Understanding the contract between a plan sponsor and its pharmacy benefit manager (PBM) is the first step toward optimizing your organization’s pharmacy benefit. Typical contracts with PBMs are structured under a three-year master agreement negotiated at the time of implementing the PBM, but the agreement can be updated via addendums and amendments throughout the contract terms. PBM contracts often include a number of definitions and terms that explain how drug claims are adjudicated and priced. Two critical contracting terms are drug definitions and the types of exclusions from the pricing guarantees. These terms play a critical role in the financial reconciliation process involved in PBM pricing and are highly impactful on the financial value of the agreement.
To read more about how to optimize a PBM contract, read this paper by Miliman’s Scott McEachern and Patrick Cambel.
Plan sponsors’ prescription drug costs continue to increase year over year and remain as one of the fastest-growing components of the healthcare dollar. One of the most important ways plan sponsors can lower healthcare costs without significantly changing their benefits is to look for opportunities to improve their pharmacy benefit manager (PBM) contracts.
The success of the plan’s pharmacy benefit depends on effective contracting. PBM negotiations typically involve a number of contractual provisions, which are critical to delivering competitive pharmacy benefits on a cost-effective basis. This paper by Milliman’s Greg Callahan and Brian Anderson explores a few important PBM strategies that can be used to reduce costs and quickly evaluate whether a current or new PBM contract is effectively managed.
The primary purpose of the pharmacy benefit managers (PBM) is to serve as an intermediary among pharmacies, drug manufacturers, and payers. PBMs manage formularies, negotiate discounts and rebates, and process and pay prescription drug claims through a web of electronic transactions.
Blockchain could potentially transform the relationship between payers, pharmaceutical manufacturers, wholesalers, and pharmacies by offering an alternative, transparent mechanism for processing, pricing, and validating prescription transactions. This approach could lead to less waste, reduced pricing variations between pharmacies, and a better app-based purchasing experience for consumers, through transparency of the true cost of prescription drugs.
Milliman consultants Brian Anderson, Gregory Callahan, and Michael DiPrima provide more perspective in their article “How blockchain technology will disrupt the PBM-payer-pharmacy relationship.”
Sponsors of prescription drug plans that decide to change pharmacy benefit managers (PBMs) may need help with pre- and post-implementation tasks. An experienced consultant can work with a sponsor to navigate complex contractual terms, develop an implementation plan, and conduct annual audits to ensure that the sponsor continues to receive the pricing terms and rebates negotiated with the PBM.
This paper by Milliman’s Angela Reed and Brian Anderson explores the PBM implementation process. The authors highlight key items that sponsors must consider for a successful PBM implementation and how an implementation manager can assist.
Employers and other plan sponsors have the option of carving in or carving out their pharmacy benefit programs from their medical benefits. There are a number of important factors that should be considered when deciding whether or not to carve out pharmacy benefits. This article identifies the advantages and disadvantages of both options and raises important questions to consider when contemplating a move to carve-out.
When the pharmacy carve-in approach is used, the employer contracts directly with the medical health plan vendor for medical and pharmacy benefits. The vendor will either administer the program in-house or contract with a pharmacy benefits manager (PBM) vendor to process pharmacy claims and administer the pharmacy program. Because the employer contracts directly with the medical health plan vendor, there is no direct relationship with the PBM.
A pharmacy carve-in is typically used under the fully insured model. In 2015, the Pharmacy Benefit Management Institute (PBMI) reported 23% of smaller employers (less than 5,000 lives) and 7% of larger employers (greater than 5,000 lives) were fully insured. Under the fully insured model, the employer pays a premium to the insurer and the insurer assumes the risk of the total claims amount rather than the employer.
When the pharmacy carve-out approached is used, employers contract directly with a PBM vendor to administer their pharmacy benefits program.
A pharmacy carve-out is typically used under the self-insured model. In 2015, PBMI reported 77% of smaller employers and 93% of larger employers were self-insured. Under the self-insured model, the employer assumes the risk and benefits from managing costs. Pharmacy stop-loss insurance may be purchased to mitigate the risk of total claims amounts going over a certain threshold. A pharmacy carve-out can also be used with the fully insured model, although this is less common.
Prescription drug plan sponsors must consistently evaluate and update their pharmacy benefit manager (PBM) contracts to control costs. In their article “Medicare Part D PBM contracting strategy,” Milliman actuaries Michael Polakowski, Nick Johnson, and Todd Wanta highlight numerous contract provisions that plan sponsors should examine and renegotiate to reduce pharmacy expenses.
Here’s an excerpt:
As contracting has become more complex, the following contract provisions are becoming more common as plan sponsors look to reduce their pharmacy expenses.
• Price protection. In the current environment of high-cost trends for brand-name drugs, price protection can offer more inflation protection than discount guarantees. Any price increases above a predefined threshold are paid back to the PBM by the manufacturer and considered rebates by the Centers for Medicare and Medicaid Services (CMS). Plan sponsors should carefully consider how price protection can affect Medicare bids and end-of-year settlements.
• Membership. More favorable dispensing fees, discounts, and/or rebates may be achieved for plan sponsors with higher membership counts. Improved contracting levels are specified directly in the PBM contract.
• Discount/rebate guarantees. Discount and rebate guarantees may be presented in many different forms, e.g., rebates per brand-name script or on a per member per month (PMPM) basis, or discounts off AWP or the maximum allowable cost (MAC) list. Rebate guarantees may exclude certain drugs. At a minimum, plan sponsors should ensure the targets are clearly understood and auditable. Plan sponsors should be wary of proprietary definitions when industry definitions are available for reference. Plan sponsors should also ensure that reimbursement mechanisms are in place if targets are not achieved.
• Rebate maximization. Because of the structure of the Part D benefit, rebates can be a more effective way to reduce Medicare bids than discounts. Over the last few years (and with the increasing cost of specialty drugs), plan sponsors have increasingly negotiated with PBMs to maximize rebates rather than discounts. The financial incentives for this approach are discussed by Milliman consultants Adam Barnhart and Jason Gomberg in a recent article for the AIDS Institute, “Financial Incentives in Medicare Part D.”1
• Multi-year agreements. Some PBMs have been willing to provide discount or rebate improvements over time if plan sponsors commit to multi-year contracts. Plan sponsors should be sure to verify that the improvements are contractually guaranteed and meet or beat market-wide improvements. Even multi-year discounts should have market check provisions to allow plan sponsors the ability to receive better terms when the market changes.