The Cost-Conscious HR Leader: Taking PBMs to Task
Connex Members identify pharmacy as their largest healthcare-related line item, with some reporting even low double-digit increases year over year. In order to understand how best to respond to and prevent year- over-year increases, one must take a critical look at how PBMs operate.
The modern Human Resource leader understands that their role is shifting, and with it, the expectations of their department. HR must become more strategic than tactical, capable of adding value and cutting costs wherever possible in order to make the business as efficient as it can be. Of the HR Members Connex engaged over the last 12 months, 64.9% reported having high interest in cost containment strategies; nearly 30% of those same respondents also indicated a need for PBM optimization, noting the importance of pharmaceutical price control as a core HR strategy.
Most of our Members identified pharmacy as their largest healthcare-related line item, with some reporting even low double-digit increases year over year. Globe Newswire reported in August of 2019 that data from WTW’s Rx Collaborative showed that nearly 20% of an employer’s overall healthcare spend comes from pharmaceuticals, and that number is expected to grow a whopping 5% by the same time in 2020.
In order to understand how best to respond to and prevent these kinds of year-over-year increases, one must take a critical look at how PBMs operate. Traditionally, the employer reimburses the PBM for the cost of the medications dispensed, and in most cases, an additional administrative fee; the PBM in turn pays each of their contracting parties and profits off any excess. While this seems like a commonsense and reasonable process in theory, it has deeply concerning realities buried in the details that negatively impact the employer:
- There is a fundamental lack of pharmaceutical lifecycle transparency
PBMs have traditionally kept their entire business lifecycle as opaque as possible, as the less the plan sponsor understands the finer details, the more room they have to inflate their margins. There has been no successful, comprehensive attempt to standardize drug prices nationally, enabling PBMs to price them according to their bottom-line interests; by keeping both pharmacies and employers in the dark about the data that matters – such as drug manufacturing costs – they’re able to avoid the free market pressures that would normally force a fair equilibrium.
Consider amoxicillin. Its average wholesale price (AWP) over the last 15 years has only increased by a few dollars. On the surface, one would be forgiven for assuming this is simply due to inflation. The story the AWP doesn’t tell is that the production costs for the same drug have fallen dramatically during the same window, with the growing margin going directly into the pockets of the nation’s PBMs. In a traditional PBM model, employers have no way to uncover these discrepancies without investing considerable time and research or relying on auditors – if their contract even allows for auditing – preventing accountability.
- Rebates and “spread” – not employer needs – dictate PBM incentives
PBMs negotiate price discounts directly with drug manufacturers in the form of rebates, which are paid based on sales volumes. In theory, these drugs would be included in the formulary and incentivized, with the savings generated passed back to the employer; in practice, PBMs offer lower administration fees to employers in exchange for keeping a larger portion of these rebates. Large rebate drugs are given preference on the formulary, whether they add significant value to the employer and employees or not. PBMs capture additional revenue from “spread” pricing with pharmacies, which means they keep the difference between what they pay pharmacies and charge plan sponsors. This directly encourages high-cost drug prioritization, increasing their margins at the expense of both the employer and the pharmacy.
- PBMs are not contracted on specific terms, and formularies are intentionally kept vague
PBM contracts do not – traditionally – specify a defined set of drugs and services at specific unit prices. The PBM is expected to act in the employer’s best interest and manage the program fairly, but they often aren’t bound to any specifics. Their formularies are equally vague, as are the terms used to categorize drugs. What constitutes a generic drug versus a brand drug is up to the PBM’s discretion, and it only gets more complicated as those segments get broken down. There is no standard for formulary quality, and with the only incentives coming from rebates and spread, formularies often include drugs that have little to no additional clinical value, like me-too and combination drugs; the former bracket is comprised of drugs that have small tweaks to particular ingredients to create a “new” drug without adding any value, and the latter combines active ingredients to create a new drug that is often more expensive than the cost of its constituent parts.
- We live in an age of PBM oligopoly, and TPAs are in on it
More than 80% of the PBM market is dominated by Express Scripts, CVS and Optum, who are often pushed by consultants and TPAs. These groups have helped build a – false – picture that makes employers feel they have no options, but not because the Big 3 represent any real standard for quality. Instead, these additional middlemen are often able to play all 3 sides of the equation: marketing PBMs they have relationships with to their clients, influencing or outright facilitating the purchase of their partnered PBM on their client’s behalf, and being part of the coalitions responsible for auditing their PBM partner and holding them accountable. Not only do they fail to be impartial, but they’ll typically receive funding directly from their PBM partners that goes unreported because it technically doesn’t qualify as a commission.
- Employers are catching up
Enterprising employers have caught on to the rebate issue and have begun fighting to retain a larger percentage. In response, PBMs have begun to diversify their revenue sources. Some have begun selling drug utilization data back to manufacturers, which is then used to improve drug sales and marketing strategies. This is not always disclosed clearly in the PBM contract, meaning employee usage data – albeit, scrubbed of identifying information – can be sold without consulting the employer or employee first. Effectively, PBMs can control drug spend while selling the utilization data it generates to those looking to maximize usage regardless of drug effectiveness or quality.
Turning the Tide
Within this environment, it is easy for employers to feel they’re at the mercy of PBMs, that their choices are limited, and that they have few ways to fight back. It’s critical that HR leaders realize that this is only what PBMs want them to believe, and that they have resources in their arsenal that can ultimately generate savings. Despite the best efforts of the Big 3, the PBM market, the HR consulting space, and HR best practices are all evolving to return control to the employer.
First, it’s imperative that HR leaders leverage the contracting process to their advantage. Either through the assistance of in-house legal teams or independent consulting partners, PBM contracts must have as many terms clarified as possible. There are too many terms in the pharmaceutical space with vague, non-standard definitions to leave them to chance. Push to examine formularies in detail – likely with support of an independent consultant – and protest against high-priced drugs with little to no added clinical value. Avoid agreements that limit your ability to audit and hold your PBM accountable; any partner taking a stance against transparency fails to have your best interests at heart. And lastly, avoid 3 to 5-year agreements, opting instead for shorter terms with clear termination clauses that give you the flexibility to reevaluate performance more often.
Second, HR leaders can turn to the independent PBM market in search of a more nimble, honest, and trustworthy partner. The Big 3 may control most of the market, but there are many smaller PBMs shaking up the market by offering the same level of retail coverage without the hassle of shady tactics. These providers often differentiate themselves through increased pricing transparency, flat fee arrangements, and backend automation – i.e. lower overhead costs – all of which work to the benefit of the employer. While it may be “easier” to convince local decision-makers to remain with well-known names or bundled PBM/health plan arrangements, that convenience comes at a dramatic cost.
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