Brokers (non-fiduciary)

• Must recommend “suitable” products, not necessarily best or cheapest
• Earn commissions or other transaction-based fees

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.                       

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.

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.

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:

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.