Reviewing pharmacy benefit management (“PBM”) contracts has become just as much art as science. Sure, you can create a checklist of contractual definitions and provisions, and you can negotiate the financial and legal issues, but sometimes it boils down to how much does the vendor really want your business? That’s where the “art” comes into play.
The consultant must be able to present the client opportunity as the kind of account that the PBM wants and needs. Some are obvious to the vendor, while some other smaller accounts need some finesse. The “Big 3” remain only three because of their ability to accept risk that many of their smaller competitors refuse to assume.
It really can put them in the position of the 800-pound gorilla. As consultant “artists” we need to read beyond the standard checklist and get to the heart of the matter, i.e., will the vendor provide our client with not only great pricing, but provide adequate protection in the event of things going south for the plan and its members as the result of PBM error, negligence or malfeasance.
For example, one of our recent clients had us negotiate their PBM contract with a new vendor. The pricing was substantially better than any of their competitors and we negotiated all of the significant contractual provisions that can wreck havoc on finalizing a deal. It came down to how much risk did the vendor want to assume. The answer was not enough to give the client comfort.
The trade-offs remain. The large public PBMs have scale and will usually acquiesce to provide greater contractual protections. Yet, by being public, they must operate in a much higher net profit margin-per- script environment in order to meet their expected quarterly earnings reports for Wall Street. As a result, their pricing and net costs presented to clients are usually not as competitive as some of their smaller rivals. Private PBMs, on the other hand, can operate on much smaller margins and are more likely to offer true pass-through or acquisition cost pricing as their competitive difference. However, they generally don’t want to expose themselves to liability that outweighs the value of the account. Why go on the hook for millions if they are only earning $150K for providing services? Additionally, some of them are controlled by a few shareholders who can accept or reject business based on their own personal whims or bias. And there lies the rub.
Plan sponsors need to have their consultants understand that price alone or protection alone does not provide a “one size fits all” solution. Striking an artful balance usually wins the day. At least until market forces or regulation drives all of the PBMs to follow one business model and market conduct for servicing their clients.
