Prescription drug prices continue to skyrocket, costing more for both you and your employees. Prices will only continue to increase as research and development expands drug development in the future.
Today, biotech drugs, which are costly to develop, manufacture and market, are increasingly being developed for the specialty drug marketplace. The oncology sector alone is slated to expand an additional $12 billion over the next four years as new research and technology creates new patient therapies. Also, “specialty pharmacies” have begun to open, catering to drug therapies aimed at specific disease state management.
The use of these new drugs in the market, along with continued increases in traditional drug therapies, will continue to stress prescription drug expenses over time. One of the most effective ways to control prescription drug costs is by contracting with a pharmacy benefit manager (PBM).
“PBMs are uniquely positioned to administer pharmacy benefits and control trends through their understanding of drug costs and clinical intervention methods that optimize the use of drug therapy,” says Ned Milenkovich, J.D., PharmD, a member at McDonald Hopkins LLC and the chair of its Drug & Pharmacy Practice Group. “By outsourcing drug management to a PBM, you’re putting a sophisticated organization in place that understands how to administer prescription drug benefits and optimize drug costs for your company.”
Smart Business spoke with Milenkovich about how to control prescription drug costs by working with a PBM and the importance of having fair PBM contract terms.
What role does a PBM play in controlling prescription drug costs?
A PBM contracts with a health plan to administer the pharmacy benefit claims on behalf of the plan sponsor or insurer and provide other programs such as utilization, disease management and other cost containment services, and to reduce prescription drug costs. The PBM may have rebate agreements with drug manufacturers and negotiates discounts with retail pharmacies to help plan sponsors reduce prescription drug costs for their members. PBMs also offer mail-order and specialty pharmacy services for maintenance medication therapy at substantially discounted rates. The type and range of tools offered depends on the PBM, so contact a PBM vendor for more details. What should be included in a PBM contract?
There are generally three different contract models to consider. The traditional contract has little transparency on how money flows. The second is the hybrid contract, which has more transparency to the employer plan — i.e., 100 percent pass-through of manufacturer rebates. The third is the pass-through financial arrangement, where employers get 100 percent of the discounts and rebates and the PBM retains no margin income. The pass-through model is the most transparent.
There are benefits and risks associated with each model. Traditional contracts have undergone severe scrutiny by employer plans due to an inability to understand how the money flows on the PBM side. Consider also that there may not be much difference in cost savings with each model, because there’s a bottom line in every contract and the PBM vendor has a minimum revenue objective under any financial model offered. In the end, the choice of model may not be as important as the types of fee arrangements you have to pay for PBM services.
Fees structures can differ, because every contract is different, depending on which metric and associated discount is used to measure drug cost. Moreover, other discounts and fees are added to the mix to arrive at a final fee structure.
What should you consider when determining the right contract model for your company?
A transparent pass-through model would make more sense if you want to see the flow of money. Then you can see exactly what you’re paying for and minimize the risk of hidden costs. But that’s what audits are for. Under the terms of agreements with PBMs, no matter what contract type, you need to be able to audit the PBM properly to assess the accuracy of the PBM vendor’s performance in relation to the contract.
What problems might you catch during an audit?
Audits can be effective for uncovering mistakes, such as incorrectly applied network discounts, mail-order discounts, specialty discounts, rebate payments, administrative fees, and any other fees associated with the program. Other potential findings might include incorrect application of member or drug coverage eligibility rules, cost-sharing rules, prior authorization, step therapy and override rules. These mistakes could be costly to a plan sponsor.
The time to determine the right to an audit should take place during the negotiation period with the PBM. Don’t allow too many auditing restrictions in the contract, because the audit might become ineffective.
Some typical PBM-requested audit restrictions include:
- The PBM’s right to limit or veto an auditing firm selected by the employer
- The information the auditor can access
- The time in which claims can be audited
- The auditor’s ability to only copy certain information
- The auditor providing the PBM a draft of the audit before it goes to the employer
- Restrictions on the amount, type, specifications and format of the claims data
These limitations on an employer can be problematic in trying to uncover some of the potential financial mistakes in claims administration and contract rate application. It’s a sensitive area, and both parties need to appreciate that there needs to be confidentiality language in place that will minimize any exposure of data to third parties.