Prescription Drug Benefit Plans: chcf A Buyer’s Guide January 2003 Prescription Drug Benefit Plans: A Buyer’s Guide Prepared for CALIFORNIA HEALTHCARE FOUNDATION by Mercer Human Resource Consulting chcf January 2003 Acknowledgments Mercer Human Resource Consulting helps clients understand, develop, implement and quantify the effectiveness of their human resource programs and policies. Our goal is to help employers create measurable business results through their people. Mercer Human Resource Consulting is a leading global consulting firm with more than 13,000 employees in some 140 cities and 40 countries. Mercer consultants work with clients to address a broad array of their most important human resource issues, both domestically and globally. This report was developed by consultants in Mercer’s Health Care & Group Benefits Consulting Practice. Employers and other plan sponsors look to Mercer as the world’s leader in the design, funding and delivery of group benefit plans, in general, and pharmacy benefits, in particular. About the Foundation The California HealthCare Foundation, based in Oakland, is an independent philanthropy committed to improving California’s health care delivery and financing systems. Formed in 1996, our goal is to ensure that all Californians have access to affordable, quality health care. CHCF’s work focuses on informing health policy decisions, advancing efficient business practices, improving the quality and efficiency of care delivery, and promoting informed health care and coverage decisions. CHCF commissions research and analysis, publishes and disseminates information, convenes stakeholders, and funds development of programs and models aimed at improving the health care delivery and financing systems. Additional copies of this report and other publications can be obtained by calling the California HealthCare Foundation’s publications line at 1-888-430-CHCF (2423) or visiting us online at www.chcf.org. ISBN 1-932064-26-5 Copyright © 2003 California HealthCare Foundation Contents 6 I. A Strategic Guide for Plan Sponsors 7 II. To Insure or Self-Insure? 11 III. To Carve-in or Carve-out? 14 IV. Retail Pharmacy Network Pricing 18 V. Mail-Order Pricing 20 VI. The Ins and Outs of Rebates 24 VII. Administrative Costs and Fees 27 VIII. Clinical Services and Pricing 31 IX. Collective vs. Individual Purchasing 33 X. Less Tangible Values 35 XI. What’s Ahead 36 Glossary I. A Strategic Guide for Plan Sponsors PRESCRIPTION DRUG BENEFIT PLAN SPONSORS face a daunting array of complex purchasing options. Manage- ment services are often priced in such a way that overall costs are obscured. Comparison-shopping can be next to impossible because elements of pricing are not consistent from one pharmacy benefit provider to the next and can depend on factors that are not easily assessed. To navigate this confusing landscape of pharmacy benefit providers and products, and to make appropriate choices, it is essential to understand the lay of the land. This guide will help plan sponsors negotiate contracts with prescription drug benefit service administrators — whether they be stand-alone pharmacy benefit managers (PBMs), such as Medco Health, AdvancePCS, or Express Scripts, or those housed within a health plan, such as Aetna, CIGNA, or a BCBS organization. This guide can be used as a tool to review pricing options, evaluate the cost of prescription drug plans, and know which questions to ask and how to interpret the responses. Starting with the basic decisions — to insure or self-insure, to carve-in or carve-out — this guide will alert buyers to the nuances and complexities of retail and mail-order pricing, manufacturer rebates, administrative costs, and clinical services, and provide a list of key questions to ask providers about each of these areas. In addition, it will consider the pros and cons of collective purchasing, as well as some less tangible items that contribute to a pharmacy benefit plan’s long-term success. The intent is to provide sufficient information to help plan sponsors negotiate the most favorable financial arrangements, resulting in lower costs for the plan sponsor and greater affordability for plan members — the consumers. 6 | CALIFORNIA HEALTHCARE FOUNDATION II. To Insure or Self-Insure? A PLAN SPONSOR’S DECISION WHETHER TO PURCHASE an insured pharmacy benefit or to self-insure depends upon the sponsor’s willingness and/or ability to accept financial risk. In a self-insured arrangement, the plan sponsor assumes risk for the impact of fluctuations in prescription drug costs from month to month. In an insured arrangement, the risk is transferred to an external pharmacy benefits administrator, and the plan sponsor is responsible solely for the payment of monthly premiums. Arrangements with health plans can be either self-insured or fully insured. Arrangements with stand-alone PBMs tend to be self-insured, though there are exceptions. (If a PBM offers a fully insured arrangement to a plan sponsor, the PBM generally needs to partner with a reinsurer, because PBMs are generally not licensed insurance carriers.) While purchasing an insured benefit absolves the employer from assuming greater risk and potentially higher costs, self-insurance provides more opportunity to exercise input on how the benefit is structured and allows for more direct negotiation of discount levels. The main advantages and potential drawbacks of each of these arrangements are summarized in Table 1. Table 1. Advantages and Drawbacks of Self-Insured vs. Insured Pharmacy Benefit Services Main Advantages Potential Drawbacks Self-Insured • Allows flexibility in plan design, • Increases sensitivity to annual formulary, and pharmacy volatility of prescription drug management. costs and rising drug benefit • Avoids legislated coverage expenses. mandates and risk premiums • Imposes a greater burden on (appeals to national employers implementing programs to because it avoids mandates control costs. that differ by state). • May pose too great a financial risk for small plan sponsors. Insured • Avoids risk and potentially • Limits or prohibits control of higher costs by transferring mandated benefits, premium claims risk to health plan increases, and plan design, which or PBM. are determined by the health plan’s cost-control measures. • May impose stricter access and utilization controls on members. (These controls can also exist under a self-insured arrangement.) Prescription Drug Benefit Plans: A Buyer’s Guide | 7 How PBMs Absorb Financial Risk it has little or no control, plan pricing will likely While it is rare for stand-alone PBMs to fully be less aggressive. insure pharmacy coverage, they usually absorb some portion of financial risk by offering Health Plans and Financial Risk guarantees for the following: Since health plans or insurers do not exclusively Brand-name drug discounts. Discounts on focus on pharmacy benefits as PBMs do, the brand-name drugs filled in a retail setting are based level of attention devoted to pharmacy varies on the PBM’s contracts with retail pharmacies. from one plan to another. Some of the largest Generally, if the discount percentage guaranteed national health insurers operate their own PBMs; is not achieved, the PBM is obligated to provide other national insurers subcontract all or some some compensation to the plan sponsor, either portion of pharmacy benefit management to an making up the difference dollar for dollar or outside PBM. Nationally, different Blue Cross paying a predetermined penalty. Conversely, Blue Shield plans have adopted variations on brand-name discounts for prescriptions filled at both strategies. mail-order pharmacies are negotiated directly Under an insured arrangement with a health with the PBM, so there is little risk for the PBM plan, pharmacy costs are sometimes blended with that the negotiated discount will not be reached. medical costs in the premium. In other cases, Generic drug discounts. PBMs are willing there is a separate prescription drug-rider rate. to guarantee the discount achieved on generic When plan sponsors purchase the coverage on medications through maximum allowable cost a fully insured basis, they limit their risk for the (MAC) pricing (see sidebar on page 8). It is prescription drug benefit, but they may also limit important for a plan sponsor to understand their input on how the prescription drug benefit how the effective discount will be measured. is constructed. To maximize the possibility of a Guarantees are only meaningful if they can be financially viable pharmacy benefits program, successfully measured, reported, and enforced. a plan sponsor should ask its health plan to do the following: The generic dispensing rate. PBMs are willing to guarantee the generic dispensing rate because ■ Separate prescription drug cost, utilization, they can influence the degree of generic substi- and trend data from the medical data. This tution (substituting a generic for a brand-name will make it easier to compare PMPY drug drug), although to a lesser extent at retail than benefit costs and annual trends with national via mail order. benchmarks. ■ Clarify whether rebates are built into the Average annual per member prescription costs. benefit premium. While plan sponsors may It is not common for PBMs to price drug benefit believe that they are not receiving rebates from management services on a per member, per year a health plan because rebate checks are rarely, (PMPY) basis, as the PBM usually has limited if ever, issued, rebate savings may be provided control over the number and type of prescriptions indirectly as part of the premium. written and the associated average cost per prescription. In a situation such as this, where a PBM is essentially being asked to share in the financial risk for an aspect of the plan over which 8 | CALIFORNIA HEALTHCARE FOUNDATION ■ Provide documentation of the utilization management programs included in the premium cost. These programs are critical to successful cost containment and may ultimately help to lower medical benefit plan increases through more competitive experience-based premium adjustments. Plan sponsors can compare the health plan’s utilization programs to similar programs offered by PBMs. ■ Provide a clear statement of health care management strategies and review these to identify cost containment opportunities. The more effectively the health plan is able to influence the prescribing physician’s behavior, the greater the cost savings potential. Under self-insured arrangements with health plans, plan sponsors can directly negotiate financial terms such as discounted prices, dispensing fees, and rebates with the health plan, just as they can in a stand-alone PBM arrangement. The health plan’s flexibility in altering these financial terms, however, is usually limited. This is particularly true when the health plan outsources these services to another provider. In addition, financial terms offered by a health plan are rarely guaranteed. Prescription Drug Benefit Plans: A Buyer’s Guide | 9 Maximum Allowable Cost (MAC) Pricing for Generic Drugs When a drug is no longer protected by a Because the generic marketplace is dynamic, commercial patent, other manufacturers have MAC pricing can be somewhat difficult to the right to produce it as cheaply as possible compare. Although the methodology used to and sell it. After a drug’s patent has expired, determine the MAC price varies from PBM to generic versions of the same compound will PBM, the effect is to set a reasonable price often be introduced to the market to compete limit on the unit cost of a particular generic with the original branded version. There can drug. The PBM reimburses the retail pharmacy be many generic equivalents of a brand no more than the MAC price, regardless of medication. For widely used products, generic which manufacturer’s product or package size manufacturers may introduce a number of the pharmacy dispensed. This encourages the generic medications into the market, and their pharmacy to exercise prudence in their choice prices will likely vary by manufacturer. of generic products. If they dispense a generic product that is more expensive relative to Reimbursement for generic drugs is based on competing products, they may not make a either of two pricing methods: profit on that sale. 1) Discounted average wholesale prices Each PBM maintains its own proprietary MAC (the “average average wholesale price” or list, and their MAC price lists vary in the AAWP). These benchmark prices, set by number of generic products included on the list averaging across the spectrum of chemically and the maximum price for generic products in equivalent compounds available in generic relation to the average wholesale price (AWP). form, are published for many generic The composition of the MAC list changes over medications. This average includes both time as more generic products are introduced. brand-name and generic drugs. The financial impact of these variations over 2) Maximum allowable cost (MAC) pricing. time and between PBMs can be significant. MAC prices are a schedule of pricing for Furthermore, several PBMs have more than generically equivalent drugs. one MAC list, which can result in more or less savings to the plan sponsor. To further compli- The federal government originally introduced the cate matters, the financial impact of a particular concept of MAC pricing for generic medications MAC list will vary from plan sponsor to plan in the Medicaid program as a mechanism to sponsor because of the impact of such factors lower costs. The Centers for Medicare and as demographics and plan design. Medicaid Services (CMS, formerly HCFA) still maintain the CMS MAC list and continue to use it to set Medicaid generic reimbursement levels. Several PBMs have developed their proprietary MAC based on the CMS MAC. In comparison to current PBM MAC lists, the CMS MAC sets a ceiling price for relatively few generic products, is not updated frequently, and sets relatively high prices. 10 | CALIFORNIA HEALTHCARE FOUNDATION III. To Carve-in or Carve-out? IN ADDITION TO DECIDING WHETHER TO INSURE or self-insure, employers must decide whether the pharmacy benefit will be administered by a health plan or by a PBM. Some plan sponsors choose to separate, or “carve-out,” pharmacy benefits from medical benefits provided by a health plan. These plan sponsors contract separately, typically with an outside PBM, to administer or manage the pharmacy benefit. Other plan sponsors choose to leave pharmacy benefits with the health plan, or “carve-in.” Larger plan sponsors are more likely to carve-out the pharmacy benefit. According to a national survey, 37 percent of employers with more than 20,000 employees carved-out the pharmacy benefit in 2000, compared to 15 percent or less for those with less than 5,000 employees (see Figure 1). Carved-out contracts are predominantly self-insured by the plan sponsor. Figure 1. Percent of Employers Who Carved-Out Pharmacy Benefits: 2001 40% 37 30% 20% 22 15 10% 13 7 0% 500–999 1,000–4,999 5,000–9,999 10,000–19,999 20,000+ Size of Employer Source: Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans 2001. Plan sponsors that carve-out pharmacy benefits usually select a single PBM to manage the prescription drug program and negotiate with that PBM for discounted prices, dispensing fees, administration and management costs, and minimum formulary rebate earnings. These plan sponsors usually have a better opportunity than those that carve-in to monitor prescription drug expenditures. Prescription Drug Benefit Plans: A Buyer’s Guide | 11 In a carved-in arrangement, the health plan One of the primary disadvantages of using a manages and administers the pharmacy benefit. health plan for pharmacy benefit management While most carved-in arrangements tend to be services occurs when pharmacy and medical insured by the health plan, there are some plan premium rates are combined, thus leaving the sponsors (usually the large ones) that have self- plan sponsor with no ability to negotiate insured arrangements with their health plans. prescription drug premium rates. However, if the In fully insured carved-in arrangements, the prescription benefit arrangement is self-insured, employer can sometimes negotiate an overall a plan sponsor can directly negotiate financial medical and prescription drug premium with terms such as discounted prices, dispensing fees, the plan. Many health plans use PBM services and rebates with the health plan. On the other selectively to manage certain portions of the hand, the health plan’s flexibility in altering these pharmacy benefit, such as mail-order services. financial terms is usually limited. These financial provisions are usually not PBMs typically provide greater flexibility in terms disclosed, so a plan sponsor that is interested in of size and composition of the pharmacy network knowing about such provisions should ask its than do health plans. The competitiveness of a health plan about the use of outside entities. PBM’s discounts can depend on the pharmacy network access arrangement that the plan sponsor PBMs vs. Health Plans selects. Most PBMs offer more than one pharmacy Both PBMs and health plans leverage the size of network to plan sponsors, usually including a their respective business to negotiate rates with restricted network option with more aggressive retail pharmacies. PBMs tend to leverage their discounts and lower dispensing fees. national scope, and sometimes their regional The largest PBMs own more than one mail-order presence, to secure competitive discount and facility. By handling a high volume of claims dispensing fee arrangements. Health plans tend through these facilities, PBMs can secure more to leverage geographic concentrations of plan aggressive discounts from wholesalers and manu- participants to secure aggressive discounts and facturers than most retail pharmacy chains can. dispensing fee agreements with retail pharmacies. Plan sponsors with a high level of mail-order A potentially significant advantage of purchasing utilization can usually negotiate more competitive pharmacy benefit coverage through a health plan mail-order discounts with PBMs. Some health is that medical and pharmacy claims can be plans own mail-order facilities and can also integrated, facilitating health care management. leverage claims volume to secure competitive By combining information derived from both discounts on certain drugs, but many health plans sources, plans can identify at-risk patients and outsource mail-order pharmacy to selected PBMs. set up potentially cost-saving disease and health The advantages and drawbacks of PBMs and management programs. In practice, however, health plans are summarized in Table 2. the level of integrated care taking place in health plans varies significantly. And in some instances, pharmacy costs can be difficult to isolate and control when medical and pharmacy coverage are integrated. 12 | CALIFORNIA HEALTHCARE FOUNDATION Table 2. PBMs vs. Health Plans: The Pros and Cons PBMs Health Plans Main Advantages • Regularly provide a full range of formulary options. • Typically accept risk. • More likely to offer guarantees on discounts and • Offer the potential for integration of health care financial and service performance. through clinical tie-in to medical data. • Offer a greater degree of choice in size and make-up • May provide for more aggressive financial terms of pharmacy network. leveraged by health plan’s business, particularly for • Allow for plan design and utilization management smaller plan sponsors. customization. • Tend to provide more detailed, flexible reporting. Potential Drawbacks • Accept limited risk. • Do not always separate pharmacy and medical cost • May offer complex and difficult to understand data, making it difficult to isolate and control financial arrangements. pharmacy costs. • May seem unwilling to disclose key information • Tend to provide less detailed reporting, leading to about pharmaceutical agreements. uncertainty about financial terms supporting premium rates. • May have conflicting motivations caused by manufacturer agreements. • Have limited flexibility to negotiate premium rates and modify pharmacy benefit. • Don’t usually offer guarantees on financial terms and service or performance. • Provide a limited range of formulary options; usually have an established formulary that may be restricted or closed. Prescription Drug Benefit Plans: A Buyer’s Guide | 13 IV. Retail Pharmacy Network Pricing THE PRICE THAT PLAN MEMBERS PAY FOR prescription drugs at a retail pharmacy is a primary function of the contractual relationships between (1) the PBM/health plan and the retail pharmacy, and (2) the PBM/health plan and the plan sponsor. Contracts between the PBM/Health Plan and the Retail Pharmacy PBMs and health plans negotiate with retail pharmacy chain stores as well as independent retail pharmacies to agree upon pricing for retail prescriptions. The resulting contract specifies the following: 1. A formula for the cost of the drug charge to the PBM. This is done by means of: ■ Discounts on brand-name medications set as a percen- tage of the average wholesale price (AWP) for each drug, published in FirstData Bank and its supplements or other nationally recognized pricing sources. ■ Discounts on generic medications, based on a MAC pricing schedule. 2. The dispensing fee (paid to the pharmacist for each prescription). Since generic medications are typically much less costly than brand medications, the PBM may attempt to negotiate terms to encourage the pharmacist to dispense generic drugs, such as setting a higher fee for generic prescriptions than for brand prescriptions, or offering a modest base dispensing fee in conjunction with a periodic bonus for pharmacies that achieve a certain level of generic dispensing. These strategies can lead to cost savings for the plan sponsor. PBMs often develop more than one pharmacy network. The difference between networks is usually the number of pharma- cies in the network and the discounts they offer. Some retail pharmacies are willing to offer deeper discounts on brand and generic medications and lower dispensing fees in exchange for the promise of greater volume of customers resulting from a smaller, more exclusive network. 14 | CALIFORNIA HEALTHCARE FOUNDATION Contracts between the PBM/Health Generic drug reimbursement. Reimbursement Plan and the Plan Sponsor for generic medications is based on either of The contractual relationships between the PBM/ two pricing methods for any given drug: (1) a health plan and retail pharmacies form the discounted AWP (as with brand products) or foundation for the retail pricing offered to plan (2) MAC pricing. Accurately comparing the sponsors. The pricing arrangement negotiated value of one MAC list against another is a between the plan sponsor and the PBM/health complex process. However, most commercial plan specifies a reimbursement formula that is MAC pricing lists usually result in more advanta- used as the basis for each retail prescription drug geous pricing to the plan sponsor than the MAC purchase. A typical reimbursement formula looks list maintained by the Centers for Medicare and like this: Medicaid Services. PLAN SPONSOR PRICE ϭ DISCOUNTED AWP Usual and customary retail (UCR) pricing. ( OR MAC PRICE ) ϩ DISPENSING FEE ϩ TAX This is generally the “everyday counter price” ( IF APPLICABLE ) Ϫ MEMBER COPAYMENT paid by cash-paying customers. When the UCR price is higher than the contracted price, the The pricing elements that most significantly PBM pays only the contracted price. When the influence this formula are (1) brand-name drug UCR price is lower than the contracted price, reimbursement, (2) generic drug reimbursement, the PBM pays the UCR price. The UCR price and (3) usual and customary retail pricing. is lower than the contracted rate when retail Brand-name drug reimbursement. AWP pharmacies offer special pricing on certain brand prices — the most commonly referenced pricing and generic medications, perhaps as a means of method for brand medications in the pharma- attracting business to the pharmacy. ceutical community — change on a periodic In cases where the lowest price at the retail basis. PBMs reimburse plan sponsors for brand- pharmacy is the UCR price, PBMs may pass the name drugs using either of the following savings along to the plan sponsor, depending on methods: the contractual arrangement. Two financial ■ A discount off the AWP. The PBM arrangements are possible: guarantees a certain percentage discount, 1. The PBM may not include UCR pricing although for some prescriptions and as part of the formula used to determine pharmacies the discount may be greater. the price charged to the plan member and ■ An AWP discount range. The PBM charges plan sponsor. the plan sponsor at the rate it has contracted 2. The PBM charges the plan sponsor with each individual or chain pharmacy, whichever is lower, the UCR price or which can vary. In some cases, even though the discounted AWP (or MAC if it is a the reimbursement rate varies by pharmacy, generic medication). the PBM will guarantee the plan sponsor a minimum discount rate computed on an Note that the financial impact of UCR pricing annual basis across all pharmacies. on overall drug expenditures decreases as the contracted AWP discount increases and the dispensing fee decreases. This is illustrated in Table 3. Prescription Drug Benefit Plans: A Buyer’s Guide | 15 Table 3. The Financial Impact of UCR Pricing on Overall Drug Expenditures Contracted AWP Contracted UCR Savings over AWP Discount % Dispensing Fee Contracted Price UCR Price Contracted Rate $100 13% $2.50 $89.50 $88.00 $1.50 (1.7%) $100 15% $2.00 $87.00 $88.00 No savings At the Pharmacy Counter keeps the excess payment. PBMs may use this The PBM discount price arrangements take effect practice to negotiate better discount rates with at the pharmacy counter when the members network pharmacies. present their ID card along with the prescription This practice, known as “zero balance billing” they wish to fill. The pharmacist is able to contact (ZBB) or “zero balance pricing” (ZBP), results the PBM online and determine how the claim is in additional revenue to the pharmacy because to be adjudicated. This enables the pharmacist to the members pay more than the cost of some determine whether the prescription is covered by prescriptions. Table 4 illustrates the impact of the plan, whether there are any requirements that this pricing practice. must be satisfied before dispensing, and, most importantly, what portion of the cost the member Table 4. The Impact of Zero Balance Billing on Member, Pharmacist, and Sponsor should pay. On those occasions when a member Retail Price Less does not present an ID card or is not already in Than Plan Co-pay the pharmacy system, he or she will not receive Contracted Price $9.00 the negotiated discounted price, and may have to pay the AWP plus an additional markup. The UCR Price $12.00 member must then submit a claim form to the Member Co-pay $10.00 PBM to obtain reimbursement. PBMs often Amount Member Pays charge an additional premium to process paper No Zero Balance Billing $9.00 claim forms, so plan sponsors should educate Zero Balance Billing $10.00 members on the importance of presenting the Additional Member Co-pay to Pharmacist ID card at a network pharmacy. under Zero Balance Billing $1.00 Plan Sponsor Pays $0.00 Zero Balance Billing As member co-pays increase, the amount of the PBMs vary in how they determine member “additional co-pay collected” will grow, and a copayment amounts. For inexpensive products, greater percentage of drugs will be affected by sometimes the entire cost of the prescription can zero balance pricing, thereby increasing the be less than the required member copayment. competitive advantage of those pharmacies using Under some PBM arrangements, plan sponsors this practice. incorrectly assume the pharmacy will not charge the member a full copayment when it is more The ZBB practice is not always clearly disclosed. than the cost of the prescription. However, some However, the PBM providers for some large PBMs’ network pharmacy contracts allow the pharmacy chains appear to insist that ZBB be pharmacy to collect member co-pays that are in included in their network contracts. excess of the contracted price. The pharmacy 16 | CALIFORNIA HEALTHCARE FOUNDATION Reporting Key Questions to Ask About To verify that all aspects of plan pricing are admin- Retail Network Pricing istered according to the contract, plan sponsors 1. Is the reimbursement arrangement should require their PBMs to provide regular guaranteed for the length of the contract? periodic reports with sufficient detail to confirm What is the amount at risk if this guarantee that discounts and fees consistently meet expecta- is not met? tions and negotiated arrangements. To date, the 2. Will every prescription be adjudicated at this information provided by health plans has not been rate? If not, how is the reconciliation done? as detailed as that provided by PBMs. One of 3. Is there more than one MAC pricing option the reasons for this difference is that health plans available? If yes, what pricing is associated often combine information on prescription drug with each option? spending and savings into a single report of overall 4. What is the effective discount associated medical costs and savings, making it almost with MAC pricing? Is this guaranteed? impossible for a plan sponsor to identify items 5. If the member’s copayment is greater than particular to the pharmacy benefit plan. the actual cost of the prescription drug as determined by the reimbursement formula, what will the plan member be charged? 6. Can the financial terms of the reimbursement agreement be verified from the cost and utilization data provided on standard reports? 7. Are any drugs subject to different pricing (e.g., specialty or biotech drugs such as Betaseron, Avonex)? Prescription Drug Benefit Plans: A Buyer’s Guide | 17 V. Mail-Order Pricing MOST MAJOR PBMS AND SOME HEALTH PLANS own and operate one or more mail-order facilities. Smaller PBMs and many health plans subcontract with a mail-order provider. Mail-order purchasing can be financially advantageous to the plan sponsor for several reasons: ■ Mail-order facilities can purchase large volumes directly from manufacturers or wholesalers, thus reducing per-unit costs. ■ Mail-order facilities can manage more effectively what members purchase to generate additional price breaks from manufacturers in the form of rebates. ■ Automation and higher volume make the cost of filling prescriptions lower at the mail-order pharmacy. ■ The administrative and dispensing fees are often lower at mail-order pharmacies. ■ Greater days’ supply limit (e.g., 90 days at mail-order vs. 30 days at retail) allows lower overhead cost per unit dispensed. Pricing is typically expressed as AWP less a discounted percent for both brand and generic medications. Occasionally, PBMs offer MAC pricing on mail-order generic purchases, but MAC pricing at mail order does not generally convey a significant financial advantage over non-MAC generic pricing. The plan sponsor’s reimbursement formula for a mail-order transaction is: PLAN SPONSOR PRICE ϭ DISCOUNTED AWP ( OR MAC PRICE ) ϩ DISPENSING FEE ϩ TAX ( IF APPLICABLE ) Ϫ MEMBER COPAYMENT While this formula is identical to the retail pharmacy formula, the ultimate mail order price will also reflect elements unique to mail order: Postal expenses. Mail order has the added expense of shipping costs, which are included in the dispensing fee or treated as an additional charge. When the shipping cost is included in the dispensing fees, there may be some contingency for increasing the cost when postal rates increase. Some PBMs provide postage-paid return envelopes to plan members. 18 | CALIFORNIA HEALTHCARE FOUNDATION Package size. PBMs typically save more money Even though these pharmaceuticals are small in through mail order purchasing, and will often number, they include relatively expensive pharma- pass along some if not all of the entire benefit to ceutical therapies, some of which cost upwards of the plan sponsor and members. The advantageous $1,000 per dose. Plan sponsors need to explicitly pricing is the result of buying large quantities of inquire about the pricing of specialty drugs. certain medications. The PBM often buys medi- Zero balance billing. Some PBMs/health plans cations at a lower price per unit, but may charge practice ZBB at mail order, collecting the full the plan sponsor the higher unit cost. Similarly, co-pay even when it is more than the cost of the for large volume liquid medications, the PBM prescription. Presumably, they then build these may charge the plan sponsor on the basis of pint- extra co-pays into their pricing model to offer sized packages, keeping the differential in price sponsors a better financial arrangement. This as profit. practice is often justified to plan sponsors as a In evaluating mail-order reimbursement formu- way to simplify the co-pay collection process. las, an assessment of pricing proposals should include whether the PBM bases charges on costs Reporting for smaller package sizes or whether they pass on the savings from bulk purchases to the plan Periodic financial reports should show sufficient sponsor. As Table 5 illustrates, the price differ- detail to confirm that discounts and fees consist- ence can be substantial. ently meet expectations. Plan sponsors should verify the contractual terms of plan pricing, and, Table 5. Price Differential between Sample as an added measure, consider performing an Medications Supplied in Larger audit to determine whether contractual agree- Quantities vs. Smaller Quantities ments are being upheld. 1 0 0 TA B L E T S Prinivil, 20 mg Vasotec, 10 mg Prescription Cost Using 100-Tablet Package $112.80 $123.85 Key Questions to Ask About Mail Order Pricing 10,000-Tablet Package $110.57 $119.12 Price Differential 1. Is the reimbursement arrangement for 100 Tablets $2.23 $4.73 guaranteed for the length of the contract? What is the amount at risk if this guarantee % Price Differential 2% 4% is not met? 2. Is mail-order pricing based on the actual Specialty drugs. Certain pharmaceuticals, such dispensed size or a fixed package size, as injectable biotechnology medications (e.g., such as 100s or pints? interferons), require special handling or may be 3. Is MAC pricing used at mail order? too costly for retail pharmacies to keep on hand. What is the effective discount associated These types of drugs are frequently available only with this MAC pricing and is it guaranteed? from a mail order facility or a specialty drug 4. Are any drugs subject to different pricing distributor. Such medications may be sold at (e.g., specialty or biotech drugs such as Betaseron, Avonex)? different discount levels than discount levels 5. Are dispensing fees subject to any from those of other medications and may incur increases (e.g., for postage increases)? associated handling fees. Additionally, AWP pricing for these types of medications can vary from one PBM or health plan to another. Prescription Drug Benefit Plans: A Buyer’s Guide | 19 VI. The Ins and Outs of Rebates THE MAJORITY OF PBMS AND HEALTH PLANS THAT provide pharmacy benefit services have contractual relationships with pharmaceutical manufacturers. Under these contracts, the PBM or health plan receives rebates — payments from manufacturers based on sales or market share targets for the manufacturers’ drugs. Rebates provide a financial incentive for pharmacy benefit providers to include certain products in their formulary lists and to educate physicians and patients about these products. PBMs and health plans may share some portion of rebate earnings with plan sponsors, but actual earnings are not always clearly disclosed. Usually, the rebate amounts of dollars that a plan sponsor receives from its PBM depends on factors such as drug utilization, formulary composition and management, plan design elements, and negotiated guarantees. Health plans generally do not share rebates directly with fully insured plan sponsors, but they may do so indirectly through reduced premium costs. Formulary Composition and Management A formulary is a list of preferred prescription drugs, selected on the basis of quality and cost by a PBM or health plan to encourage use of appropriate, cost-effective medications. Physi- cians may use the formulary when making decisions about what medication to prescribe to a plan member. Rebates vary depending on the type of formulary in place and the formulary management techniques utilized. Most PBMs and some health plans offer more than one formulary for plan sponsors to choose from, with some formu- laries being more restrictive than others. A restrictive formulary is believed to result in greater cost savings. It may, however, have drawbacks such as member dissatisfaction due to coverage limitations or higher co-pays for a larger number of drugs. In some cases, plan sponsors can customize their formularies to a certain extent. While a plan sponsor might then be able to benefit from designating an expensive new drug as non- formulary, or from encouraging members to move to a less expensive generic drug when a brand-name drug comes off patent, changes to the formulary might have a negative impact on rebates and other financial elements. 20 | CALIFORNIA HEALTHCARE FOUNDATION Formulary Intervention Programs Negotiating Rebate Guarantees To encourage formulary compliance, PBMs Since PBMs vary the amounts of the rebate and health plans may initiate various formulary payments they are willing to share with plan management interventions, such as pharmacy sponsors, a plan sponsor can benefit from point-of-sale messages, education targeted to negotiating financial guarantees for a minimum patients and physicians, and therapeutic inter- dollar amount or percent of rebates. change programs that encourage physicians to Comparing minimum rebate guarantees substitute a formulary drug for a non-formulary proposed by different PBMs can be confusing. drug. A plan sponsor’s participation in these Some PBMs guarantee a certain dollar amount programs may increase rebate payments and lead for all processed claims, including both brand to additional cost savings when a less expensive and generic drugs. Others guarantee a specific medication is selected. dollar amount only for each formulary brand When deciding whether to participate in a claim processed or for each “rebatable” claim therapeutic interchange program, the plan (drugs for which the manufacturer actually pays sponsor should: a rebate). When negotiating rebate guarantees ■ Understand how guarantees work. Some expressed in an amount per “claim,” determine PBMs are willing to guarantee that therapeutic whether the rebate is paid per: interchanges will result in overall cost savings; ■ claim (all drugs), others guarantee that each individual product ■ brand claim (all brand drugs), interchange will result in cost savings. ■ formulary brand claim (all brand drugs ■ Probe if a PBM or health plan is unwilling listed on the formulary), or to disclose the rationale behind specific ■ rebatable claim (all drugs for which a formulary interchanges and how savings are rebate is earned). achieved, or if the PBM or health plan is unwilling to provide a savings guarantee. The rebate payment basis affects the calculation ■ Inquire about what is done when a drug of the total rebate earnings, as shown in Table 6 interchange results in a higher-priced drug on the following page. and how this charge may affect your rebates Instead of, or in addition to, guaranteed minimum and overall costs. (The impact is not always amounts, some PBMs will guarantee a percent negative. Even when the interchange share of rebate payments. In this case, a formulary substitutes a more expensive drug, the management fee is often embedded in the percen- substituted drug may be more cost-effective tage of rebates retained by the PBM. Even when after rebate.) comparing percent formulary brand guarantees, ■ Assess the implications if you decide not to it is necessary to evaluate the percent of brand implement the formulary interchange drugs that are on the formulary to get a meaning- programs. The decision not to participate ful comparison. When a PBM quotes both a in these programs can affect rebate guarantees. guaranteed rebate dollar amount and a percent By and large, plan sponsors receive a greater of the actual rebates earned, the plan sponsor share of formulary rebate earnings if they should receive the greater of the two. allow more intensive intervention efforts, including targeted communications to patients and physicians. Prescription Drug Benefit Plans: A Buyer’s Guide | 21 Table 6. Comparison of Proposed Minimum ■ Take advantage of mail order. Plan sponsors Rebate Guarantees* may also be able to increase rebate earnings ANNUAL REBATE EARNINGS through increased use of mail order. Because R E B AT E B A S I S Retail Mail Order Total of a combination of larger fills at mail order Per All Rx $1 $3 (generic & brand) ϫ 8,000 ϫ 2,000 and a greater ability to influence physician $8,000 $6,000 $14,000 prescribing and formulary compliance, PBMs Per Brand Rx $1 $3 can usually command greater rebate dollars ϫ 8,000 ϫ 2,000 from the manufacturers. Plan sponsors who ϫ .60 ϫ .60 $4,800 $3,600 $8,400 are able to increase mail-order utilization among their members may be able to take Per Formulary ϫ .85 ϫ .85 advantage of these higher rebates, as a greater Brand Rx $4,080 $3,060 $7,140 number of prescriptions are filled with Per Rebatable Rx $1 $3 medications on formulary. ϫ 8,000 ϫ 2,000 ϫ .40 ϫ .40 $3,200 $2,400 $5,600 Reporting *Assumptions: 1) Number of Annual Prescriptions: 10,000 (8,000 retail and 2,000 mail order); 2) 60% of all drugs are brand (of Plan sponsors should require their PBMs to which 85% are on formulary); 3) 40% of all drugs are rebatable. provide regular reports on rebate earnings. While PBMs do not typically disclose to plan sponsors the total value of their rebate earnings from Plan sponsors can use these two strategies to particular pharmaceutical manufacturers, some increase the guaranteed rebate amount: are willing to provide fairly detailed information. ■ Leverage tier plans. Manufacturers typically Plan sponsors should request information regarding provide PBMs and health plans with increased specific rebate payments by manufacturer and, if payments for formulary designs that include the PBM is willing, by drug. The more detailed incentives for members to utilize drugs on the information, the easier it will be for a plan preferred lists. Plan sponsors can leverage their sponsor to calculate the actual impact of the tier plans and potentially increase the amount rebate on the pharmacy benefit. of rebate they receive by moving to a three-tier Plan sponsors can also require periodic reports plan. Most PBMs and health plans will recom- on a number of other measurements of services mend a certain copayment differential between provided from their PBMs or health plans. The the formulary brand drug and nonformulary PBM or health plan should be able to demon- brand drug to guarantee higher rebate amounts. strate the formulary’s cost-effectiveness and In general, the recommended differential bet- clinical appropriateness. A pharmacy benefit ween the preferred brand and nonpreferred provider should be willing to disclose both the brand tiers is $15. clinical and cost rationale behind the drugs selected to be on the formulary. 22 | CALIFORNIA HEALTHCARE FOUNDATION If participating in a therapeutic interchange program, a plan sponsor can request periodic Key Questions to Ask About reports that effectively demonstrate program Formularies and Drug Rebates savings. Some PBMs guarantee “rebate” savings 1. Will formulary rebates be paid to the plan that are actually a combination of formulary sponsor? If yes, what percent is paid to the rebates and ingredient cost savings achieved plan sponsor and what percent is retained by the PBM? from the drug interchanges. In these cases, a 2. Are there any guarantees on the amount of plan sponsor should request detailed reporting formulary rebates to be paid? What will be and disclosure of savings elements, and consider the terms of the guarantee? modifying the guarantee to more clearly define 3. Are greater rebate levels available under the separate sources of savings and measurements. certain plan designs such as a three-tier co-pay? If yes, how do the co-pays need Finally, plan sponsors should clarify how often to be structured in order to qualify for the they will receive rebate payments. The timing higher rebates? of payments can vary greatly from one PBM to 4. How frequently will rebates be paid? another: Some pay once per year, while others 5. What cost savings can be expected from pay semiannually or quarterly. Usually, there therapeutic interchange programs? Are is a lag time associated with rebate payments. these cost savings guaranteed? Pharmaceutical manufacturers use this period to reconcile rebate payments with PBMs. This lag time can be as long as 180 days after the end of the respective rebate reporting period. Prescription Drug Benefit Plans: A Buyer’s Guide | 23 VII. Administrative Costs and Fees “ADMINISTRATIVE FEES” — IMPOSED BY PBMS AND health plans for a wide range of services and ancillary activities — can become a catchall phrase for unidentified charges. This phrasing leaves plan sponsors uncertain about what the money is being used for, and is often a source of confusion for them. In general, administrative fees cover the cost of processing claims (including electronic, paper, out-of-network, and mail- order claims) and managing the account. In addition, PBMs may charge for such services as drug utilization review (DUR) programs, physician and pharmacist profiling, data reporting (standard, customer/ad hoc, online access), customer service, participant communication materials, ID cards, and coordination of benefits (COB). Claims Processing Many plan sponsors assume that there is a single charge for all claims processed, regardless of how the claim comes in or how many claims are handled. In fact, PBMs often charge different fees depending on whether a claim is received electronically or on paper, or whether the claim is from a prescription filled at a retail or mail-order pharmacy. In addition, some PBMs charge fees for paid claims only, while others charge for both paid and denied claims. Whether a plan sponsor is looking for a new PBM or reviewing the performance of a current one, it pays to understand how the PBM charges for claims in order to make a meaningful comparison. Suppose, for instance, that two PBMs both charge $0.75 per “claim.” It might be assumed that their total claims processing fees would be equal. However, if the first PBM charges for both paid and denied claims, and the other for paid claims only, total claims fees would differ (see Table 7). Table 7. Total Claims Processing Fees Differ Depending on How PBMs Charge for Claims PROCESSING FEES PBM 1 PBM 2 NUMBER OF (all claims) (paid claims only) Total Claims 10,000 ϫ $0.75 ϭ $7,500 Denied Claims (assuming 7%) Ϫ 700 Paid Claims 9,300 ϫ $0.75 ϭ $6,975 24 | CALIFORNIA HEALTHCARE FOUNDATION To complicate matters, some PBMs have recently often treat them as additional services, and charge begun to use new terminology to discuss claims accordingly. Table 8 enumerates some services for processing fees. In addition to the more standard which a PBM may charge an additional fee. Plan “paid” and “paid and denied,” new terms such as sponsors should request that prospective PBMs “paid, denied, and reversed” have made their way itemize which services are — and are not — into PBM offerings. While these may be similar included in their basic fee. or equivalent to denied claims, they certainly add to confusion and could result in additional fees. Table 8. Typical Services for Which a PBM May Charge Additional Fees • Online claims analysis tool ID Cards and Member • Setup and loading of historical claims Communications • Hard copy eligibility submission When introducing a new or changed benefit, • Optional explanation of benefits (EOB) — plan sponsors often desire to provide their mem- explanation of why a claim was denied and member options surrounding this claim bers with customized information and updated • COB benefit ID cards. Some PBMs and health plans • Medicaid subrogation may not be able to provide customized ID cards • Medicare coordination at all; others may charge additional fees for these • Ad hoc programming and reports services. Plan sponsors are encouraged to question • Printing of customized and/or potential PBMs and health plans to determine additional formulary booklets whether they can provide such services, and if • Personalized client Internet site so what the costs will be. Even if the services are • Health and demand management provided at no charge, it is important to find programs out whether such services are ongoing or if, • Administrative functions related to for example, there is a charge associated with integration with medical plan replacement ID cards or reprints of member • Appeals process information packets. • Physician profiling (interventions) • Prior authorization options • Retrospective and enhanced drug What Is — and Isn’t — utilization review options Part of the Basic Package? • Plan design changes Depending on such factors as plan design, the • Implementation start-up size of the account, the inclusion of additional • Special audits or data requests services, and competitive circumstances, base administrative costs can range from nothing to more than several dollars per member per month. A health plan’s administrative charges may be included within the overall medical admini- strative services (ASO) fee. However, base administrative fees may not cover everything. Items such as monthly reports and coordination of benefits (COB) are part of a basic administrative services package, but PBMs Prescription Drug Benefit Plans: A Buyer’s Guide | 25 Health plans often charge higher per-prescription fees for basic administrative services than do Key Questions to Ask About PBMs. At the same time, health plans may offer Administrative Costs and Fees limited ancillary services focused on pharmacy, 1. On what basis (e.g., per paid claim, per such as online claims analysis tools and customized paid and denied claim) is the administrative member communications. It is not always easy to fee applicable? discern the costs associated with a health plan’s 2. Are the administrative fees guaranteed for the duration of the contractual agreement? administrative services because under insured arrangements they are usually bundled with 3. Are administrative fees paid on retail claims? On mail order claims? medical fees. Finally, while most of the larger 4. Do administrative fees differ depending on PBMs offer financial guarantees that they will plan design (two-tier vs. three-tier)? meet set administrative performance measure- 5. What services does the administrative fee ments, it is rare for a health plan to agree to cover? What services are not covered in guaranteed fees beyond one year. the administrative fee and require an additional charge? 6. Are customized ID cards available? If so, what are the costs? 26 | CALIFORNIA HEALTHCARE FOUNDATION VIII. Clinical Services and Pricing AS PRICING FOR NEW BUSINESS HAS BECOME MORE competitive, PBMs have looked for other ways to distinguish themselves and earn revenue. Clinical programs have been a means by which PBMs attempt to distinguish their value. Plan sponsors typically try to choose the most suitable programs for their specific populations, making sure that the price paid and any accompanying savings guarantees are in line with expecta- tions, and insisting that the information supplied in program reports be useful in evaluating the program. What’s Basic, What’s Enhanced? While PBMs endeavor to promote a variety of clinical program offerings, not all programs come free of charge. Plan sponsors should always ask which clinical programs are included in the base administrative fee and which will incur an additional charge. The same program that one PBM refers to as standard may be provided by another PBM at an additional charge. To effectively compare all programs, it helps to review the specifics of the various PBMs’ or health plans’ clinical programs side-by-side. Almost every PBM has more enhanced, or value-added, programs in addition to its basic offerings. Most PBMs, for example, provide, as part of their basic package, concurrent drug utilization review (DUR) (online programs that track prescription utilization and alert pharmacists to potentially harmful drug interactions at the point of sale) as well as retrospective DUR. Some PBMs also offer enhanced DUR programs. Exactly what “enhanced” means varies among the PBMs, but basically involves further intervention on the part of the PBM beyond the electronic messaging that pharmacists receive at the point of sale. There may be follow-up phone calls or faxes by a clinical pharmacist or other trained clinician to the prescribing physician or the member. Some PBMs provide other types of enhanced programs that attempt to inform physicians about prescribing alternatives. These programs may use targeted face- to-face physician interventions, often called academic detailing, whereby qualified clinicians supply useful information to doctors on issues such as formulary adherence and generic drug utilization. These enhanced programs are typically offered at an additional cost to the plan sponsor. Prescription Drug Benefit Plans: A Buyer’s Guide | 27 Can Clinical Programs Be Customized? ■ Shared savings. To make certain that clinical programs being ■ Hybrids of minimum guaranteed savings and offered are actually relevant to a plan sponsor’s shared savings above the minimum guarantee. population, the PBM should be requested to Table 9 shows that for a plan sponsor with 500 complete an analysis of the plan sponsor’s claims. employees, approximately 10,000 prescriptions The PBM should be willing to identify the per year, and drug costs of $500,000, the amount unique needs of a plan sponsor and present of savings will vary considerably depending on individualized clinical solutions. Some PBMs both the savings level achieved and the type of do not provide as much flexibility as others do savings guarantee in place. in customizing their clinical savings programs. While PBMs rightfully try to recoup the costs they incur to provide clinical programs, plan How Savings Guarantees Work sponsors should expect some type of savings Savings guarantees for clinical programs such as guarantee for the cost of purchasing optional concurrent and retrospective DUR and disease clinical programs. To determine whether the management are an important aspect in negotia- value of a clinical program is commensurate with tions. While many PBMs promise savings at the amount of savings retained by the PBM, some level, it is not always immediately clear a plan sponsor should clarify how savings are how those savings are defined, how they will be measured and insist that program measurement measured, whether or not the savings will be be well defined and the reporting clear. Savings shared with the plan sponsor, and if the savings can be measured as: can be effectively reported. ■ A certain percentage of net plan cost, Plan sponsors will realize different savings ■ A specific percentage above the cost of depending on which of the following methods the particular program, or the PBM employs: ■ An average savings per month, per quarter, ■ Minimum percent savings. or per year. ■ Minimum dollar savings. ■ Defined cost-to-savings dollar ratios. Table 9. Different Types of Guarantees Produce Different Savings A C T U A L S AV I N G S L E V E L A C H I E V E D O N $ 5 0 0 , 0 0 0 R X S P E N D I N G 1.5% | $7,500 2.0% | $10,000 2.5% | $12,500 S AV I N G S G U A R A N T E E Plan Sponsor PBM Plan Sponsor PBM Plan Sponsor PBM 2% Savings $10,000 $(2,500) $10,000 $ — $10,000 $2,500 Per Rx Cost $0.50/PMPM $1.00 Savings 4,500 3,000 5,000 5,000 5,000 7,500 50/50 Savings Split 3,750 3,750 5,000 5,000 6,250 6,250 2% Savings; 50/50 Split on Excess 10,000 (2,500) 10,000 — 11,250 1,250 28 | CALIFORNIA HEALTHCARE FOUNDATION Reporting Manufacturer and Program reports that provide data summarizing Pharmacist Involvement key measurements and are easy to understand can Pharmaceutical manufacturers and/or retail be of great value to a plan sponsor in evaluating pharmacists sometimes participate financially a program’s utilization and effectiveness. When in clinical programs. It is worthwhile to find out evaluating potential PBMs, a plan sponsor should the level of involvement of these groups in any request sample copies of the reports each PBM clinical management programs. will provide for each type of clinical program. Manufacturers sometimes finance specific disease Many PBMs now provide plan sponsors with or health management programs offered by both written and electronic versions of reports. PBMs, particularly if they revolve around a class Some also make online reporting tools available of drugs that includes products produced by the and supply desktop access to various report for- manufacturer. While this will often allow the mats. This service allows plan sponsors to make PBM to offer the program at little or no cost to additional queries, run reports specific to their its customers, such involvement could, depending information needs, develop charts and tables, on a plan sponsor’s view, call for additional and, in some instances, “drill down” for more discussion with the PBM. detailed information. Here are a few examples Similarly, retail pharmacists are sometimes offered of reports that are typically available: financial incentives for participation in clinical ■ Utilization detail by: programs by both PBMs and manufacturers. • brand/generic While this may not change the overall goal of a • retail/mail order particular program, such as increasing the number • formulary/nonformulary of cholesterol screenings, it could influence the ■ Top therapeutic classes/drugs by: number of people who become involved in a • cost particular health management program and the • volume level of patient intervention that takes place. ■ Top drugs by: Depending on the plan sponsor’s point of view, • cost programs that encourage pharmacists to be more • volume influential may or may not be seen as valuable. Ask prospective PBMs for samples of all standard written and electronic reports available and a list of data elements available for ad hoc reports — and clarify the cost of these additional information tools. Request a demonstration of the PBM’s online reporting capabilities to ascertain the level of flexibility and information availability. Prescription Drug Benefit Plans: A Buyer’s Guide | 29 Key Questions to Ask About Clinical Services Pricing 1. What clinical services are being offered? Out of the list of services, what specific services are included in the base admini- strative service fee and what services require an additional fee? 2. What are the expected savings from each of the clinical programs being provided? What savings are guaranteed? 3. If savings guarantees are offered, describe the methodology for how savings will be measured. What amount at risk will be paid if the guarantee is not met? 4. For what disease/medical conditions does the PBM offer programs? What services are provided through these disease and health management programs? What cost impact, if any, is expected from these programs? Are any of these programs financed by pharmaceutical manufacturers? 5. Can the PBM customize pharmacy manage- ment? What is the charge, if any, for clinical program customization? How will these modifications impact the expected or guaranteed cost savings? 30 | CALIFORNIA HEALTHCARE FOUNDATION IX. Collective vs. Individual Purchasing A GROUP OF PLAN SPONSORS MAY JOIN FORCES to leverage greater bargaining power and gain the benefits of economies of scale. PBMs often respond by offering aggressive financial terms such as deeper discounts, particularly at mail order, and more competitive administrative fees and rebates. PBMs may also be willing to place greater dollar amounts at risk for service performance guarantees. However, as coalitions become more prevalent and PBMs work to prevent erosion of existing business, it is likely that pricing will become more conservative. A collective purchasing group’s economies of scale may also enable it to obtain enhanced or dedicated customer service, greater account service resources, improved service standards, and expanded clinical management opportunities. An individ- ual plan sponsor may also obtain such enhanced services, depending on its willingness or ability to pay for them. Such pricing and service improvements are especially beneficial for smaller-sized plan sponsors that join a collective purchasing group. Plan sponsors who are interested in joining a coalition should review their current contracts, however, as some contracts may contain language regarding a plan sponsor’s ability to break a contract earlier than the negotiated end date. Large employers may not gain as much through collective purchasing, since they are often able to negotiate fairly aggressive purchasing agreements on their own. However, the incremental gain is likely to be more than can be saved through individual negotiations. Some coalitions are formed to let each plan sponsor decide on specific benefit alternatives; others offer only defined plan options. Depending on the group’s terms, it may be possible for a plan sponsor to reduce prescription drug benefit costs simply by joining a coalition, without necessarily changing its plan design. Depending on the purposes of the coalition, there could be a down side to collective purchasing. For example, if the coalition decides that all member organizations should use a single plan design, any plan sponsor involved is obviously limited in its ability to customize its own plan design. Although a single plan sponsor may be offered less aggressive financial terms than those it could receive through collective purchasing, it may also receive more individualized attention and more options to Prescription Drug Benefit Plans: A Buyer’s Guide | 31 customize various aspects of its program — Also, financial, service performance, or clinical including the financial aspects. A collective group savings guarantees for coalitions may be may encounter more challenges, having to achieve measured and structured for the group as a consensus on various purchasing decisions. whole, and the benefits may not filter down equally to each of the coalition members. Table 10 summarizes the advantages and disadvantages of collective and individual purchasing. Table 10. Advantages and Disadvantages of Collective Purchasing Individual Plan Sponsor Collective Purchasing Group Potential Advantages • Negotiate directly with PBM to meet individual needs. • Receive more aggressive financial terms. • May receive more individualized attention. • Gain more dedicated resources. • Gain more flexible plan design. • Receive improved service guarantees. • Retain independent decision making. • Receive expanded clinical management opportunities. Potential Disadvantages • Receive less aggressive financial terms than in a coalition. • May need to compromise to gain group consensus. • Receive fewer enhanced services. • May not have as much flexibility around all plan design issues. 32 | CALIFORNIA HEALTHCARE FOUNDATION X. Less Tangible Values THE TOTAL VALUE OF A PHARMACY BENEFIT cannot be measured solely by looking at the financial offer. Being aware of this fact, PBMs have begun to bring other measures to the table to demonstrate the overall value of their program. Unfortunately, it is not so easy to evaluate overall value, as it is less tangible than a discount off a published price or a fee charged on some defined basis. When reviewing a PBM’s financial offer, consider the following issues, which will ultimately impact the success of a pharmacy benefit program: Medical cost offsets. The idea that appropriate drug use can be an effective way of reducing overall medical costs is not entirely new; both manufacturers and PBMs have promoted this concept heavily in past years, particularly when negotiators raise concerns about the rising cost of prescription drugs. In fact, focused studies have demonstrated that use of certain medications, such as anti-asthmatics, can help decrease the number of visits to the emergency room, thus lowering total medical costs. Apart from such studies, it makes sense that if taking a medication will prevent an individual from entering the hospital, then, unless the cost of the drug is greater than a hospital stay, use of the medication does result in a medical cost offset. Workplace productivity. While there are a growing number of studies being conducted about this subject — which is much talked-about among many plan sponsors — there is still a great deal to be learned about the connection between improved health and increased productivity. What has been looked at to date does appear to make a strong connection between being healthy and working more effectively. Prescription drug manu- facturers have worked to show that proper use of prescription drugs leads to improved physical and mental health, which in turn increases workplace productivity. Prescription Drug Benefit Plans: A Buyer’s Guide | 33 Quality of care and member satisfaction. Access to pharmacies, availability of pharmacists to answer questions, and convenient and easy-to- access member support services are essential to a pharmacy benefit plan’s success. PBMs and health plans work constantly to improve standards in these areas, gathering data and measuring results through customer and member satisfaction surveys. Manufacturers are also investing significant resources to fund studies, looking for ways to work more closely with plan sponsors. Although the financial aspect of procuring pharmacy benefit management services is paramount in most plan sponsors’ minds, these other, less easily measured aspects of the benefit are vital to any pharmacy benefit program’s long- term success. 34 | CALIFORNIA HEALTHCARE FOUNDATION XI. What’s Ahead? THE PBM AND HEALTH PLAN MARKETPLACE IS constantly evolving. With changing marketplace needs and competition between providers, the structure and make up of pricing arrangements will continually change. An evolving regulatory environment can, of course, also impact plan sponsor purchasing decisions. Advances in science and technology will continue to impact the cost of pharmacy benefits. Various new treatments including biotech drugs have emerged to replace older drugs or fill a void where no drug treatment previously existed. Scientific advances are also leading to more preventive drugs for various conditions, sometimes resulting in additional plan costs for previously untreatable conditions. Plan sponsors can expect to be faced with new decisions regarding the best management methods for their pharmacy benefit program. New purchasing opportunities may emerge as plan sponsors seek alternative solutions. For instance, on-site company pharmacies, supplemental discount card programs, and defined contribution initiatives have surfaced as possibilities among some plan sponsors. With all of these new challenges and opportunities ahead, plan sponsors whose negotiating skills rest on an informed grasp of the prescription drug marketplace will retain the buyer’s edge. Prescription Drug Benefit Plans: A Buyer’s Guide | 35 Glossary Average wholesale price (AWP) — A list of bench- pricing for generic medications in the Medicaid mark prices set by averaging across the spectrum program as a mechanism to lower costs. The CMS of prices charged to pharmacies by wholesalers for issues a MAC price list for generic products that both brand-name and generic drugs. The current have three or more manufacturers or distributors list price is published in recognized sources, on the market. Because of this limitation, not all including Medi-Span, FirstData Bank and its generics have a corresponding CMS MAC price. supplements, and Medical Economics’ Red Book. PBMs often utilize this government-issued MAC as the basis of their MAC list and supplement the Collective purchasing group — Also known as group list with other generic products. purchasing organizations or GPOs, these are groups of retail entities that join together to leverage their Pharmacy benefit managers (PBMs) — Organizations combined purchasing power to negotiate discount that help manage the purchasing, reimbursement, pricing from wholesalers or manufacturers. and dispensing of prescription drugs for employer plan sponsors or health plans. PBMs create and Formulary rebates — Remuneration received from maintain pharmacy networks. They also create certain drug manufacturers as a result of inclusion formularies that influence physician prescribing of those manufacturers’ products in the formulary. patterns and dispensing. Through formulary Formulary — A list of preferred prescription drugs guidelines and their large customer base, PBMs chosen by a pharmacy benefit manager on the basis can secure substantial manufacturer rebates. of quality and cost. Retrospective Drug Utilization Review (DUR) — Generic dispensing rate — The percentage of generic Retrospective DUR is a program designed to drugs within the total of prescription drugs measure and assess utilization, quality, medical dispensed under a program in a contract year. appropriateness, and appropriate selection and Generic drug — A medication that is the chemical cost of prescribed drugs. It involves evaluating equivalent of a brand-name drug with an expired pharmaceutical therapies after the medications patent. When a brand-name drug’s patent expires, have been dispensed. other pharmaceutical companies can produce the Therapeutic interchange programs — These programs same active chemical compound and sell the drug are employed by PBMs to substitute generic or less under its generic name, typically at a lower price. expensive brand medications for higher-cost brand Generic substitution rate — The total number of drugs when available and appropriate. The ability prescriptions dispensed under a program in a con- to make such changes is often dependent on the tract year that consists of generic drugs, divided by physician’s willingness to modify prescriptions (has the total number of prescriptions dispensed under not indicated “dispense as written”), as well as the the program in the same contract year for which a patient’s willingness to change medications. generic is available on the market. Third party administrators (TPAs) — Organizations Health and disease management programs — that process pharmacy claims, but have no influence Some PBMs offer clinical programs that maintain over what the retail pharmacy charges, nor what is wellness, provide case management services for dispensed. Plan sponsors rarely use TPAs to process particular conditions, such as asthma and diabetes, pharmacy claims without PBM support as it greatly and disseminate educational information to increases expense. patients and physicians. Manufacturers often subsidize development and management of these programs by the PBM, believing that they will help achieve greater product recognition and influence physicians and consumers toward a preferred therapy. Maximum allowable cost (MAC) pricing — MAC prices are a schedule of pricing for generically equivalent drugs based upon the listed average wholesale prices (AWPs) of competing generic drug manufacturers. The federal govern- ment originally introduced the concept of MAC 36 | CALIFORNIA HEALTHCARE FOUNDATION