As most pharmacy benefit plan sponsors know, the new change in AWP became effective on September 26, 2009. On that date and in response to the associated court settlement, First DataBank and Medi-Span adjusted the AWP mark-up over the wholesale acquisition cost (“WAC”) to no more than 20%. This represents an approximate 4% reduction in AWP for 1,440 NDCs included in the settlement and an additional 21,500 NDCs that are being voluntarily included. Many PBMs have proffered adjustments to their contracts with plan sponsors to address this situation. The underlying question, however, is “Who pays?”
The Plan sponsor should be expecting to hear good news. “Guess what, your costs for providing prescription drugs have gone down.” But in the PBM world, this is not what happens. There are several approaches that the PBMs are using to respond, with no universal answer. The vast majority of PBMs have presented an alternative that they claim is “cost-neutral” and maintains the “original economic intent” of the contract for PBM services. This means that none of the parties in the PBM contract are expected to change their relative economic positions that were in effect prior to September 26th.
Most of the PBMs have asked their plan sponsor clients to accept a reduction in the contractual discounts designated in their current PBM contract. An AWP-15% discount will become AWP-12.75% under the new pricing arrangement. While this approach may create equity when compared to pre-September 26th pricing, is that really the fair approach? And more importantly, should it be “sold” to the sponsor as a “no one pays more” solution.
Here’s an example: old AWP is $100 with a 15% discount = $85. Now, the new AWP will be $96. This should be good news to the sponsor. But the PBMs know that if they honor the 15% discount, one of two things happens: one, the PBM has to eat the reduction in their profit margin because they are obligated to pay the pharmacies in their retail network a contracted price; or two, the pharmacy has to accept reduced margin for their transaction.
From the view of the pharmacy, when AWP for our example drug was $100 with a 15% discount, the pharmacy was paid $85. If their cost is $80, they received the $5 spread plus a dispensing fee of say, $2.00, so their total earned was $7 on this Rx.
Now, the new AWP will be $96 and the plan sponsor’s 15% discount creates a cost to the sponsor of $81.60, not $85. The pharmacy would see their spread on the script reduced to $1.60 ($81.60 minus $80 cost). The $2.00 dispensing fee is added to the $1.60 for a total earned of $3.60. This cuts their “profit” almost in half! Who pays?
Well, the answer under this “cost neutral” approach is the plan sponsor. Back to our example: In order to keep the pharmacy and the PBM whole, the PBM asks the sponsor to reduce the contracted discounts. The $100 AWP that becomes $96 now has a discount of 12.75% in order to create a “cost-neutral” invoice of $85, the same as pre-September 26th. The PBM doesn’t have to subsidize the pharmacy and the pharmacy doesn’t have to cut their margins.
While it’s true that this approach won’t require the sponsor to pay more than they are currently paying, they are not paying less. Some would argue that paying less is the objectivewhen hiring a PBM to manage pharmacy costs.
That being said, is this solution acceptable? It depends on the view of the sponsor. The threat from not accepting this option is a potential loss of pharmacies in your network. Most PBMs have protected themselves by included language in their contract for services with the plan sponsor that reserves the right to alter pricing in the event of this AWP change. The plan sponsor may decide to find a PBM that is more aligned with the sponsor’s interest. The PBMs, of course, prefer to present it as a “painless” adjustment, in an attempt to not alienate their clients. You must keep in mind, however, that someone always pays!