6 Things Every Employer Should Know About Their Pharmacy Benefit Manager

Pharmacy benefit managers (PBMs) ostensibly work on behalf of self-insured employers to manage drug spending and ensure employee access to preventive and curative medications. But an industrywide lack of transparency, coupled with complex and often-confusing policies and contract terms, has opened the door to PBM profiteering. Large, self-insured employers – and their employees – are the ones paying the price.

Here are six things employers should keep in mind when evaluating the drug supply chain and PBMs:

1. The higher the drug price, the more money the PBM makes. Like drug manufacturers and wholesalers, PBMs are paid a percentage of retail drug prices. They’re incentivized to exclude lower-cost drugs and promote higher-cost medications in their approved drug lists or formularies. This means employers often end up paying higher drug prices for branded medications when clinically equivalent generic drugs exist. Branded drugs will at times, be needed, knowing that, every employer should engage in a detailed negotiation related to rebates and insist that all earned rebate dollars are passed back to the employer.

2. Industry consolidation is contributing to reduced transparency and higher costs. The three leading PBMs are controlled by national health care enterprises, managing nearly 90% of prescription claims in the U.S. These consolidations create potential conflicts of interest between business units and make it nearly impossible to trace the flow of funds surrounding prescription drug costs. Every employer should take their PBM out to bid at the end of every contract cycle and consider working with new market entrants that have adopted a more innovative, transparent approach, aligned with the needs of employers and their employees.

3. The big three PBMs are adding cost and opacity by layering on new organizations that contract directly with drug manufacturers. The three leading PBMs all have group purchasing organizations (GPOs) to serve as intermediaries between drug manufacturers and their respective PBM operations. Even though it’s not clear what, if any, value the GPOs will create, research suggests they’re expected to extract an added 5-8% in fees from the drug supply chain. Additionally, because they’re replacing PBMs as the organizations that contract directly with drug manufacturers, the GPOs will help insulate PBM operations from audits and potential legislative cost remedies, including new transparency requirements of the Consolidated Appropriations Act. Every employer should scrutinize their PBM contract and ensure they have access to the data ownership and audit rights they need to evaluate and optimize their pharmacy benefit.

4. Employers should focus less on rebates and more on total manufacturer revenue. In PBM contract negotiations, large employers typically want a guarantee that they will receive 100% of manufacturer rebates, often missing the contractual loophole that caps these rebate payments at a fixed dollar amount, preventing the employer from collecting on total rebates earned. This is money PBMs have long kept for themselves to boost profitability. On top of an employer’s rebate dollars, a PBMs collection of administrative fees has also increased, with transaction and claims processing fees as recent additions to client invoices. Employers should comfortably question every fee that gets included in their PBM contract. To implement the strongest possible contract, every employer should push for a guarantee of a major percentage of all manufacturer revenues, or the higher of, the guaranteed rebate amount or actual manufacturer rebates earned.

5. Each PBM creates its own definitions of brand and generic drugs. Almost every single PBM contract begins with a Definitions section. PBMs have long used widely varying definitions for categorizing drug types to maximize their rebate earnings. To make matters more confusing, the initial Definitions section isn’t the only place PBMs define contractual terms; they might do so in several other spots throughout the contract. In doing this, PBMs are guaranteeing they maximize their opportunities to make decisions that continue to fuel their profits. Every employer should be vigilant about their PBM’s defining and redefining of contractual terms as it directly impacts the employer’s financial plan performance. Your contracts begin with an all-inclusive Definitions section, using the readily accessible industry standards as the source, and include a clause dictating that the terms and their definitions are only available once.

6. Three critical questions should be asked and answered before signing a contract. PBMs have long thrived in an environment characterized by inordinate complexity and a lack of transparency. For this to change, every employer must become more informed and proactive to use their purchasing power to ensure PBMs are consistently working in the best interests of the employer and its employees.

Use this information and the following set of questions in your upcoming discussion with your PBM:

• What are you [PBM] doing to drive to the lowest net cost for my plan?
  • Employers should not be romanced by the story of high rebate earnings potential. Your PBM’s best practice should always be to implement the lowest-cost, highest-efficacy formulary.
• Do you [PBM] mandate/encourage the use of generic drugs?
  • The FDA requires generic drugs to have the same active ingredient, strength, dosage form, and route of administration as the brand-name drug. A PBM looking to drive for the lowest net cost and most patient centered outcomes would be managing their formulary by including the lowest cost option for these medications as opposed to the higher cost branded product that would be driving more silent rebate dollars to them.
• What measures are in place to ensure that only the most clinically effective, lowest net cost drug is administered and approved for my member?
  • Guaranteeing there is never a brand drug indicated as preferred over an available generic or biosimilar drug is the foundation for driving clinically effective utilization amongst your membership.