Beware of these five common blunders when contracting with a PBM

Pharmacy benefit managers (PBMs) manage the pharmacy benefits for 266 million people in the U.S., but PBM contract language has become increasingly complex.

“The terms laid out in most contracts — not to mention the pricing — can be mind-boggling,” says Gannon Murphy, Ph.D., area vice president of Pharmacy Benefit Consulting, Gallagher.

More than half of employers that responded to a recent Gallagher Benefit Services survey said their PBM contract is too complicated and often benefits the PBM at their expense. And only 30 percent understand the details of their contract.

Smart Business spoke with Murphy and Joe Roberts, area vice president of Benefits & HR Consulting, Gallagher, about five mistakes to avoid in a PBM relationship.

What’s the underlying issue?

There is a fundamental difference between price and cost when contracting with PBMs. Price is what is printed on a page — usually in the form of percentage-based discounts off of average wholesale price (AWP), dispensing fees and any administrative fees, and then offset by applicate rebates. Cost is what the PBM actually pays in hard dollars.

What are the five challenges and how can employers sidestep them?

  1. Fuzzy math — Guaranteed AWP discounts are established in each PBM contract for brand drugs, generics and specialty medications, but there is no regulation that governs AWP. Some PBMs use a recognized, objective and independent source to establish AWP; others follow a proprietary algorithm with AWP amounts that make drug discounts look better than they really are.
    So, ensure the contract states both the PBM price quotes and its reconciliation of guarantees will be based on an objective, independent source.
  2. Differing definitions — The definitions of brand, generic and specialty medications differ among PBMs. Some PBMs redefine a portion of the generic drugs, known as single-source generics, as brand drugs. Therefore, the PBM appears to have improved the discounts to both the generics and brand drugs.
    To avoid this, PBM proposals and contracts should use an objective source for the definition of brands, generics and specialty medications.
  3. Transparent-lite — With the demand for greater transparency, many PBMs offer pass-through pricing. PBMs pass through the same discount they negotiate with their pharmacies to their customer and apply an administrative fee. However, many transparent contracts are as murky as traditional ones, and some are worse.
    To get a clearer picture, have the numbers independently modeled and compared by a qualified professional. This will help establish whether the terms are really transparent or transparent-lite.
  4. Inflation games — Prescription drug costs are outpacing overall inflation, and some drug prices have tripled or quadrupled. PBMs attempt to fight this by negotiating with drug manufacturers through rebates and other means. Not all payers, however, get the full benefit. Most PBMs have inflation cap guarantees but don’t always pass along all the money. PBMs also try to tamp down costs and inflation through utilization management programs. They screen the appropriateness of medications before they’re dispensed. But what if the approval rate is 90 percent? That’s not a good use of the plan’s money. It’s also not uncommon to find PBMs preferring certain medications over viable, lower cost alternatives.
    Make sure the PBM incentives are aligned with those of the plan. The contract should secure a benefit to the plan from inflation caps and guarantees that drive sound clinical decisions.
  5. Not-so-guaranteed — PBM contracts often state a shortfall in a particular guarantee can be made up by overperformance in a different guarantee, a practice known as offsetting. Certain guarantees may look good on the surface, but if the contract language that undergirds them is adverse, the value of those guarantees can be feeble or meaningless.

So, before signing anything, ensure that any offsetting by the PBM is clear and equitable and protects the plan’s interests.

Insights Employee Benefits is brought to you by Gallagher