Tuesday, April 3, 2018

Standing pat can't be a long-term strategy for self-insured employers

The smirk from a non-fiduciary PBM salesperson
after closing a deal with an unsophisticated employer
One of the biggest mysteries within a non-fiduciary PBM's contract are the algorithms that determines whether a drug is a brand or a generic. Here is an example of how the algorithm could be used at the smallest scale.

How it works:
  • Imagine a generic drug has an average sticker price of $100, and its cost (including money for the drug maker, wholesaler and pharmacy) is $15.
  • The PBM says it will apply an 80% discount on generic drugs, meaning an employer should only pay $20 for the drug. The PBM pockets $5 on normal spread pricing (after subtracting the $15 cost).
  • However, using the algorithm, the PBM could define the generic drug as a brand, which only commands a 17% discount.
  • Under that scenario, an employer would pay $83, or more than four times what it should for the generic, and the PBM pockets $68 after subtracting the drug's cost.
  • Multiply this strategy for millions of generic prescriptions, and the profits add up quickly.
Tyrone's Commentary:

Within a PBM service agreement, the definitions usually start on pages one or two. Not coincidentally, this is also when the games [self-dealing] begin and some of the largest companies in the world fall for it. Just because you can make smart phones, build cars or design software doesn't necessarily mean you are good at managing pharmacy benefits. Take ego out of it here are three no-no's:
  1. Don't allow the definitions for important terms such as generic, brand and specialty drugs to be defined by non-fiduciary PBMs. Create a template in-house for important contract definitions and demand they replace ambiguous definitions in your PBM contract. 
  2. Don't count on in-house lawyers to eliminate contract loopholes. There is nothing illegal about the contracts non-fiduciary PBMs present to their clients. Subsequently, some of the largest companies in the world (see Anthem vs. Express Scripts) think they are protected because they have in-house and outside attorneys vetting these contracts and that simply is not necessarily the case.
  3. Don't hire or retain any adviser who doesn't protect you from points one and two above.
The thing is, assessing transparency is more effectively done by a trained eye. Someone who knows the ins and outs of PBM revenue models, contract loopholes and has personal knowledge of the self-insured employer's plan goals.

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