In 1970, Milton Friedman’s article “The Social Responsibility of Business is to Increase its Profits” set the standard that has long been followed. The leaders of some of America’s biggest companies are chipping away at the long-held notion that corporate decision-making should revolve around what is best for shareholders.
The Business Roundtable recently changed its statement of “the purpose of a corporation.” No longer should decisions be based solely on whether they will yield higher profits for shareholders, the group said. Rather, corporate leaders should take into account “all stakeholders”—that is, employees, customers and society writ large.
Many purchasers (plan sponsors and their advisers) select the PBM vendor who puts the lowest price on the table. Lowest price involves several variables including admin fees, rebate guarantees, AWP discounts and most important contract language. The problem is plan sponsors are putting a premium on the “numbers” and largely discounting the contract language.
Non-fiduciary PBMs subscribe to Mr. Friedman’s philosophy. They will overcharge for their services if plan sponsors continue to put financials over contract language in a PBM services agreement. Consider this, non-fiduciary PBMs know how you evaluate proposals and tailor their pitches to your procurement strategy.
A fiduciary is the highest standard of care yet shouldn’t be the goal for every plan sponsor. The goal for every plan sponsor should be radical transparency. Once a plan sponsor acquires superior market knowledge and overcomes information asymmetry, they are winning radical transparency. Sometimes though it requires walking away from the free dispensing and free admin fee proposals that non-fiduciary PBMs are putting in front of you. Not an easy thing to do unless you attain superior market knowledge.
It is a myth that the Big 5 offers better price savings just because of their size. Sure, they have more purchasing power, but their clients often don’t realize the full benefit. For example, if my rebate aggregator pays us a $3000 rebate for drug “A” every penny goes back to the client with an audit trail. The Big 5 might earn $4000 on that same drug, but retains $1200 in-house. The plan sponsor pockets an additional $200 working with a radically transparent, albeit smaller, PBM. A similar scenario plays out in mail, specialty and retail pharmacy networks.
Price quotes are simply an estimate of what the plan sponsor would have spent had the historical utilization matched that of the proposing PBM (a lot in this sentence). Furthermore, the future actual cost is unknown. As a result, the plan sponsor’s PBM contract is the most important tool to address the actual level of spend – not cost projections.
If you’ve never considered the PBM service fee in how you procure pharmacy benefit management services, watch the 5-minute video. The PBM service fee isn’t what you think it is. It is the fee a PBM recoups for providing their services to plan sponsors. For non-fiduciary PBMs, the bulk of this fee is buried in the final plan pharmacy cost.
I am the proud founder and managing director of TransparentRx, a fiduciary-model PBM based in Las Vegas, Nevada. We help health plan sponsors reduce pharmacy spend, by as much as 50%, without cutting benefits or shifting costs to employees.