shift medications from tier to tier at any time, leading to potentially unpleasant surprises for employees presenting prescriptions at pharmacies.

Recommendation: Ask about how you and plan members will be notified when the PBM makes a tiered co-pay change for a medication.

8) Do you offer performance guarantees?

Performance measurement is a key function for clients as they assess their ongoing relationship with their PBM. Traditionally, performance measurement is divided into the following two categories: Cost and utilization; and PBM service performance.

Cost and utilization performance measurement includes such metrics as the number of prescriptions dispensed per member, average ingredient cost per prescription and per member, generic use rates, and rebates. Cost and utilization results may vary significantly by client based on the client’s demographics and the client’s overall benefit plan design.

Conversely, PBM service performance measurements are more uniform. Clients have established a series of benchmarks and service guarantees to measure the overall service performance of a PBM. Many of the service guarantees were derived from the guarantees used by medical claims administrators. Service guarantees deal primarily with the administrative aspects of a PBM’s performance, as this is the main service provided by the PBM.

Since PBMs do not manufacturer, prescribe and dispense drugs (with the exception of mail order), the service performance measurements are the main “quality” measurement for a PBM.

Recommendation: One of the best means of tracking overall PBM performance is by conducting annual customer satisfaction surveys. In almost all cases, the monitoring of performance measures is performed and paid for by the PBM.  Another feature that all clients should demand is a market check at specified intervals during a typical three year contract – say, every year or at the 18 month mark – such that there is an opportunity to review and renegotiate some of the terms if market conditions change.

9) Can you provide a detailed explanation of your fee schedule and specifically the cost of clinical programs?

Be sure to compare “apples to apples” when evaluating a financial proposal from a PBM.  Inexpensive claims processing fees may be less attractive if you are “nickel and dimed” on everything else. Clinical programs are an area where fees vary widely.

For example, a prior authorization (PA) program establishes protocols for prior approvals of expensive, nonformulary drugs. A PA program is one tool, among many, that keep costs under control. However, PA program fees vary widely, ranging from $2 to $40 per PA.

Recommendation: Ask for detailed disclosure and explanation of a PBM’s fee schedule. If policies related to prior authorization systems are not clearly explained — ask.

10) What is your policy on selling pharmacy data?

In the business of health care, information equals revenue.  Every drug manufacturer would like to know about your plan members’ demographics and utilization patterns.  You have the right to demand that your company’s proprietary information not be sold by your PBM to the highest bidder.  And, that all PBM practices are in compliance with the privacy regulations established under the Health Care Portability and Accountability Act (HIPAA).

Recommendation: Ask the PBM to include a paragraph covering the sale of data in your contract. If you have no objection to aggregate data being sold, you should still require disclosure of the sales. Also consider the value of your company’s data and whether or not to ask for some form of compensation from the PBM.

All of the above questions are important points to keep in mind the next time you have the opportunity to comparison shop for a PBM. Just remember that it is only after the layers of each offering are peeled back will the PBM representing the best fit be determined.

What is a spread? Certainly not a Topping for Toast.

Plan sponsors, while getting smarter about managing prescription drug benefits, continue to be plagued by drug spreads.  A drug spread is the difference between the amount paid to a PBM and the amount that should’ve been paid, by the plan sponsor, for the prescription drug ingredient portion of a transaction in the pharmacy benefit manager’s retail pharmacy network.  This definition is very simplistic, but the strategies a PBM employs to maintain these spreads are often complicated and inconspicuous.

The larger spreads generally take place with generic medications.  This is due in part to much smaller COG (cost of goods) and larger profit margins attained from generic compared to brand medications. Think about it for a second.  A generic medication may have fifteen different manufacturers (multi-source) all competing for the same purchaser while a brand product will have in most instances only one manufacturer (single-source).  This, ultimately, leads to lower costs for generic medications and much higher costs for brand medications.

Supply-side economics tell you that much more money is too be had from the sell of generic medications vs. brand medications.  Don’t be upset with your local pharmacist due to the high price of brand medications.  He or she has very little control, to the downside, on the price of these products.

Small to medium-sized businesses are most often the victims of spreads.  Larger companies often maintain a staff (which may include a seasoned pharmacist or two) dedicated to thwarting the efforts of any PBM attempting to hide cash flows.  Make no mistake about it; spreads are an opportunity cost and hidden cash flow.  I urge you to read the pilot study conducted by American Pharmacists Association.  Here is the abstract from this study.

Objective: To document the difference between what pharmacy benefits management companies (PBMs) charge employers and what they pay dispensing pharmacies for the drug ingredient portion of prescription transactions (the “spread”).

Design: Descriptive, cross-sectional study.

Participants: Two large employer groups, each of which used a different PBM, and six independent community pharmacies participating in these plans during 2002.

Interventions: Two sets of financial records issued by each of two PBMs were reviewed retrospectively, including 129 line-item prescription transactions billed to the employer and the line-item transaction information that accompanies the PBM payment to the dispensing pharmacy.

Main Outcome Measure: Spread between drug ingredient cost billed to the employer by the PBM and drug ingredient cost paid to the dispensing pharmacy by the PBM for brand name versus generic drug products.

Results: For both PBMs, the mean (± SD) spread was $12.29 ± 27.93 per prescription, with a range of –$1.67 to $201.65. Considering all 129 transactions, the mean spreads for brand name and generic medications were significantly different from one another, with mean (± SD) spreads of $4.65 ± 10.47 and $23.45 ± 39.47 per prescription, respectively. The two PBMs differed significantly in their spreads for brand name drugs ($3.20 ± 2.85 and $5.93 ± 14.12), but the spreads for generic products did not achieve statistical significance in absolute dollars ($10.83 ± 13.58 and $31.74 ± 48.11) because of their greater variation (as reflected in the larger standard deviations). However, the percentages difference for generic products differed significantly.

Conclusion: This pilot study indicates the possibility of substantial and widely varying differences in the spread and spread percentage between PBMs for brand name and generic medications. A more transparent business model for the PBM industry could produce better relations with PBM clients and business partners, including community pharmacies.

I know what you’re thinking, “there is no way this is happening to my organization.”  Guess what yes it is unless your PBM has agreed, contractually, to a fiducuary role.  And if you’re a fully-insured company with more than 300 employees forget about it!  You may as well send your insurer or TPA a blank check and ask them [nicely] to fill it in with any amount they believe suitable for the drug portion of your health benefit.

HHS High Risk Pools Remove Restrictions and Lowers…

Faced with enrollment numbers that have been far below expectations, HHS (Human Health Services) has decided to no longer require those wishing to gain coverage in federally run high risk pools to prove they have been unable to find health coverage for at least six months, according to Kaiser Health News.

Individuals applying for coverage under the high risk pools run by the federal government in 23 states and the District of Columbia will just have to show a doctor’s note that says they have a pre-existing medical condition. Is there any question about the abuse this leads to from individuals that do not want to pay for coverage until they become ill?

Premiums will drop as much as 40 percent in 17 of the states plus the District where the federally run plans operate, bringing high-risk premiums in those states closer to the rates that can be found in the individual market. The premium costs and the requirement to prove an inability to find insurance were two obstacles that have kept the high-risk pool enrollment to below 20,000 people when the promise was that 500,000 would enroll.

There was a time when many experts believed the $5 billion set aside for high-risk pools by the health reform law wouldn’t be enough to meet demand. The pools were designed to be an early carrot in the health law that would give people coverage options until 2014, when insurance carriers will no longer be able to discriminate based on pre-existing conditions.

TransparentRx, LLC has over ten years experience in the health insurance industry. We have observed many carriers try to gain market share. Experience demonstrates that the quickest way to failure for an insurer is to eliminate all barriers to entry and lower prices. If HHS were faced with the same scrutiny by state insurance departments as insurance companies, they would be served with Cease and Desist Orders for the way the risk pools are being managed.

On the other hand, insurance companies do not have the deep pockets of the American Taxpayer to fall back on.  This, in turn, leads to higher costs for plan sponsors.

Fiduciary: An Appropriate Role for a PBM

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? Let’s take a look at the two standards:

Brokers (non-fiduciary)

  • Must recommend “suitable” products, not necessarily best or cheapest
  • Earn commissions or other transaction-based fees
Advisers (fiduciary)
  • Must put clients interests before their own
  • Most charge a percentage of assets or a fixed fee
Here is the definition of Fiduciary from Wikipedia

A fiduciary duty is a legal or ethical relationship of confidence or trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person. One party, for example a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to the other one, who for example has funds entrusted to it for investment. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires the fiduciary to act at all times for the sole and interest of the one who trusts.

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.

When a fiduciary duty is imposed, equity requires a different, arguably stricter, standard of behavior than the comparable tortious duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without knowledge and consent. A fiduciary ideally would not have a conflict of interest. It has been said that fiduciaries must conduct themselves “at a level higher than that trodden by the crowd” and that “[t]he distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty.
I don’t completely understand why all self-insured plan sponsors don’t require pharmacy benefit managers to contractually obligate themselves to a fiduciary role; managers are too busy to investigate further, the C-suite isn’t aware of the potential cost savings, or maybe no one cares enough to make a change.  As healthcare costs continue to climb it is increasingly important for plan sponsors to hold yourselves, brokers, consultants and PBMs more accountable.  I’ve spoken directly with hundreds of benefit personnel and am surprised by how little they actually know about pharmacy benefits. Brokers, consultants and plan sponsors must become experts in pharmacy benefit management. If you know little about a subject area, in which cash is exchanged, you will undoubtedly be taken advantage of and leave money on the table.
I have a friend who is very smart, but has a difficult time judging people and their intentions.  I’ve always told her don’t give money to anyone asking for “spare change.” This past Christmas Eve we were leaving Kohl’s department store and a gentleman walked up to her, gas can in hand, and asked for money.  He had been standing near an automobile appearing to pour gasoline into the tank.  It’s Christmas Eve right? No one would hustle her the day before Christmas!  I’m shaking my head, having seen this scam many times, certain she was going to give him a buck or two.  Low and behold as I’m loading gifts into the automobile she walks over and says, “it’s only a dollar.” By the time we get into the vehicle she looks out and sees the poor man’s vehicle still there, but he had vanished.
Now, I may have fallen for the same trick had it not been for a conversation I overheard by two “homeless” men.  I had just left a business meeting in downtown Detroit when I overheard one homeless man say to another, “How much money did you make today?” His reply, “I only made $80 and I almost got into a fight with a dude trying to take my spot next to the freeway.”  I know what he did to make money because I had seen him there before.  I thought he was really struggling but low and behold it was his job!
The point here is that companies are “hustled” out of their hard earned money everyday by some PBMs. As Ronald Reagan once said, “trust, but verify.”  In order to verify one must be well-informed and knowledgeable. Then once the knowledge is gained add an additional safety net by requiring your PBM to sign as a fiduciary.

Hidden Cash Flows and Pharmacy Benefit Managers

I want to make this very clear – not all PBMs engage in deceptive practices. There is a relatively new business model some PBMS are embracing called transparent + pass-through. This essentially means that a PBM has taken the position to forgo driving revenue from hidden cash flows and instead earns revenue from a single source, an administrative fee. While this new business model benefits both plan sponsors and their employees, some traditional PBMs either can’t or won’t adopt the transparent + pass-through model for all of its clients.

Here are four deceptive practices some PBMs use to hide cash flows from their clients thereby increasing the actual cost of the plan.

Excessive mark-ups from mail-order prescriptions. It is not uncommon for some PBMs to mark-up mail-order medications as much as %500! Why do you think these PBMs push so hard to move prescriptions to mail-order from retail? A transparent + pass-through PBM will not make a profit from mail-order dispensed medications. Again, it will only charge its plan sponsor a flat administrative fee per claim. The savings are passed back to plan sponsor reducing actual plan costs.

This is not to say that prescriptions dispensed via mail-order are a bad thing.  In fact, mail-order can offer quite a bit of savings. But you must be aware of the arbitrage opportunities for non-transparent pharmacy benefit managers and eliminate them.

Rebates. There was a study conducted by the Pharmacy Benefit Management institute which concluded that 47% of a traditional PBM’s revenue is derived from manufacturer revenue. Just think about this for a second. It is the plan sponsor driving the business for which these revenues are earned so why should they be earmarked for the PBM?  These monies shouldn’t be shared with a PBM, but instead passed back to the plan sponsor 100%. Hence, the business model transparent + pass-through.

Don’t be duped, there are many names these PBMs may use to hide these cash flows such as reimbursements or SG&A expenses.  It doesn’t matter the plan sponsor is entitled too any money awarded by a manufacturer as a result of prescriptions dispensed from its plan member.  For a rebate eligible prescription drug rebates are typically $2.00 – $3.00 per prescription.

Differential Pricing or Contracting.  This is a deceptive tactic that is very common yet too many payors are unaware of its detrimental cost.  Here is how it works.  Let’s say that a PBMs billing terms to a plan sponsor are based on AWP or average wholesale price for a certain generic drug.  But, the reimbursement to the network pharmacy for dispensing this medication is based on MAC or maximum allowable cost.

MAC will always be lower than AWP thus leaving a difference in price or contracting.  The amount a plan sponsor is billed should be exactly the same amount a network pharmacy is reimbursed otherwise how can a plan effectively determine its actual pharmacy benefit costs.

Spreads.  A spread occurs when a plan sponsor is billed the “least favorable” or higher amount for a prescription drug that is reimbursed by the PBM to the network or mail-order pharmacy at a lower cost. The difference or spread is retained by the PBM. This should never happen, but it does all too often. In fact, there is information in the marketplace suggesting that the average spread for prescription drugs dispensed as part of a pharmacy benefit is as much as $15!

Again, if you don’t know the spread even exists or its amount how can a benefit director possibly determine the actual cost of the plan? This begs the question, “how does this happen?”  A simple example is when a PBM has different MAC lists for plan sponsors and pharmacies.  These MAC lists may differ in the number of drugs listed and their respective prices. A transparent + pass-through PBM will not have any spreads and should contractually bound itself to such.

I’ve discussed here only a handful of the hidden cash flows some PBMs use to keep plan sponsors in the dark.  There are many more like effective network rates, repackaging, formulary steering and co-pay differential.  To prevent this from happening to you always require full auditing rights, real-time access to MAC lists and claims data.  Then compare the amounts billed (not all claims but maybe 20 or so per month) to the price lists and you’re now in position to determine actual costs.  If your PBM doesn’t provide full audit rights or access to MAC lists and you’re still willing to “cut the check” then don’t complain about rising healthcare cost.                       

Pharmacy Benefits Manager (PBM): Traditional vs. Fiduciary

Occasionally, I’m asked what is the difference between a traditional and fiduciary pharmacy benefit manager. I say “occasionally” only because the question isn’t asked nearly as much as it should be. Many persons dealing with PBMs, either directly or indirectly, believe that PBMs are created equally and that couldn’t be any further from the truth.

Let’s say you decide to stop at the grocery store for some staples after a hard day at the office. Milk, eggs, cheese and bread are on your grocery shopping list. As you walk through the aisles, and before placing each item in the shopping cart, you are sure to check prices for every item.

This is a standard practice for most shoppers so to make sure that when one gets to the checkout counter the prices billed are exactly what were displayed.  You’ve agreed to pay only the displayed prices, not a penny more, once the item is placed into your cart.

Now, imagine a scenario where you’ve placed the milk, eggs, cheese and bread into your shopping cart then walked to the checkout counter only to find out that the prices have changed!  Take it a step further.  Because the scanned prices don’t display on the cash register, you’re unaware of the price changes until the cashier hands you a single line item receipt which says, “groceries $100,” an amount owed much higher than anticipated.

The cashier simply wants you too pay whatever number he/she has been told is appropriate for that day. If you weren’t aware of this potential scenario playing out prior to walking into that grocery store would you shop there again let alone pay the bill? Believe it or not this scenario plays out every single day between traditional pharmacy benefit managers and their plan sponsors.

First, the plan sponsor enters into a contract with a traditional PBM which they believe offers airtight drug pricing. Why would a plan sponsor think otherwise when their consultants have told them as much? No matter what you think you know the PBM will always know more and find loopholes to increase cash flow unless it embraces the role of a fiduciary.

The relative drug prices will often change as soon as the ink is dry on the contract. But, the plan sponsor is unaware of the price changes because their PBM doesn’t offer full auditing rights or access to MAC price lists.  Doesn’t this sound familiar to the grocery store analogy?

Having access to price lists is essential to being able to confirm that you are paying exactly what you’ve agreed to pay and not a penny more.  Price lists are also very useful in determining the actual cost of a pharmacy benefit.

PBMs: Traditional vs Fiduciary Repricing Report (Actual)

[Click to Enlarge]
To make matters worse, a traditional PBM may send only a single line item invoice for drug benefit costs although thousands of claims have been submitted for that reporting period.  To avoid these pitfalls do business only with a fiduciary pharmacy benefits manager.

To speak of transparency alone is not enough; it must be binding. A fiduciary PBM discloses all cash flows, passes through all network prices and rebates, prices more competitive than industry norms and provides full accounting (auditing provisions) to the plan sponsor.

Any PBM which claims to be transparent and doesn’t offer all of these features is an impostor. This is the primary difference between a traditional and fiduciary PBM. A traditional PBM may only provide one or two, but often times none of these features.

The real benefit to plan sponsors is that fiduciary PBMs offer similar services, at a lower cost, compared to transparent, traditional or non-fiduciary PBMs. Caveat Emptor.

The Lover’s Quarrel: Walgreens vs. Express Script

That Walgreens requires access to Express Script’s patient base in order to avoid a sharp decline in gross revenue is clear. However, it appears that Express Script is in no rush to re-open its book of business to the once proud chain pharmacy partner.  This begs the question.  What is the root cause of the two parties inability to reach a mutual contractual agreement?  For most businesses it boils down to cash and this case is no different.  But, the root cause is a bit more complicated than simple greed.

Many health care companies have been making subtle changes to their business strategies for a while now.  Well, at least since the prospect of a national health care program (Patient Protection and Affordability Care Act) became a reality.  While the pool of potential customers will certainly increase, as a result of PPACA, profit margins will undoubtedly decrease.  PPACA is the root cause of the two organization’s unwillingness to come to a mutual agreement.

In other words, without health care reform there is enough hidden cash flow to go around for everyone. I surmise health care reform is also the primary reason Express Scripts has agreed to purchase Medco.  The loss in profit margin will be compensated for, in part, with higher volume. PPACA makes it easier and less costly for those persons without existing or adequate coverage to gain access to health care thus substantially increasing the number of potential customers.

The federal government is a bit more [state governments are making headway, but still have a lot to learn] prudent when paying for prescription drugs compared to private industry.  Simply put, it will not pay as much for prescription drugs as state governments and private industry nor will it allow PBMs to charge historically exorbitant fees to providers in the newly created health care exchanges. Excluding the obvious choice, buying power, there are two major reasons for these aforementioned facts: unlimited resources and accountability.

Most private companies just don’t know enough about pharmacy benefit management to deliver for shareholders what they expect and that is too purchase quality goods and services at the lowest possible cost.  Instead, they pass a majority of the responsibility to pharmacy benefit consultants. This is okay except when the consultant is ignorant.  In my experience most consultants lack the knowledge, tools and/or desire necessary to prevent its clients from being duped by traditional PBMs.

Having said that, much of the meal ticket for traditional PBMs, like Express Scripts, will be eliminated.  This is due to fully-insured health care plans being much more impacted by PPACA than self-insured payors.  Still many self-insured employers will continue to be played for patsies by traditional PBMs and TPAs.  I’ve discussed the implications of PPACA on self-insured plan sponsors in a previous blog post called Health Care Reform (PPACA) Provisions that Impose Obligations on or Affect Self-Insured Health Plans.

According to a WSJ article on Tuesday 1/3/2012, Walgreens as late as December 2011 offered to keep rates flat, but ESI (Express Script) rejected that proposal.  ESI has said it remains open to keeping Walgreen it its network, but only at a rate that is right for its clients.  Really, that sounds good, but an astute business person should interpret this as….a rate that is right for their shareholders.  ESI accounts for about $5 billion in revenues for Walgreens or 14% of total sales.

Walgreens in an attempt to retain some ESI patients is offering coupons, discounts and boosting staff.  I equate this to putting lipstick on a pig.  It’s not a good look and doesn’t work long-term. If Walgreens accepts any deal lowering existing rates ESI will see a weakness and continue to press in the future for further rate reductions.  It is a large hit, but in my opinion Walgreens should make plans to fully move on without ESI.

If you have any questions or comments and do not want to post them send directly to Tyrone D. Squires via email to director@transparentrx.com.

PPACA: Imposes Obligations on Self-Insured Health Plans

There has been an ongoing trend for large employer benefit plan sponsors, particularly those operating in multiple states, to move away from insured health and welfare benefit plans (“H&W Plans”) and to create self-insured plans. A rationale for this transition is that self-insured plans offer greater flexibility in benefit design because, by virtue of ERISA’s first preemption clause, 29 U.S.C. § 1144, they are not subject to state insurance benefit mandates.

The following review of some of the burdens and obligations imposed on insured ERISA H&W Plans, multiple employer welfare arrangements (“MEWAs”), and voluntary employees’ beneficiary associations (“VEBAs”) demonstrates that self-insured plans have been spared many of the obligations imposed by PPACA. I’m unaware whether or not Congress purposefully structured PPACA to encourage the growth of self-insured plans. PPACA imposes the following burdens and obligations:

Comprehensive Coverage for Health Benefits Package – Self-insured plans are not required to offer the package of benefits specified in Section 1302 of PPACA. This is required of insured plans only.

Essential Health Benefits Requirements – This provision of PPACA is applicable to “Health Plans” and, thus, does not apply to self-funded plans.

Prohibition of Discrimination Based on Salary – Self-insured plans are expressly relieved of the obligation to comply with this requirement.

Annual Limitation on Deductibles for Employer Sponsored Plans – This limitation does not apply to self-insured plans.

Guaranteed Issue of Coverage – This does not apply to self-insured plans.

Self-Insured Plans Are Not Subject to Jurisdiction of State Ombudsmen – PPACA provides for the creation of a state-level office for an “Ombudsman.” The function of the Ombudsman is to address complaints concerning violations by plans or plan officials of both state and federal laws. Section 2793 clearly provides that the Ombudsman’s jurisdiction is limited to insured plans. As a result of this exclusion of self-insured plans from the Ombudsmen’s jurisdiction, some complex ERISA preemption issues have been avoided.

Prohibition on the Making of False Statements and Representations – This provision is applicable only to MEWAs.

Application of State Law to Combat Fraud and Abuse – This provision also applies only to MEWAs.

Imposition of Cease and Desist Orders – This applies only to MEWAs.

Ensuring that Consumers Get Value for Their Dollars – This provision empowers the Secretary to investigate the reasonability of premiums and to publicize findings and conclusions.

Administrative Simplification – Pursuant to this provision, the Secretary is required to develop a “single set of operating rules” governing the administration of various functions and transactions that are common to all H&W Plans. The entities subject to these rules will have to file documented reports of compliance with the Secretary, and are subject to penalties if they make misrepresentations in those reports. The entities subject to these obligations are “Health Plans,” a category that excludes self-insured plans.

Guaranteed Renewability of Coverage – This requirement applies only to insurers.

Exemption from Sections 2716 and 2718 of the PHSA47 – These provisions involve (i) the prohibition of discrimination in favor of highly compensated individuals, (ii) the protection of Second Amendment gun ownership rights and the prohibition of the collection of information on gun ownership, (iii) the prohibition of considering gun ownership as a factor in the calculation of premiums, and (iv) the requirement for the submission of annual reports providing detailed financial information concerning the provision of covered benefits.

Self-Insured plans are favorably treated under PPACA. There are clear advantages to self-funded plans; they allow employers greater flexibility and discretion with respect to both state laws and PPACA. From an administrative perspective, self-insured plans need not impose any greater burden on employers than insured plans. Many insurers administer self-funded plans under ASO arrangements, as do many TPAs. Stop-loss coverage is offered by many insurers so that an employer may define and limit its benefit cost risk.

The choice to self-insure need not be limited to very large employers with thousands of employees. There are legal structures through which smaller employers can implement self-insured benefit plan structures and limit their risk exposure. In this fashion, they can achieve the same flexibility available to very large employers in selecting the benefits they can afford to offer to their employees. As demonstrated, more flexibility is available to employers that sponsor self-funded benefit plans than to those that choose to sponsor insured benefit plans.

If you wish to discuss this subject further, please contact the author:

Proposed ESI (Express Scripts Inc.) and Medco Health Solutions Inc. Merger

There is no question that pharmacy benefit managers provide a valuable service. One that when properly implemented saves lives, reduces costs, increases employee productivity, and improves patient lifestyles. However, there are plenty of opportunities for pharmacy benefit managers to exploit loopholes in the supply chain and increase profits through arbitrage.

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit at zero cost.

Traditional PBMs like Medco, CVS/Caremark and ESI take advantage of retail, mail-order and rebate price differences to reap excessive profits. I say excessive because much of these profits should go back to payors in the form of lower drug costs. I don’t care what you’ve been told or by whom; if your PBM is unwilling to accept a fiduciary role and commit to it contractually then it is in all likelihood Hiding Cash Flows via arbitrage. I’ll dive into this subject, with more detail, in later posts.

In my opinion, the proposed merger of Medco and ESI will primarily benefit ESI and Medco shareholders. Sure ESI will have greater pricing power, but do you really believe for one second that these savings will be passed down to payors particularly small to medium-sized businesses? It is a public corporation with two goals: survival and shareholder return!

I am not a Big Three (Medco, Caremark and ESI) hater. Don’t get it twisted. I’m a capitalist at heart and strongly believe in every company’s right to grow revenues, but at what cost? Simply put, I am telling you from experience what I’ve seen (see) as a former employee of Eli Lilly and Company and now the founder of TransparentRx, LLC and a mail-order pharmacy. Most pharmacies, PBMs, health insurers, and employers will in the long-run be negatively impacted by this merger if it is approved by the FTC.