Are PBM Contractual Loopholes Costing Your Plan Money?

APRIL 6, 2021

While pharmacy is the fastest-growing component of health plans, many employers are given little guidance on how to better manage costs around their pharmacy programs. When employers ask their benefits consultants what they can do to gain more control over pharmacy expenses, the answer is often to shift additional costs to the employee or to change the benefit coverage. However, before changing benefits or plans, USI Insurance Services recommends that employers review their pharmacy contracts, as there may be opportunities to reduce plan costs.

Both integrated, “carve in” contracts with a health plan, as well as standalone “carve out” contracts with pharmacy benefit managers (PBMs) or third-party administrators (TPAs), often contain vague language that hurts the employer. Following are common strategies deployed by health plans, PBMs and TPAs that benefit them at the expense of employers. In addition, we’ve outlined strategies to help employers negotiate best-in-class contracts.

Drug Definitions

PBMs often loosely define generic drugs in an attempt to misclassify them as brand-name drugs. In some cases, PBMs classify a drug as a generic to determine member copay, and classify the same drug as a brand to reconcile discount guarantees. This practice artificially inflates the reported performance for both generic and brand-name drugs and ultimately boosts the PBM’s return on investment.

With a USI-managed, best-in-class contract, every prescription drug is classified as a generic or brand based on the multisource indicator code assigned and published by Medi-Span, a nationally recognized and independent database. Average wholesale price (AWP) is also based on Medi-Span AWP data, and is specific to the actual date the drug was dispensed and actual package size used, and prohibits pricing based on repackaged products. These stipulations save money and prevent PBMs from taking advantage of employers.

Financial Guarantees

Financial metrics should be specified in the pharmacy contract and guaranteed. The metrics should stand on their own with “no offsetting” of performance relative to guarantees or only minimal aggregation by dispensing channel.

Formulary and Rebates

Rebates, or price concessions paid by pharmaceutical manufacturers, are directly related to the type of formulary in place. A formulary is a list of drugs approved for reimbursement under the benefit plan. Some formularies are designed to drive members to lower-cost drugs, and as a result, pay less in rebates. Other formularies are less restrictive and focus on maximizing rebates.

When negotiating rebates, it’s important to recognize the impact a particular formulary might have on plan cost net of rebates. What a PBM defines as rebates varies as well. Some contracts guarantee that all forms of remuneration (i.e., revenue streams) that a PBM might receive from pharmaceutical manufacturers will pass through as rebates, whereas other contracts will reclassify (and retain) some portion as something other than rebates.

Auditing Provisions

PBMs should be required to release an internal annual reconciliation of performance relative to guarantees. All documentation that quantifies and validates actual performance should be provided as well to the auditor. Any differences between the respective results should be negotiated in good faith.

Exclusions

Any exclusions to discount and rebate guarantees should be fully disclosed in a contract, and understood and agreed upon by all parties. Vendors often try to utilize exclusions as a way of driving more revenue to their bottom line. Examples of exclusions to watch for include drugs that treat a specific condition, biosimilars, limited distribution drugs, new-to-market drugs, specialty drugs released during the contract term, and drugs with a member cost share above some percentage threshold.

General Terms and Provisions

How PBMs actually calculate “effective discounts” for reporting and reconciliation purposes can vary, making it important to understand the formula. Day supply limitations directly influence how drugs are priced and which rebate guarantees might be applicable. These types of general terms and provisions should be specified in the contract.

Length of Contract

The PBM industry is extremely dynamic and rapidly changing. We continually see year-over-year improvements in the form of stronger discount guarantees, lower dispensing fees and larger rebates. Many PBM contracts are based on a three-year term, which puts pricing guarantees at risk of becoming stale. It’s important that those contracts contain a market-check provision that provides an opportunity to renegotiate terms. At a minimum, this should include a market check during year two to impact pricing for the third year.

How USI Helps

To help employers better understand the impact of changes to their pharmacy contracts, USI developed a proprietary Pharmacy Contract Assessment tool that identifies areas where a contract can be improved and estimates the value of said improvements. For clients, USI utilizes this assessment to negotiate with PBMs for more favorable definitions, appropriate pricing and rebate sharing.

The PBM industry is rapidly evolving. USI benefits consultants are committed to staying abreast of PBM performance, and continually push to optimize contract language and address new loopholes as they arise.

To learn more about how USI helps employers better manage pharmacy costs, or to request an assessment of your organization’s pharmacy contract, contact your local USI benefits consultant or email ebsolutions@usi.com.