Twenty years of discussions, bad publicity, lawsuits, settlements and presentations, and choosing a PBM has still retained it’s air of confusion, double-speak and bewilderment! Prescription drug are an integral component in managing overall healthcare costs, and the attempt by plan sponsors and payersChooseWisely_#1 to make sense of it all can be a fatiguing exercise. That’s because there are huge dollars in play and the status quo does not slip away into the night without a fight!

The PBM world is made up of over 60 companies that vie for a plan sponsor’s business, yet most benefit managers are only familiar with a few. The Big 4 (Express Scripts, CVS Caremark, United Healthcare’s Optum and Catamaran) control 70% of the non-Medicare/Medicaid prescriptions filled, so their clout and reach is enormous, but not without competition. The good news is that choice remains; the bad news is that choice remains. So the question becomes: how do we choose wisely?

The best place to start is to determine what is your organization’s business philosophy? What do you expect from your other vendors? Most people say they want a business relationship that is a form of  partnership, as opposed to a commodity transaction.  As a partner, they expect shared business objectives and incentives, so they do not wind up in a fundamentally dysfunctional relationship due to misaligned business practices. Honesty, fairness and some degree of transparency are also attributes  of an effective working agreement. While it sounds sort of obvious that these characteristics would be easily identified as desirable, they are not always easy to ascertain and maintain.

PBMs operate under three fundamental pricing models: traditional; transparent; and pass-through.  Traditional arrangements are based on the PBM being paid by creating pricing spreads between the amounts they pay to retail pharmacies and pharmaceutical manufacturers for the drugs dispensed to a plan’s members, and what they invoice the client. It’s the classic middleman role and is fundamental in capitalism, i.e., buy low, sell high and try to make as profit.  PBM’s also create additional revenue streams for themselves by negotiating various forms of rebates and financial incentives from pharmaceutical manufacturers. The problems occur when plan sponsors conclude that healthcare services should be delivered in a non-profit or low profit environment. If that’s the case, then a traditional arrangement is at odds with that business philosophy, particularly if the PBM has public shareholders and quarterly earnings calls to meet. Even in 2015, many PBMs still remain very secretive regarding their member-driven revenue sources and make their contracts with their clients extremely difficult to decipher.

To try and address these issues, the Transparent pricing model was developed. The idea with this approach is that the PBM would identify and disclose certain pricing spreads and manufacturers incentives.  Not necessarily the actual amounts, but an acknowledgment that they exist and that the PBM will retain those revenues.  Many times plan sponsors are confused by this term, and believe that the pricing spreads have been eliminated. We find that most of these types of contracts are really much more opaque than transparent!

For plan sponsors that believe the PBM should be more forth-coming and define their compensation, the Pass-Through model was born. Under pass-through, a PBM charges an administrative fee, in exchange for its services. There is not supposed to be pricing spreads, so the costs of prescription drugs that is paid by the PBM is what gets passed-through to the payor.  Likewise, 100% of the rebates and other manufacturers incentives are passed-through to them as well. Unfortunately, this isn’t always the case. We find PBMs that claim to provide pass-through pricing  while performing contract 3-card Monte, which makes it impossible to determine what is really going on.

We find that it is a much more effective process when a PBM commits to one of these three, and does not pretend to support all of them. At WBC, we believe that’s it’s incongruent for a PBM to claim that they can provide all three, and that it doesn’t really matter to them which option a client chooses. Of course it matters, and their company’s entire infrastructure is supported by which option you select.  That’s why the old-line publicly traded PBM’s do everything in their power to steer clients toward a traditional deal.

There is no one arrangement that is always better than the rest. If there was, then all PBM contracts would be the same and there would be only one PBM with all the business. A plan sponsor must determine what matches their vendor profile, what type of structure is consistent with their objectives and which arrangement satisfies their needs.  Stay tuned.  More contracting guidance in future blog entries!