By: Dennis M. Sponer, CEO, ScripNet, Inc.
For Workers’ Compensation (WC) payers, whether private or public, carrier or self insured, make-buy decisions about Managed Care Organizations (MCOs), Third Party Administrators (TPAs) and Pharmacy Benefit Managers (PBMs) are based on many factors. Professional reputation, timely and responsive customer service, and ultimately – how it improves patient outcomes, are all very important. But with costs on the rise and organizations wanting to focus on their core competence, outsourcing has become a common industry practice for many WC payers. Outsourcing is based on the premise that an outside firm can perform these activities at a lower cost than staffing the function internally. But to select and cost-effectively manage a PBM, TPA or MCO, it is best to understand specifically what they do to contain costs (drug prices and utilization in the case of a PBM) and what pricing options the PBM offers for its services. Part 1 of this series dealt with PBM Cost Containment Activities. This Article, Part 2, deals with PBM Pricing.
The PBM industry has been around for over a decade, but there is still controversy over how to charge for services. There are a number of safeguards that protect the payer community (carriers and self-insured companies) from being overcharged, starting with State Fee Schedules, where state commissions have established a ceiling price for brand name and generic drugs. Because the industry is competitive, PBMs typically charge under State Fee Schedules and utilize Medi-Span’s Average Wholesale Price (AWP), published by Wolters-Kluwer, as a common benchmark for price negotiation and payments between PBMs and pharmacies, and between PBMs and their carrier and self-insured customers. The complexity and confusion occurs, however, when PBMs add their own cost of service. PBMs who have established pharmacy networks can often negotiate 11% to 13% discounts or more off AWP with their pharmacies and then in contracts with customers, decide whether and how much of those discounts to offer customers. PBMs may be transparent with their pharmacy costs and pricing by telling their customers how much they are paying pharmacies, or they may negotiate separate agreements with customers based on AWP and not share the pharmacy cost information, pocketing the difference. Transparency is a good thing for WC payers to ask for in their dealings with their supplier partners.
Within that framework, there are a number of ways that PBMs can price their services, each with advantages and disadvantages, depending on what works best for their prospective customer.
The traditional method is called Spread Pricing, with prices to carriers and self-insured organizations simply based on a percentage off AWP, regardless of the PMB’s actual pharmacy costs from their negotiated network discounts. The actual pharmacy cost information may or may not be shared with customers because it is not part of the pricing or settlement process.
An alternate pricing method, called Cost Plus Pricing, is based on a markup of the PBM’s negotiated pharmacy costs and is a more transparent way for PBMs to work with customers, both from an information and a common goals perspective. The downside of Cost Plus pricing is that PBM revenues (and earnings) will increase with higher pharmacy costs and higher prescription volumes, things that will negatively impact a WC payer’s bottom line. Transparency policies and program reporting can mitigate this problem, if the PBM can demonstrate that its programs and services (formularies, generic substitution for brand name drugs and drug utilization reviews) are actually containing prices and utilization on the carrier’s behalf.
Yet another pricing model is based on the Percentage of Savings, which starts with the Fee Schedule, subtracts out the negotiated pharmacy rate, and bases the PBM’s fees on a percentage of savings. This more closely aligns the goals of the PBM with the goals of the carrier/self-insured organization, with an emphasis on cost containment, managing both prices and utilization. Working on the customer’s behalf, the PBM can then focus its efforts on cost containment programs, without hurting its own bottom line.
Cost containment programs that support this pricing approach include: negotiated pharmacy contracts, generic substitution, formularies, real time point-of-sale approval/adjudication, retrospective drug reviews and physician outreach programs. Note that some states, Texas in particular, have instituted provisions that don’t allow Third Party Administrators and PBMs to charge fees based on how much they save the carrier, thinking that it would encourage a denial of benefits. Although noble in concept, this is somewhat misguided for ethical PBMs, whose primary mission is to serve the injured worker, reduce risk and improve patient outcomes, and whose cost containment programs focus on improving administrative efficiency and reducing fraud and diversion, rather than denial of benefits.
PBM’s also offer customized services, like Retrospective Drug Utilization Reviews, Physician Outreach and Pharmacy Audits, which help to reduce costs and assure appropriate patient healthcare.
Although not always a part of the PBM’s pricing and settlement process, PBMs also receive rebates from the drug manufacturers, based on the volume of drugs that they manage. Basically, the alternative is for a PBM to charge a carrier more for the retail drugs up front and share the rebates on the back end, or charge less up front, and retain the rebates. The downside of sharing the rebates is that can take six months or more to obtain rebate revenue and there is uncertainty about how much the rebates are going to be.
Understanding the various ways that PBMs offer and price their services will help WC payers in negotiating pricing contracts. Obtaining multiple competitive bids with the use of a Request for Proposal (RFP) is the best approach. With a formal RFP process, organizations can ask the right questions and make decisions about how they are going to be charged, how it is going to be measured and how to make adjustments as regulation, inflation or the economy changes. Following an extensive but successful RFP process with ScripNet’s current client – Minnesota Counties Insurance Trust (MCIT), both organizations collaborated to author an article for Risk & Insurance Magazine, entitled: “Best Practice in PBM Vendor Selection-Using the RFP“.
Due diligence with price negotiation on the front end is not productive if there is no performance tracking and reporting of results on the back end. This is particularly true if PBMs are misrepresenting drug prices in their proposals or competitive pricing analyses to win the business, but charging higher prices once the contract is awarded. The best policy is to be transparent about the various money flows, offer the pricing structure that works best for the services that the customer wants, and be fair and honest in the relationship. Again, because it is a competitive environment with other PBMs, it is up to the carrier or self insured customer to talk through the options and select the PBM and the pricing option that offers them the greatest value. In the end it boils down to establishing a constructive and open customer relationship with common goals and the ability to work together to manage all aspects of the business. Ethics and trust are critical to long term relationships, but they are by-products of common goals and an open dialog, measurement and continuous improvement and innovation.
About Dennis Sponer
Dennis Sponer founded ScripNet in 1997. Dennis obtained a Juris Doctorate from Brigham Young University and a Master of Laws in Taxation (L.L.M.) from the University of San Diego School Of Law. Dennis is a 1999 graduate of Leadership Las Vegas, was named to InBusiness Las Vegas’ Top 40 Under 40, and in 2009 he was named Entrepreneur of the Year by In Business Magazine. Dennis is a licensed attorney in California and Nevada, a past President of the Entrepreneurs’ Organization, Las Vegas Chapter, and is on the Southern Utah University School of Business National Advisory Board. Dennis is a frequent speaker at Workers’ Compensation and Pharmacy Conferences, including STRIMA, PRIMA, IRSG, RIMS and NCSI.
ScripNet is one of the fastest growing pharmacy benefit management (PBM) companies in North America, providing PBM services to over three million employees through pharmacies in all 50 states. ScripNet electronically processes prescription drug claims for workers’ compensation, which allows insurance carriers, large self-insured companies, municipalities, managed-care organizations, and third-party administrators to participate in better cost control and increased efficiency for pharmacists, and offers more convenience for injured workers. ScripNet offers a drug utilization review program that improves patient care, reduces fraud and abuse, and cuts administrative expense. ScripNet is a three time winner of Inc. Magazine’s annual listing of the 500 fastest growing privately held companies in the nation and was named one of the nation’s Best Places to Work in Insurance by Business Insurance Magazine.
To learn more, visit www.scripnet.com.