In pharmacy benefit management, pass-through doesn’t mean what you think it means hence the title of this post 6 Indicators Your PBM is Hoarding Rebates. A logical person would surmise that when a pharmacy benefit manager (PBM) professes it is pass-through, any discounts it has negotiated are distributed back to the client. Au contraire mon frere.

Pass-through pricing means that the PBM passes the discounts, rebates, other revenues, and actual costs charged by the pharmacy or paid by a pharmaceutical company (in the form of refunds) directly on to the plan sponsor. In actual use, it can have various definitions according to the understanding of the parties.

When a PBM salesperson tells you its organization is pass-through, they aren’t necessarily being untruthful. What they and you must understand is that in practice they are passing through only the discounts or refunds required by the contractual terms. The typical PBM salesperson is working with limited industry knowledge, so they don’t know any better. If there is a loophole, you must assume the PBM will take financial advantage of it.

The term pass-through must be carefully defined in the contract in every instance it is used since there is no industry-accepted definition. If the term is not included in the contract, add it. I spoke with a broker recently who was adamant that the deal they negotiated for their client was pass-through. When I pushed back the broker insisted that the contract was pass-through because the PBM told him so.

The base administrative fee for services related to pharmacy benefits management including, but not limited to, mail services, clinical services, and customer service was $0.00. I asked, rhetorically, how can the PBM make a profit if not through hidden cash flow streams when there is no administrative fee? It is not possible for a PBM contract to be truly pass-through when it waives the administrative fee. Here are 6 indicators your PBM is hoarding rebates.

1. The base administrative fee for services related to pharmacy benefits management including, but not limited to, mail services, clinical services, and customer service is artificially too low. It is not possible for a PBM to be truly pass-through when it waives the administrative fee or doesn’t charge enough to cover overhead.
2. The definition for rebates in the contract language is opaque. One example is “…and directly attributable to the Formulary and Covered Product utilization by Eligible Persons.” Allowing contract language such as this the broker unknowingly permits the PBM to retain at least 15% of rebate dollars.
3. You forgo all or a portion of rebates to take a credit on the medical administrative fee. Heck, you may as well call it for what it is – a bonus payment. The PBM’s pricing analysts will shift costs to make up for any “credit.” What’s more, these credits incentivize the PBM to dispense more brand drugs. An 87% generic dispense rate (GDR) is not good. It is below average. An 80% or higher prior authorization approval rate is not good either. In fact, it is way too high. High PA approval rates don’t improve outcomes, but it does increase drug spending unnecessarily. Rebate credits reward PBMs for rubberstamping drug utilization management programs. Never forgo rebates for any reason including medical benefit drug rebates.
4. The PBM excludes claims with DAW codes 1, 3 or 5 from rebate eligibility. There is no reason on god’s green earth for these claims to be excluded other than the PBM taking financial advantage of its client. DAW code exclusions are driven by PBMs who profit from an opaque revenue model.
5. The PBM does not provide claim (NDC) level reporting. A Rebate Remittance Summary Report is a summary of the total payments received from manufacturers, on a per client basis, which includes the total allocations for these payments, NDC, pharmacy identifier, claim number, fill date, and plan identification. The information in this report will reflect the guarantee and payment received on each specific claim.
6. The PBM service agreement ought to incorporate year-over-year increments on rebate or refund rates. This increment will assist with guaranteeing that your agreement is working every year. When long-term agreements are set up, it’s particularly vital to increase rebate rates every year to adjust for inflation and provide price protection. One more method for tending to this yearly rebate rate increment is through a market check. The market check helps to ensure you are getting the best rates year-over-year. In a perfect world, you would incorporate both the year-over-year increments of rebate rates, as well as an annual market check provision in the PBM service agreement.

Conclusion – 6 Indicators Your PBM is Hoarding Rebates

The Lehigh County Controller’s Office reviewed Lehigh County’s prescription drug plan which lost savings of almost $1.4 million, while battling a lack of transparency and openness about drug costs[i]. Lehigh County elected to choose a fixed discount structure, meaning that it received a flat rate savings for each employee on its healthcare plan. Lehigh County is self-insured. It could have elected to take full rebate value which results from savings passed from the pharmaceutical company to the pharmacy benefit manager but chose not to do this. In 2019, Lehigh County found that the actual rebate value exceeded the fixed discount by $700,000. The Controller’s Office also identified $654,749 in potential drug cost savings through a market check.

Bloomberg Law writes, “among employers’ concerns are a lack of transparency into whether PBMs are fully refunding rebates and discounts negotiated with drug manufacturers; how PBMs profit from manufacturer discounts; and whether they are including expensive drugs on formularies to increase their own profits.” It seems Bloomberg Law and Lehigh County have a lot in common.

[i] Siegel. J. 2021, January 29. Lehigh County Controller Takes on Highmark Health Insurance. PR Newswire. https://www.prnewswire.com/news-releases/lehigh-county-controller-takes-on-highmark-health-insurance-301218070.html.

4 PBM Trends to Watch — And, Yes, Transparency is One of Them and other notes from around the interweb:

• 4 PBM Trends to Watch — And, Yes, Transparency is One of Them. The industry’s tradition of conducting complicated reviews of a year of claims and drug spend and advice to clients based on those copious reports needs to change to one that uses software and automation to review claims (and rebates) in near real time. Continuous Monitoring or CM identifies performance issues before they get out of hand. Audits typically occur 12 – 24 months after the fact which is too late to recoup most of any potential overpayments. Continuous Monitoring on the other hand, catches and resolves overpayments or other issues much faster.

• Six Things to Look Out for Within the Rebates Section of Your Pharmacy Benefit Management Contract. Prior to signing your Pharmacy Benefit Management (PBM) contract, it’s essential to pay particularly close attention to the pharmacy services that provide cost-containment strategies. One vital component you should focus on is the rebate administration. Today, we are sharing six areas within the rebate section of your PBM contract, to help you maximize savings and mitigate risk.

• How specialty drug ‘solution stacking’ can rein in pharmacy benefit costs. Brokers and employer groups alike know that 5% to 10% percent of insured workers and their dependents drive 50% to 60% of the cost of pharmacy claims. A few members with prescriptions for a specialty drug with a five-figure price tag can easily represent most of an entire group’s pharmacy spend. These drugs are often lifesaving or provide a dramatic quality of life improvement for those who take them. No one would question the necessity of using them. But when a group can mitigate some of the cost without affecting the clinical outcome, it can be a game changer. The broker who unlocks these savings becomes a trusted ally.

• 3 reasons why owning pharmacy benefits data matters. The Federal Trade Commission is pushing PBMs for greater transparency to help employers take control of their prescription costs. But what is transparency without access to plan data or performance analytics? Currently, employers are disempowered because too many don’t own their data, must pay extra to get access to what should already be theirs, or only receive partial access. These PBM practices of obscuring data have led to significant distrust from all stakeholders. To fix a broken system, the data being hidden by these third parties needs to be freed to provide employers and plan members with the information they need to find the path to lower costs.

Is self-funding the solution to growing medical and drug costs and other notes from around the interweb:

• Is self-funding the solution to growing medical and drug costs? So, is self-funding the solution? First, let’s debunk the myths about self-funding and examine its advantages and disadvantages to determine whether it is right for your organization. Self-funding, especially for smaller organizations, is more common than most employers think. According to Kaiser Family Foundation, in 2020, 23% of employers with two to 199 plan participants were self-funded. From 100 – 199 plan participants, the percentage of employers that were self-funded grew significantly and from 200 – 1,000 participants, nearly 60% of employers were self-funded. Still, many smaller organizations with fewer than 200 employees believe they can’t self-fund because they don’t have a large enough group. Employers with at least 100 participants typically have enough data to make educated decisions around their funding and can have more opportunities for savings.

• Six Things to Look Out for Within the Rebates Section of Your Pharmacy Benefit Management Contract. Prior to signing your Pharmacy Benefit Management (PBM) contract, it’s essential to pay particularly close attention to the pharmacy services that provide cost-containment strategies. One vital component you should focus on is the rebate administration. Today, we are sharing six areas within the rebate section of your PBM contract, to help you maximize savings and mitigate risk.

• How specialty drug ‘solution stacking’ can rein in pharmacy benefit costs. Brokers and employer groups alike know that 5% to 10% percent of insured workers and their dependents drive 50% to 60% of the cost of pharmacy claims. A few members with prescriptions for a specialty drug with a five-figure price tag can easily represent most of an entire group’s pharmacy spend. These drugs are often lifesaving or provide a dramatic quality of life improvement for those who take them. No one would question the necessity of using them. But when a group can mitigate some of the cost without affecting the clinical outcome, it can be a game changer. The broker who unlocks these savings becomes a trusted ally.

• Newly launched U.S. drugs head toward record-high prices in 2022. Drugmakers are launching new medicines at record-high prices this year, a Reuters analysis has found. The median annual price of 13 novel drugs approved for chronic conditions by the U.S. Food and Drug Administration so far this year is $257,000, Reuters found. They were in good company: seven other newly launched drugs were priced above $200,000. Three other drugs launched in 2022 are used only intermittently and were not included in the calculation. Last year, the median annual price rose to $180,000 for the 30 drugs first marketed through mid-July 2021, according to a study published recently in JAMA. While the Reuters tally does not completely replicate the work of that study, it shows that the direction of new drug prices continues to be on the rise.

Newly launched U.S. drugs head toward record-high prices in 2022 and other notes from around the interweb:

• Newly launched U.S. drugs head toward record-high prices in 2022. Drugmakers are launching new medicines at record-high prices this year, a Reuters analysis has found. The median annual price of 13 novel drugs approved for chronic conditions by the U.S. Food and Drug Administration so far this year is $257,000, Reuters found. They were in good company: seven other newly launched drugs were priced above $200,000. Three other drugs launched in 2022 are used only intermittently and were not included in the calculation. Last year, the median annual price rose to $180,000 for the 30 drugs first marketed through mid-July 2021, according to a study published recently in JAMA. While the Reuters tally does not completely replicate the work of that study, it shows that the direction of new drug prices continues to be on the rise.

• The coming public-private drug pricing divide. The prescription drug pricing reforms included in the health, tax and climate package are limited to Medicare and exclude the millions of Americans with private insurance. Why does it matter? At best, this sets up a two-tiered pricing system for certain drugs, in which employers and enrollees in the commercial market will pay a significantly higher rate than the government in the years to come. And at worst, some employers and experts warn, it could cause drug prices to rise in the private market. House Democrats cleared the legislation on Friday, sending it to President Biden’s desk. Once signed, the law will fulfill Democrats’ decades-long promise to allow Medicare to negotiate prescription drug prices. It also penalizes drug companies that raise prices faster than inflation, forcing them to pay a rebate on their Medicare sales, and limits seniors’ out-of-pocket costs for insulin to $35 a month. But excluding the commercial market from the law’s reach was dictated by political necessity and arcane Senate rules.

• How specialty drug ‘solution stacking’ can rein in pharmacy benefit costs. Brokers and employer groups alike know that 5% to 10% percent of insured workers and their dependents drive 50% to 60% of the cost of pharmacy claims. A few members with prescriptions for a specialty drug with a five-figure price tag can easily represent the majority of an entire group’s pharmacy spend. These drugs are often lifesaving or provide a dramatic quality of life improvement for those who take them. No one would question the necessity of using them. But when a group can mitigate some of the cost without affecting the clinical outcome, it can be a game changer. The broker who unlocks these savings becomes a trusted ally.

• Biosimilars shake up US drug market in 2023 and beyond despite ‘problem of complexity. Despite the glacial pace of biosimilar uptake in the United States so far, their use is expected to cut drug costs by $54 billion over the next decade, noted a presenter at the 2022 Rheumatology Nurses Society Conference. “We think biosimilars will drive down drug costs by about $54 billion over the next 10 years,” Christopher Palma, MD, ScM, assistant professor in the department of allergy/immunology and rheumatology at the University of Rochester, in New York, told attendees. Part of the reason for this optimism, according to Palma, is the expected entry of as many as 11 Humira (adalimumab, Abbvie) biosimilars into the U.S. marketplace through the end of 2023. AbbVie’s blockbuster Humira is currently the highest-grossing drug in the world, netting the company $16 billion in U.S. revenue and $19.8 billion in global revenue in 2020 alone.

An ownership mindset means taking responsibility for outcomes and being empowered to make the decisions that will lead to those outcomes. To cultivate an ownership mindset on your team, focus on transparency, autonomy, and customer empathy[i]. I would like to think the transparency piece swings both ways both internally and externally. In other words, to have an ownership mindset requires us to be transparent with our teams and demand the same from our vendors. Because pharmacy benefit managers falsely use DAW codes to reduce the number of rebate eligible claims, one can’t stress enough the importance of pharmacy benefit manager (PBM) contract language.

We’re at the tail end of yet another PBM selling season. Not much has changed as PBM proposals – optics – are being placed on a spreadsheet for comparative analysis. There is little regard for evaluating and memorializing contract terms which drive lowest net cost and full disclosure. The language (transparency or lack thereof) in a PBM contract has the biggest impact on PBM cost performance. More specifically, whether a plan sponsor has entered a fair deal or bad deal with a pharmacy benefits manager.

Manufacturers dictate to PBMs which claims are eligible to earn refunds or rebates, for example. The list of claims not eligible for rebates is long! Here is a brief list of claims excluded by drug manufacturers from eligibility for rebates.

• Reversed Claims or Claims for non-eligible Members
• Claims where the Member pays 100% of the cost of the product without subsequent reimbursement under a Benefit Plan (e.g., discount card program), except where Member may pay for the full cost during a deductible or similar period under a Benefit Plan
• Compounds
• LDD
• Home Infusion (claims from IV infusion hospitals are excluded but not necessarily the infusion itself)
• Indian Health/Tribal Serv
• LTC
• Military/DoD
• OTC (except certain test strips for which we get a rebate)
• Vaccines
• Veterans Affairs

It is understandable why drug manufacturers compile an exclusion list of claims before paying rebates. What I can’t reconcile is a non-fiduciary PBM adding to this already exhaustive list of exclusions. Moreover, consultants reviewing proposals must consider the number of claims for which rebates are being paid or are going to be paid. Below are exclusions which should not be allowed but are often left in the contract allowing the PBM to retain the full dollar amount of rebate payments for these types of claims.

• Dispense As Written (DAW) Claims with code 1
• Dispense As Written Claims with code 2
• Dispense As Written Claims with code 5
• Claims with greater than 50% Member cost share

DAW codes are set up by PBMs in our claims adjudication software platforms! One of my Certified Pharmacy Benefits Specialist (CPBS) students wrote, “this is a good course to learn how PBMs nickel and dime their clients to death.” How DAW codes are employed is at the discretion of the PBM and/or sophisticated plan sponsor. In the list of exclusions shared above, DAW codes are being used to generate hidden cash flow. Conversely, PBMs are increasing the final plan cost for their clients. DAW codes are not the only source of rebate spreads, outcomes or value-based refunds are other examples.

DAW 9 has become increasingly popular and is being put into place by non-fiduciary pharmacy benefit managers. In short, even when prescribers write a prescription and sign Product Substitution Permitted — the pharmacist must dispense the brand name product for the product to be covered by the patient’s insurance. This is done by changing the computer DAW code from a 0 to a 9[ii]. Non-fiduciary PBMs make more money from rebates at the expense of their clients not being able to attain the lowest net cost.

Pharmacy Benefit Managers (PBM) Falsely Use DAW Codes to Reduce the Number of Rebate Eligible Claims

Non-fiduciary PBMs have learned how to leverage the purchasing power of unsophisticated plan sponsors to their financial advantage. They give you the optics or what you want to see in exchange for what equates to a blank check. PBM contract language gives the purchaser a peek into the future as to what is really going to happen – after the plan goes live! Contract nomenclature will dictate how a PBM behaves.

A contract with radically transparent language prevents the PBM from taking a rent-seeking strategy. Proposals with opaque contract language should be discounted. Conversely, proposals with radically transparent contract language should be given a premium. Make sure your broker or consultant is an expert at scoring PBM contracts. Ask for samples of their contract scorecards and the methodology. That is step one. Step two is recognizing drafting, negotiating, and finalizing a contract with a PBM are the three most important tasks during a competitive bidding process.

[i] Goff-Dupont, May 25, 2021, 3 signs your team doesn’t have an ownership mindset and what to do about it, August 16, 2022, https://www.atlassian.com/blog/leadership/how-leaders-build-ownership-mindset

[ii] Blakemore, January 6, 2018, The increasing use of DAW 9 and its potential impact on pharmaceutical care, May 12, 2020, https://samblakemore.com/2018/01/06/the-increasing-use-of-daw-9-and-its-potential-impact/