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.