June 22, 2018

How to evaluate your pharmacy benefit management pricing arrangement

In this post, VP of Pharmacy Benefits Bryan Klazinga breaks down the complexities of the pharmacy benefit system.

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Pharmacy benefits can be difficult for members and employers to understand, despite Rx costs eating up a larger portion of both parties’ medical spending.  With all the moving parts, it can be increasingly hard to identify opportunities for savings while remembering that at the end of the chain is a patient – your employee.

In this post, VP of Pharmacy Benefits Bryan Klazinga breaks down the complexities of the pharmacy benefit system to expose the opportunities employers and their advisors have to bridge the gaps between cost-effective pharmacy benefits and patient experience.


Understand pharmacy benefit pricing

Despite intentions to provide the best benefits, pharmacy pricing is notoriously complicated, making it difficult for employers and advisors to feel confident in their strategies.

At its simplest, pharmacy pricing breaks down into pricing for brand drugs versus generic drugs, and mail order versus retail.  Pricing is also affected by the formulary, a list of preferred drugs, as well as the network of pharmacies enrolled. Additional elements play a role: copay structure, administrative fees, rebates, dispensing fees and clinical program fees.

This complicated pricing formula makes evaluating pharmacy benefit managers (PBMs) difficult. It’s possible that when employers or advisors question one area of their pricing structure, the PBM can simply increase their revenues in another area of the complicated pricing equation. Furthermore, PBMs can offer incentives to have exclusive arrangements for mail order that have yet to prove savings to the plan.


Recognize shortcomings in pharmacy benefit manager contracts

The pricing formula, however, is just the beginning. On top of the complicated pricing discounts and fees, employers and their administrators must carefully review contract language. There are definitions and other language within typical PBM agreements that could substantially affect the overall costs to the plan.  For example, the definition of a generic drug; Plan sponsors commonly overlook when discounted generics are excluded from the guarantee to raise the overall average discount.

All the moving parts of the pricing formula along with nebulous contract language makes it very difficult for the plan sponsor to know if they have a good pricing arrangement with the PBM.


Identify hidden PBM practices impacting spend

Unfortunately, there’s yet another layer. Revenue received by the PBM that is not included in an employer’s PBM cost quote will also affect their pharmacy costs.  Mail order is one common example. It has always been a revenue generator for PBMs, yet it is questionable if mail order will actually result in substantial savings.


Employers must also pay attention to the formulary (which drugs are covered) as well as who manages the prior authorization process.  It’s not uncommon for substantial rebates and fees to be paid to the PBM to have drugs covered under plans that should be excluded.  In many cases, these high-cost but low-value medications can be replaced by one or two generic medications at a fraction of the cost.  In other cases, due to manufacturer requirements, prior authorizations are approved for high-cost medications before cheaper first-line treatments are exhausted.


Take the next steps

How do we sort through the confusion so employers can provide a meaningful benefit and employees can get the life-saving medications they rely upon?  Employers are finding solutions in pharmacy benefit manager arrangements that provide individualized care to members and fully transparent pricing. This approach ensures employees get the right medication from the right source at the right time. In the end, this focus on the patient and lowest net cost provides employers with a sustainable health care benefit for the future.


Learn more about proactively managing your company’s pharmacy spend by contacting a member of our team.