Foundational Issues Facing the Pharmacy Benefit Manager (PBM) Industry

Pharmacy Benefit Managers (PBMs) have long been portrayed in a negative light, often being called “a middleman who increases costs, has little regard for patients, and brings no value.” Recent articles in The New York Times and The Wall Street Journal, as well as a partial report from the Federal Trade Commission (FTC) have both fed off and reinforced these perceptions.

We are living in highly divisive and emotional times. It is often difficult for some of us to hear what others have to say when what is said contrasts or conflicts with our belief system. This dynamic is often heightened when it involves healthcare-related issues and considerations, given the view that healthcare is an essential right.

PBM Issues and Considerations

Due to the prominence of PBMs and the essential services they provide, it is imperative that a detailed analysis, description, and discussion occur around the facts and realities tied to the industry. The Risk Strategies Consulting team is developing a detailed white paper designed to bring clarity and context to a highly complex series of related topics.

The white paper will address several issues and considerations, including the following:

• PBMs have an obligation to provide value propositions that encompass advantaged cost of goods, optimal clinical and financial outcomes, enhanced member and provider experiences, as well as health equity. Each PBM, including but not limited to, the big three of Caremark, ESI and Optum, has its own distinct business model that must be examined to determine where and how it meets, exceeds, or falls short of each of these key areas. There are inherent strengths and weaknesses within each model and company that must be quantified, qualified, and understood.
  
  
• PBMs are part of a complex buy/sell supply chain that includes, but is not limited to, manufacturers, wholesalers, distributors, Group Purchasing Organizations (GPOs), rebate aggregators, health systems, health plans, consultant-owned coalitions, pharmacies, and government. When this supply chain is examined in its entirety, we find that PBMs are sometimes held accountable for the actions and realities driven by other entities within the supply chain. PBMs do not operate in a vacuum, and must work within the existing supply chain. Reform requires accountability, incentive realignment, and change from several of the other entities within the supply chain.
  
  
• Government acts as the legislature, regulator, and largest purchaser of pharmacy benefits. This is a unique and powerful position. Often government does not speak with one voice. There are frequent contradictions between the various agencies and legislators on even simple matters, such as defining the terms “transparency” and “pass-through.” The existing rebate structure, which has been a focus of so much of the PBM-based criticism, was actually created by Pharma (i.e., pharmacy manufacturing industry) in the 1990s in response to litigation regarding then existing discount-based pricing practices utilized by manufactures to obtain preferred positioning for their products. Some bona fide service fees, which are another form of monies being transferred by Pharma to PBMs, have been legislated, and are therefore required. Clarity and transparency of the existing complex flow of monies between Pharma and PBMs does not wholly address the issues at hand. The causalities of the issues facing the market go beyond the role of the PBMs and into how Pharma incents behaviors to other key members of the supply chain including wholesalers, distributors, GPOs, rebate aggregators, health systems, health plans, and pharmacies.
  
  
• There is significant controversy about vertical integration within the various forms of healthcare delivery. This extends beyond PBMs to instances where health systems own physicians, health systems own health plans, health plans own health systems, and/or physician groups, as well as instances in which health plans and PBMs exist under common ownership. The potential for misaligned movement of monies is a reality that requires disclosure, diligence, auditing, and accountability. In the PBM space, vertical integration takes a few forms. These include PBMs being owned by health plans, PBMs being owned by retailers, PBMs owning home delivery and specialty pharmacies, PBMs and retail pharmacies subject to common interest ownership, as well as PBMs participating directly in the manufacturing of medications. Potential conflicts of interest exist within any one of these models or instances, therefore requiring disclosure, diligence, auditing, and accountability. Vertical integration within either the health plan or PBM ecosystem needs to be evaluated objectively for advantages and consequences along with a full understanding of the business model in question in order to adequately demonstrate both the value propositions and the flow of monies.
  
  
• Medication therapies are changing how healthcare is being delivered. Clinical protocols and practices have undergone fundamental changes in the areas of oncology and cardiology. When combining the cost of care between medical-based medications and PBM-based care, we know that the total comprises approximately 40% of total healthcare costs. This number will grow in the coming years due to the pipeline of high-cost specialty drugs, gene therapies, and cell therapies. Healthcare delivery systems will change significantly, and infusion centers will invariably replace some inpatient facilities and services.
  
  On the pharmacy side, there has been a long-recognized national oversupply of retail and other pharmacies. We have already seen the early stages of the reduction in retail pharmacy outlets. As this trend continues, there will be a resulting increase in pharmacy reimbursement levels, with the corresponding increase in costs to plan sponsors and patients. There are also likely instances where access to retail pharmacies is diminished with the resulting creation of “pharmacy deserts.”

Foundational Issues with Financial Models

A foundational issue facing the PBM industry is its use of “spread pricing” revenue models. The basis of these models is the use of false and/or fictitious buying/pricing indices such as Average Wholesale Price (AWP), Average Sale Price (ASP), and Wholesale Acquisition Cost (WAC). None of these indices are fully and accurately tied to the true net acquisition cost of the goods purchased. In fact, true net acquisition costs change daily. There are a number of variables including, but not limited to, rebates, bona fide service fees, and invoice credits, as well as other monies that are paid by Pharma to lower acquisition cost and/or to better position their products.

PBMs’ stated financial propositions are standardly depicted as guaranteed percentage discounts off of AWP, ASP, and WAC, guaranteed rebate levels, and guaranteed dispensing fees. Separate discount guarantees are quoted for brand, generic and specialty drug, as well as between prescriptions dispensed on either a retail or home delivery basis. The various PBMs often utilize subtle differences in defining generic, brand, and specialty drugs, as well as rebates. The valuation process of PBMs’ financial offerings is foundationally flawed. Discounts off of fictitious indices, combined with subtle definitional differentials make it difficult, at best, to accurately assess and depict the actual financial value. The market, and the consultants leading it, need to employ financial models that convert PBM pricing to a per member per month cost basis. It is essential to note that health plans and self-funded plan sponsors utilize per member per month costs in building their accruals for either insured rates or self-funded rate equivalents. The present financial modeling leaves room for potential significant errors, thus creating a lack of accountability for both PBMs and consultants.

Risk Strategies Consulting has found that the surest way to resolve the issues tied to spread pricing is to negotiate a contract with the PBM that is based upon “true net acquisition costs.”  Our white paper will include terms and definitions that realize actual true net acquisition costs. This language has been successfully negotiated with different PBMs for a number of our clients. Combined with needed audit language, it enables true alignment and accountability, as well as accurate valuation of the PBMs’ performance.

Moving Market Focus

Failure to move the market to true net acquisition costs leaves us “fighting the last war.”  The market needs to move its focus to the efficacy of differing clinical management strategies and how medication therapies affect a patient’s whole health. This includes the proper management of existing and emerging drug therapies. We have found success collaborating with a number of PBMs around these issues and considerations. These same PBMs realize their business models will inevitably change in the next three-to-five years as the market requires them to demonstrate differentiating clinical and financial outcomes that benefit both the patient and plan sponsor.
We are anxious to receive feedback on our white paper, including, but not limited to, the terms and definitions of true net acquisition costs.

Addressing the shortfalls of the PBMs on a stand-alone basis will not resolve the issues at hand. As consultants, our job is to objectively and fully take on complex issues, explain them with enough accuracy, detail, and context, so that actionable outcomes can be determined and undertaken. The status quo and its inherent problems go beyond the roles, responsibilities, and realities of PBMs. There are a number of entities in the supply chain who are hesitant to see the existing model evolve. Our goal is to broaden the discussion so that the market can realize its needed comprehensive changes.

Learn more about Risk Strategies Consulting or email us at  riskstrategiesconsulting@risk-strategies.com.