The Battle of PBM Analytics (Part 1)

The Battle of PBM Analytics | Risk & Insurance | With difficult economic times upon us, benefits plan sponsors and plan members have become strange bedfellows in their desire to cut pharmacy benefits costs without sacrificing coverage. The good news is that there are dollars to save.

By JOHN ADLER, national practice leader for TRICAST Inc., an audit, quality assurance, process improvement and consulting firm located in Milwaukee

(Editor's note: This is Part 1 in a two-part article.)

Part 1: Consensus Hard to Find (10/11/12)
Sifting Through Models and Motives (03/01/12)
States Take Lead on Compounding Pharmacies (Politico) (05/08/13)
Ushering in a New Class of Painkillers (03/01/13)
The Class of 2011 (05/29/12)

They're hidden in the pricing spreadsheet often used to evaluate pharmacy benefits management pricing. The bad news is that you need new and innovative analytics to uncover those savings.

Plan sponsors who are looking for the most cost-effective (and patient-friendly) prescription drug benefits plan can now ask for sophisticated pricing and cost information that will help them achieve savings without sacrificing coverage. By focusing on the total net cost of a pharmacy benefits plan--rather than the individual prices offered by the pharmacy benefits manager--plan sponsors and members can achieve significant savings.

Plan sponsors who choose their PBM services based on total net cost are better positioned to control prescription expenses than those who rely strictly on drug pricing and rebates.

What are the primary elements of total net cost? The primary elements of total net cost are drug mix and channel mix. Drug mix is the percentage of generic drugs in a plan's formulary, while channel mix is the percentage of retail prescriptions versus mail-order prescriptions.

THE ROLE OF DRUG MIX

Plans that take advantage of the growing number of generics available in the market can realize significant savings. The ability to move consumers to generics is crucial to keeping pharmacy benefits affordable. Innovative PBMs encourage switching to generics from brands through member communication that uses pertinent and timely information. Informing plan members of impending generic releases is a good example of this type of communication.

When combined with traditional financial incentives, such as higher co-pays for branded drugs, this same communication becomes an example of combining the old with the new to create a more powerful approach to modifying member behavior.

Plan sponsors can also realize tremendous savings with drug mix through the use of step therapy programs that begin with an over-the-counter drug. Examples of therapeutic categories that are no-brainers for these savings are nonsedating antihistamines and gastro-esophageal reflux disease.

Plan sponsors can upgrade the benefit by establishing a zero-dollar co-pay for members if they choose the OTC. This will maximize the member incentive to switch to the OTC option. In addition, they can offer to pay the PBM an administrative fee for each OTC script. This helps maintain the PBM revenue model and gives them an incentive to establish the operational pieces necessary for OTC step therapy programs to succeed.

For the plan member, a $10 co-pay savings may not have been an incentive a year ago. But with today's economic crisis, that same $10 helps offset the rising costs of everything from basic food supplies to healthcare insurance co-pays.

In addition, a doctor must write a script for each OTC, just as they would for a legend drug. This means that all OTC scripts are subject to the same adjudication as a generic or brand script for eligibility and all other electronic edits in place to protect against improper utilization, clinical appropriateness, fraud, waste and abuse.

Generic substitution incentives are worth pursuing under almost all circumstances. The long-term cost-savings of clinically appropriate generic substitutions are enormous for plan sponsors and plan members. A generic drug typically costs 60 percent less than its brand-name counterpart. A 1 percent increase in the plan's generic fill rate will typically save the plan sponsor 1.5 percent of its annual drug spend and allow the organization to maintain current benefits levels for its plan members.

The good news is that these savings will continue to increase over the next five years. More than 20 brand-name drugs worth more than $60 billion in annual sales will go off patent between 2009 and 2013.

MAIL VS. RETAIL: THE ROLE OF CHANNEL MIX

Is mail order more cost-effective than retail? When discussing the role of how channel mix affects total drug spend, no question is asked more often. Why is this question so compelling and often difficult to answer?

One point of differentiation is that mail order can drive higher engagement through consumer education communications, leading to improved compliance and better drug mix.

According to an analysis by the Lewin Group, mail order saves about 10 percent of total plan costs. This represents significant savings for both the plan sponsor and the plan member. These savings are dependent on several variables. Two of the most important are generic contract pricing, and how effectively the concurrent drug utilization review edits between retail and mail order "talk" to each other.

GENERIC CONTRACT PRICING

Day in and day out, branded drugs are less expensive at mail order than at retail. However, generics can be a different story. Why?

All PBMs establish retail generic reimbursement to pharmacies using maximum allowable cost (MAC) pricing programs. In a retail MAC pricing program, the retail pharmacy is paid a set reimbursement for generic drugs in each therapeutic category, regardless of the selected drug's list price, also called the average wholesale price (AWP).

Typically, retail pharmacies maximize their profit by dispensing the generic drug that costs them the least. This also means that the lower AWP is typically chosen. The PBM represents the MAC contract pricing as part of an overall discount guarantee, which is usually 55 percent to 60 percent less than AWP.

PBMs typically do not have MAC pricing programs for generics at mail order. This can result in a greater discount being calculated while, in fact, the net cost is greater than at retail. How can this be?

If PBMs consistently pick the higher AWP generic drug in each therapeutic category, they can offer a greater discount, when, in fact, the net cost is greater. A 60 percent discount from a $150 AWP results in a higher cost than a 50 percent discount from a $100 AWP.

It is important to understand this concept and ask your PBM the questions necessary to ferret out this little-examined quirk in PBM contract pricing. If you do, you are well on your way to a basic understanding of whether mail order is more cost effective than retail.

(Editor's note: Part 2 of this piece will look at how to prevent duplicate therapy, the latest analytical tools to capture total cost and how to empower your employees to become better healthcare consumers. The story will be posted online as a Web extra in the May issue.)

April 15, 2009

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