Thursday, January 19, 2012

Hidden Cash Flows and Pharmacy Benefit Managers

I want to make this very clear - not all PBMs engage in deceptive practices. There is a relatively new business model some PBMS are embracing called transparent + pass-through. This essentially means that a PBM has taken the position to forgo driving revenue from hidden cash flows and instead earns revenue from a single source, an administrative fee. While this new business model benefits both plan sponsors and their employees, some traditional PBMs either can't or won't adopt the transparent + pass-through model for all of its clients.

Here are four deceptive practices some PBMs use to hide cash flows from their clients thereby increasing the actual cost of the plan.

Excessive mark-ups from mail-order prescriptions. It is not uncommon for some PBMs to mark-up mail-order medications as much as %500! Why do you think these PBMs push so hard to move prescriptions to mail-order from retail? A transparent + pass-through PBM will not make a profit from mail-order dispensed medications. Again, it will only charge its plan sponsor a flat administrative fee per claim. The savings are passed back to plan sponsor reducing actual plan costs.

This is not to say that prescriptions dispensed via mail-order are a bad thing.  In fact, mail-order can offer quite a bit of savings. But you must be aware of the arbitrage opportunities for non-transparent pharmacy benefit managers and eliminate them.

Rebates. There was a study conducted by the Pharmacy Benefit Management institute which concluded that 47% of a traditional PBM's revenue is derived from manufacturer revenue. Just think about this for a second. It is the plan sponsor driving the business for which these revenues are earned so why should they be earmarked for the PBM?  These monies shouldn't be shared with a PBM, but instead passed back to the plan sponsor 100%. Hence, the business model transparent + pass-through.

Don't be duped, there are many names these PBMs may use to hide these cash flows such as reimbursements or SG&A expenses.  It doesn't matter the plan sponsor is entitled too any money awarded by a manufacturer as a result of prescriptions dispensed from its plan member.  For a rebate eligible prescription drug rebates are typically $2.00 - $3.00 per prescription.

Differential Pricing or Contracting.  This is a deceptive tactic that is very common yet too many payors are unaware of its detrimental cost.  Here is how it works.  Let's say that a PBMs billing terms to a plan sponsor are based on AWP or average wholesale price for a certain generic drug.  But, the reimbursement to the network pharmacy for dispensing this medication is based on MAC or maximum allowable cost.

MAC will always be lower than AWP thus leaving a difference in price or contracting.  The amount a plan sponsor is billed should be exactly the same amount a network pharmacy is reimbursed otherwise how can a plan effectively determine its actual pharmacy benefit costs.    

Spreads.  A spread occurs when a plan sponsor is billed the "least favorable" or higher amount for a prescription drug that is reimbursed by the PBM to the network or mail-order pharmacy at a lower cost. The difference or spread is retained by the PBM. This should never happen, but it does all too often. In fact, there is information in the marketplace suggesting that the average spread for prescription drugs dispensed as part of a pharmacy benefit is as much as $15!

Again, if you don't know the spread even exists or its amount how can a benefit director possibly determine the actual cost of the plan? This begs the question, "how does this happen?"  A simple example is when a PBM has different MAC lists for plan sponsors and pharmacies.  These MAC lists may differ in the number of drugs listed and their respective prices. A transparent + pass-through PBM will not have any spreads and should contractually bound itself to such.

I've discussed here only a handful of the hidden cash flows some PBMs use to keep plan sponsors in the dark.  There are many more like effective network rates, repackaging, formulary steering and co-pay differential.  To prevent this from happening to you always require full auditing rights, real-time access to MAC lists and claims data.  Then compare the amounts billed (not all claims but maybe 20 or so per month) to the price lists and you're now in position to determine actual costs.  If your PBM doesn't provide full audit rights or access to MAC lists and you're still willing to "cut the check" then don't complain about rising healthcare cost.                         

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