Managing costs: shedding light on the Byzantine world of PBMs - benefits

Pharmacy benefit managers have come under more scrutiny due to recent litigation initiated by organizations alleging that PBMs are benefiting from undisclosed financial arrangements with drug manufacturers. These issues, along with annual double-digit pharmacy cost increases driven by increased utilization and overall drug costs, are prompting plan sponsors to take a closer look at their pharmacy benefit plans.

But in the confusing PBM world of discounts and manufacturer rebates, how do you know whether you're getting the best deal? Most plans measure financial performance based on what they spend for prescriptions per member per month, multiplying utilization by the average cost of a prescription.

While a PBM cannot control when people get sick and how often they utilize their prescription benefits, a PBM can control, or at least have an impact on, the average cost per prescription. This statistic will be the best measure of trend management. Why? Because the average cost per prescription is influenced by a number of factors that your PBM should be able to clearly explain.

Those factors include:

Average cost per brand prescription. Brand products will always be used. PBMs can control brand utilization by focusing on products that offer the best therapeutic results for the lowest net cost. When an appropriate generic alternative isn't available, look for the brand product that has the lowest average wholesale price (AWP). Discounts will be applied against the AWP to determine net cost. Plan sponsors should not worry about manufacturer rebates at this point, since there are few occasions where the rebate will make a more expensive product a better buy.

Average cost per generic prescription. Compared with brand name medications, generics are a true value. For most plans, the average generic cost is as much as 80 percent less than the cost of a prescription sold under a brand name. However, some generics, particularly those produced by a single manufacturer, can still be expensive.

The average cost of a generic is affected by the contracted discount pricing. If you are unable to clearly define what is considered MAC (maximum allowable cost), you're not alone. The products on a MAC list vary from PBM to PBM, and so do the discounts.

When a generic product is not MAC priced, then what discount are you getting? The best way to measure the value of generic pricing is to ask your PBM, "What is my plan's net effective generic discount, not including any usual and customary or zero-balance claims?" This number blends the actual discounts of MAC and non-MAC priced generic claims with no effect on the efficacy of your rates, since usual and customary and zero-balance claims are not a pricing strategy managed by the PBM.

Utilization rate of a brand-name product vs. a generic product. Plans that encourage the use of generics have dramatically lower costs. In fact, for every 1 percent increase in generic utilization, the plan cost is reduced by 40 cents.

Improving generic utilization involves not only motivating pharmacists to dispense generics whenever possible, but also educating plan members to ask their physicians for generically available alternatives.

For instance, say a patient has high blood pressure and the doctor prescribes the brand Norvasc. At the pharmacy the patient asks for a generic alternative but none exists because Norvasc is not available generically. The patient copays for a brand-name product and the plan pays $40 to $60 a month. If that patient asks the doctor for a generic medication, the physician would likely prescribe one of the many generically available drugs to treat hypertension. The patient would copay for a generic product. The cost to the plan would be only $5 to $10 per month.

Network Discounts

Rather than trying to navigate the convoluted language of network discounts, simply measure the results. Here's how:

Make sure you're dealing with 11-digit national drug codes. Discounts based on a calculation of the cost for the nine-digit code does not reflect the discount based on the product that was dispensed. Then, remove zero-balance claims or those priced as usual and customary. Total the average wholesale price for generic claims and brand claims and add up what was paid by the plan and the member for generic claims and brand claims. Finally, subtract what was paid from the average wholesale price, then divide by the average wholesale price. The result is your overall effective discount rate. This is the only rate that matters.

Manufacturer rebates. Rebates sound great, but consider this: Plan sponsors will save more money with a 5 percent increase in generic utilization rate than they'll ever recoup through rebate earnings. The problem with rebates is that you have to spend money to get them--sometimes more money than is necessary. That's why care should he taken, especially when locking into guaranteed minimum rebates. In order to meet such guarantees, many PBMs promote more expensive products that generate bigger rebates. Since even large rebates typically represent a very small percentage of total cost, you can easily spend much more than you save.

Rebates should be in line with expenses. If costs are running below the national trend and the plan is spending an average of $50 per prescription, plan sponsors should expect $1 or $2 in rebates, depending on the type of plan. More aggressive plan designs can increase rebates, but can also cost more to administer. PBMs should not charge additional fees to administer cost management strategies and programs that decrease ingredient costs.

Formularies and preferred products listings. Many therapeutic categories include multiple appropriate product choices. When all things are equal the preferred alternative should always be the medication with the lowest cost, which could be a generic prescription or a brand-name product. If the lowest priced medication is not preferred, there should be a good explanation. Consider changing programs if your current plan prefers more expensive products most of the time.

A simple way to compare costs is to review your top medication reports. Divide the total cost for each product by the number of days' supply. While other factors will slightly affect cost, this calculation will give you a good idea of your average daily cost for each medication.

PBMs that are most closely aligned with your plan goals will provide you with information and alternatives to help you cut costs. Understanding the factors that influence your pharmacy plan will enable you to develop a more effective working relationship with your PBM and better manage the costs of your plan.

Mark Campbell is CEO of Innoviant Corp., formerly Wausau Pharmacy Benefits. Before joining Wausau in 1998, Campbell was a pharmacy coordinator for Prudential Health Care in Memphis, Tenn.

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