Let’s face it, as pharmacy costs continue to rise, few employers are happy with their PBM. But with roughly 30% of contracts up for renewals every year, why are so few clients switching to a new solution? Two reasons.
The first reason is straightforward: there are few alternatives. 80% of the PBM market is controlled by the “Big Three,” legacy PBMs that have wielded their weight to advance the proliferation of dubious pharmacy benefits practices, practices that have contributed to skyrocketing prices on pharmaceutical drugs.
The other reason is more devious, let’s call it being lured back by the devil they know. Companies conduct a lengthy RFP process, but when it comes time to make a decision, they’re suddenly squeamish to jump to a new PBM vendor. What’s causing their last-minute heartburn? It’s nearly always a fresh package of monies from the incumbent PBM, a late-stage tactic that PBMs deploy to gussy up the so-called “best and final” offer they put on the table just last week. These eleventh-hour cost savings may seem lucrative, but the PBM is really just using these credits to put lipstick on their high-priced pharmacy pig.
While employers have little say around which players control the PBM market, they can start bending their cost curve by removing their reliance on these late-stage tricks, opting instead for per member per month (PMPM) pricing guarantees from their PBMs.
Monies offered by PBMs come in many forms – a general allowance credit that the client can use to pay for claims and expenses during open enrollment and implementation, an administrative credit that the client can use to pay back to the PBM for administrative fees, a clinical credit that the client can use to pay for voluntary clinical programs administered by the PBM or, at times, slightly improved pricing. If it seems odd that two of these credits go towards paying back the PBM for additional services, that’s because it is. Employers should think of these credits like getting tokens at a carnival – the tokens are valuable, but only if the employer uses them at the proverbial PBM carnival (i.e., invests them back into the PBM). If PBMs would manage their costs appropriately to begin with, employers wouldn’t be taken for this ride.
While these monies can be an economic lever for pharmacy benefit spending for a year or two, they’re not durable. They don’t change the long-term utilization patterns or cost of the drugs, levers that PBMs have at their disposal, but are unwilling to pull. Take the general allowance credit, which functions the closest to cash as it can be used to pay claims. Instead of giving the client one hundred thousand dollars in a general allowance credit, why don’t PBMs change the economics of managing the drugs that would lower costs far further than $100K? Because it would cut into their revenues. Instead, PBMs let costs swell, then dole out credits that offer a meager discount on the profits the PBM reaped from the client in the first place.
How do PBMs continue to get away with this? Because their pricing models hide behind complexity: the fee structures, the rigidity of the formulary, the opacity of rebates passing through introduces excessive and unnecessary uncertainty. PBMs rely on this uncertainty to make the monies they hand out instill some sense of savings on the offer. Any employer receiving last-minute monies should ask themselves: “Why didn’t I get your best deal when we requested your best and final offer?” The answer is simple: these tactics allow the PBM to sweeten the bid on the table by offering a short-term financial windfall without giving the client a more advantageous pricing arrangement. They improve the bid by artificially changing pricing dynamics enabling the PBM to assuage a fraction of the employer’s risk without introducing more aggressive rates to the marketplace.
Instead of offering monies, PBMs should make per member per month (PMPM) guarantees. PMPM guarantees would nullify much of a PBM’s opaque practices. Suddenly, the percent of rebates PBMs pass through or what rebate they guarantee per script would not be important. Gimmicks like administrative credits would no longer matter. It would also be easy to compare one PBM’s rates with another’s, something today’s PBM contracts make nearly impossible to quantify. Why is it so hard? It’s by design. By making it difficult to compare offers, PBMs remove pressure for a performance guarantee, giving them the upper hand when it comes to contract negotiations.
Today’s employers rely on pharmacy consultants to create sophisticated models that calculate their total cost and allow them to compare different PBM bids. These calculations are an exercise in futility; consultant models rarely match the actual costs that employers incur. Requiring that PBMs bid on a PMPM guarantee would reduce the employer’s uncertainty by securing the actual per member per month cost to the employer. They would not only make the total cost easy to calculate, employers would be able to effectively compare one PBM’s offer against another.
A PMPM guarantee would also shift the uncertainty from the employer, forcing the PBM to control their risk by passing through more rebates, managing their drug mix, and their overall utilization, practices that would lower drug costs. It would incentivize PBMs to move members towards less medications and more cost-efficient options. Employer drug spending would decrease, and so would the PBM’s profit margins, bad business for a publicly-traded company tasked with delivering quarter-over-quarter growth. This is why PMPM guarantees will only become the norm once employers begin pushing for them.
What can employers do to promote PMPM guarantee practices? Instead of treating last-minute monies like a welcome windfall, employers and their brokers need to fight for guaranteed PMPM rates, which represent the actual drivers of their growing pharmacy spending. By forcing PBMs to deliver on their guarantees, employers will not only have greater control during negotiations, they will be able to impact their cost trend for years to come. Everything else is just a drop in the profit chasm of legacy PBMs.
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