Posts Tagged ‘PBM Direct Contracting’

PBM Consulting – Networked?

Tuesday, June 8th, 2010

To quote the great Peter Finch’s character Howard Beale in Network  ”….My life has value….I’m mad as hell, and I’m not going to take this anymore.”   I guess this may apply to anticipated potential unrest when pharmacy benefit plan sponsors go to renew their CVS/Caremark contracts and find out that Walgreens has decided to drop out of the Caremark network. While it won’t take effect for current contracts, it will apply for all new contracts and renewals.  With the announcement yesterday (http://bit.ly/cUXu80), Walgreens sent the analysts scurrying for answers.  Was this a pre-emptive strike against an arch-rival, a response to the market impact that Caremark’s Maintenance Choice (90-Day at Retail program) has had, or a little of both?  Maybe even a little competitive envy, since Walgreens PBM arm, Walgreens Health Initiatives, offers a similar 90-Day at Retail program to Caremark’s, called Advantage 90.  In any case, it was a bold announcement by Walgreens, since the Caremark business represents about 11% of their revenues!

In our opinion, this movement is the beginning of what we’ll call “Being Networked.”  It’s actually a progression of what we at WBC (www.wbcbaltimore.com) , and others have called “The Walmart Effect,”  i.e., bringing improved pricing through select networks (we like that term over “restricted”).  Being Networked then means that plan sponsors will be presented the choice of reducing the size of their PBM network in exchange for improved pricing, all while trying to balance any potential employee/member noise over the loss of retail outlets.  In the case of Walgreens and Caremark, however, the plan sponsor won’t have a choice.  Walgreens has made it for them!

A number of issues remain to be seen. Will Caremark find 1/1/11 renewals difficult to sell, without the Walgreens stores?  Will employees/members really care?  Will improved discounts off of AWP (as a result of a select network)really change the net cost of drugs to any substantial degree?  As in most areas of PBM-ology, the answer is ” It depends.”   Mostly, it depends on the geography of the plan sponsor and their employees/members. In many areas, Caremark can easily jettison Walgreens without missing a beat.  Benefit managers will hardly hear a peep from employees, simply because  CVS, Rite-Aid, Walmart, Target and the supermarkets offer more than adequate access.  The fact is, just about no plan sponsors needs the full 60,000+ store retail networks offered by most PBMs. The opposite is also true in some markets where Walgreens rule.  It should be interesting to see what happens in metro NYC with the Duane Reade chain that was purchased by Walgreens in March 2010 and remains the dominant retail outlet in that market .

The real story behind the story, however, in the opinion of WBC,  is how does a plan sponsor select a PBM to manage their pharmacy benefit?   The plan sponsors generally are looking for three things:  reduced cost, member satisfaction, and management assistance so the H.R. departments aren’t taxed with pharmacy benefit- related issues. This announcement from Walgreens may motivate plan sponsors to dig a little deeper as to what they are receiving from their PBM. We believe it should also open the discussion regarding not just meaningless superficial discounts in a spreadsheet analysis, but real  plan management for significant reduced net cost.

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PBM Consulting – Restricted Networks

Monday, January 18th, 2010

2010 is in full-swing and PBM trends for the year are beginning to take shape. One trend that will gain momentum this year is the use of restricted pharmacy networks.

Restricted NetworksAt one time, the larger networks were considered a competitive advantage, providing maximum convenience to enrolled populations.  The realtiy is that very few plans need the “convenience” of 57,000+ participating pharmacies.  In some metropolitan areas, there are literally pharmacy options on every corner. Most plans can meet the needs of their employee/members with a 15,000-18,000 store network, and in some cases, substantially less. The benefit of losing this excess baggage are better discounts and lower net pricing.

It has been interesting to listen to the dialogue that has evolved between finance and human resources within organizations that are considering more aggressive cost-reduction proposals for controlling their benefit costs. We have heard from several CFOs who were willing to disregard any anticipated employee disruption as a result of making this move.

Walmart and Walgreen’s are two chains that are being very aggressive in their promotion of creating a more “exclusive” retail alternative. Plan sponsors can achieve better net cost by steering employee/members to the stores of choice. The Caterpillar experience and the associated publicity will provide ground-breaking evidence (or not) that this strategy is one to be emulated by other sponsors.

Another alternative to consider for those sponsors who want to maximize their prescription drug cost savings while providing employees with more-than-ample choices for script fulfillment is to contract with a PBM that embraces full pass-through or acquisition cost pricing. This business model utilizes  an administrative fee as the primary or, in some cases, the only revenue source to the PBM. All discounts, rebates and purchasing incentives are passed-through to the plan sponsor without the creation of pricing spreads, thereby reducing the size of the invoice that gets presented to the plan sponsor for payment.

All-in-all, the aftermath of AWP pricing adjustments has created an environment where plan sponsors are questioning the discounting methodology typically deployed and are searching for better value. Restricted networks may be a useful alternative.

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PBM Contracting – Big Gorilla in the Room

Wednesday, November 25th, 2009

Reviewing pharmacy benefit management (“PBM”) contracts has become just as much art as science. Sure, you can create a checklist of contractual definitions and provisions, and you can negotiate the financial and legal issues, but sometimes it boils down to how much does the vendor really want your business? That’s where the “art” comes into play.

The consultant must be able to present the client opportunity as the kind of account that the PBM wants and needs. Some are obvious to the vendor, while some other smaller accounts need some finesse.  The “Big 3″ remain only three because of their ability to accept risk that many of their smaller competitors refuse to assume.image It really can put them in the position of the 800-pound gorilla.  As consultant “artists” we need to read beyond the standard checklist and get to the heart of the matter, i.e., will the vendor provide our client with not only great pricing, but provide adequate protection in the event of things going south for the plan and its members as the result of PBM error, negligence or malfeasance.

For example, one of our recent clients had us negotiate their PBM contract with a new vendor. The pricing was substantially better than any of their competitors and we negotiated all of the significant contractual provisions that can wreck havoc on finalizing a deal. It came down to how much risk did the vendor want to assume. The answer was not enough to give the client comfort.

The trade-offs remain. The large public PBMs have scale and will usually acquiesce to provide greater contractual protections. Yet, by being public, they must operate in a much higher net profit margin-per- script environment in order to meet their expected quarterly earnings reports for Wall Street. As a result, their pricing and net costs presented to clients are usually not as competitive as some of their smaller rivals.  Private PBMs, on the other hand, can operate on much smaller margins and are more likely to offer true pass-through or acquisition cost pricing as their competitive difference. However, they generally don’t want to expose themselves to liability that outweighs the value of the account. Why go on the hook for millions if they are only earning $150K for providing services? Additionally, some of them are controlled by a few shareholders who can accept or reject business based on their own personal whims or bias.  And there lies the rub.

Plan sponsors need to have their consultants understand that price alone or protection alone does not provide a “one size fits all” solution. Striking an artful balance usually wins the day. At least until market forces or regulation drives all of the PBMs to follow one business model and market conduct for servicing their clients.

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AWP Settlement – Should Change Everything

Sunday, September 27th, 2009

Finally, September 26th has come and gone, the effective date of the new AWP settlement changes. Your PBM is still processing claims.  Members are still having their drug cards honored at the image pharmacy counter and if you are a drug benefit plan sponsor, you’ll be receiving adjusted invoices to reflect this momentous event.  The problem is that for most plan sponsors, all this “normalcy” is a bad thing!

The adjustments that many had hoped would happen as a result of the settlement, have been altered in a way that creates no economic improvement for the pharmacy benefit plan sponsor! The AWP settlement involved a roll-back of the AWP benchmark pricing for 1,400 drugs that had been artificially inflated. If you were a plan sponsor that relied on an AWP benchmark provided by First DataBank or Medi-span, then you were entitled to file an application to be part of the class action settlement fund. One would think that an adjustment to pricing that lowered the cost of drugs should be  benefiting  the folks who pay for those drugs, i.e., the plan sponsors and their members.  However, most PBMs have included language in their contracts that enables them to make an adjustment in their pricing, so that the “original economic intent” of the contract is maintained.

Most of these same PBMs have sent letters to their clients asking them to sign amendments acknowledging these changes. The requested change is usually in one of two forms: either a reduction in contractual discounts; or a decision by the PBM to maintain their own AWP benchmark that keeps the same markup to wholesale acquisition cost (“WAC”) thereby re-creating the same AWP that was in effect prior to September 26th!

Rather than just let this practice slide as a”business as usual” routine, WBC thinks it should be a great watershed event in the evolution of pharmacy benefit management. When pricing improvements such as this one occurs, a plan sponsor should use the moment to re-qualify their PBM. Is the PBM committed to a mission of serving the exclusive benefit of the plan and their members, or do they have an overriding imperative to serve their own shareholders?

Adjustments to maintain the “economic intent” are designed to maintain the PBMs net margins and  comes at the expense of the plan.  We believe that this pricing event creates the perfect environment to challenge the validity of the whole “AWP Discount” model.  It should be compared to true acquisition cost pricing as a form of direct contracting, an approach that refines the role of a PBM and enables the plan sponsor to dramatically reduce the cost of prescription drugs to the plan and their members.

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AWP Settlement Changes Your PBM Contract

Saturday, August 29th, 2009

The First DataBank/Medispan/McKesson litigation settlement is finally coming home to roost. The impact begins with the scheduled change in Average Wholesale Price (“AWP”) benchmarks occurring imageon September 26, 2009. For prescription drug plan sponsors, it presents a potential opportunity to sit down with your PBM and renegotiate your cost structure (www.wbcbaltimore.com).

Of course, that’s the last thing that PBMs want you to do. They much prefer that a plan sponsor simply accept their seemingly benign language to accommodate a “business as usual” continuity. We believe it should be anything but status quo.

Let’s revisit the settlement: First DataBank and Medispan publish AWP. McKesson, the country’s largest drug wholesaler, had inflated the price by adding 25% rather than their practice of adding 20% to Wholesale Acquisition Cost (“WAC”). The selement calls for AWP to be reduced so the markup will be no greater than WAC plus 20%. This should mean a reduction in cost to the plan sponsor.

But, not so fast! Many PBMs business models are built on creating pricing spreads between what they must pay wholesalers for drugs and what they bill plan sponsors. Their margins are dependent on these spreads, so any reduction in baseline cost to the plan sponsor without a corresponding reduction in their wholesale price erodes the PBMs margins!

That’s why most of the PBMs have included language in their contracts that addresses a change in AWP or the use of an alternative pricing benchmark. Their language calls to maintain the “original economic intent” of their agreements. WBC asks “Who’s original economic intent?” We thought the PBM’s job was to reduce the plan sponsors cost. In our opinion, any changes that create cost savings to the plan sponsor should belong to the sponsor not inure to the benefit of PBM shareholders.

In order to maintain the status quo, most PBMs are suggesting that adjustments be made to reduce the pricing discounts in their contracts so that the net result is cost-neutral to themselves and their clients. This may mean that an AWP-16% discount might become AWP-14.5%, for example.

Some plan sponsors may feel these adjustments are fair and reasonable. On the other hand, it may present an opportunity to re-think the basic business model deployed by your PBM and whether their business goals are aligned with yours. The questions of real transparency, acquisition-cost pricing and direct contracting are much bigger issues and have vastly greater savings impact than just an adjustment in AWP markup.

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