Don't Forget Your PBM Contracts!

With healthcare reform looming, drug costs skyrocketing and pharmacy benefit managers trying to win customers in a consolidation flux, now's the time to look at your PBM contracts for some potentially significant savings.

Thursday, June 13, 2013
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If HR leaders and their benefits administrators are focusing on the bigger picture of healthcare reform -- private exchanges, employer-sponsored healthcare plans, full-time versus part-time worker classifications -- at the expense of what they consider a smaller concern, their pharmacy-benefit-manager contract, they're doing so at their own peril, experts say.

Now is the time to dig it out, dust if off and benchmark it against the deals that are currently being made in what Paul Burns calls "a buyer's market for PBM pricing."

"With many medications having double-digit price increases, and with the continued consolidation among PBMs," there's never been a better time for "aggressive PBM negotiations," says Burns, principal and national pharmacy practice leader for New York-based Buck Consultants, a Xerox Co. "Any PBM contract that is 18-to-24-months old should be reviewed for pricing competitiveness as well as up-to-date contractual language."

With all the ideas flying around in HR and benefit circles as ways to avoid cost increases with the Affordable Care Act barreling toward reality, and with "all the momentum out there right now in terms of private exchanges, employer groups and so on," says Burns, "I'm telling clients, 'Don't forget the basics; pay attention to the PBM-contract negotiation.' "

Continued acquisitions in the PBM industry -- not just the big ones such as Express Scripts/Medco and CVS/Caremark, but smaller ones too -- have increased the pressure to "deliver growth to the street and win business" for these new conglomerates, he says. "That means significant downward-pricing pressure." Even health insurers' PBMs, such as Aetna's and Cigna's, he says, are becoming "extremely price-competitive."

In fact, says Burns, "in the last 18 months, I have seen an increase in this downward-pricing pressure that I have never witnessed before. I'm seeing a deal that's maybe two-and-a-half years old [go through a market comparison for the identical company and contract and] come out 10 percent better. We've even had a couple comparisons that were 13 percent and 14 percent better.

"It's been quite surprising and should not be ignored by employers," he adds. "I think they need to wake up. They may not be attracted to something as basic as a PBM contract [in the midst of so many more crucial issues and looming costs tied to healthcare reform], but they need to be."

David W. Dross, partner and managed pharmacy practice leader for Houston-based Mercer, concurs.

"So many HR executives are so overwhelmed with healthcare reform and what they're going to do," says Dross, "that they're saying, 'Well, the pharmacy costs aren't really so urgent.' Unless there's some specific 'pain' with pharmacy, they might not pay attention to it."

But they should. "They need to understand that medical-care contracts are much easier to get out of than pharmacy," he says. With PBM contracts generally running in three-year cycles, HR and benefits leaders might decide to move into a private healthcare exchange in, say, 2015, yet be locked into a PBM contract for longer than that if they haven't done their homework and forward calculations.

"You would have significant issues moving to a private exchange if you're going to still be locked into a PBM contract," he says. "You would be limited in what you want to do [to keep a lid on costs] in terms of ACA."

More importantly, though he agrees with Burns that there's some significant money to be saved in today's price-competitive PBM market (in fact, Buck's 2013 Prescription Drug Benefit Survey shows 61 percent of employers now use PBMs compared to 57 percent in 2011 and 47 percent in 2009, with the majority, 68 percent, citing pricing competitiveness as an extremely important PBM service), Dross thinks an equally -- if not more important -- point of negotiation should be around the language and terms of the contract.

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For instance, in most Mercer PBM contracts, he says, consultants have helped clients get their PBMs to agree to what they call an "annual market check." Though their agreed-upon terms are for three years, the market-check clause allows them to tweak the contract terms that aren't keeping up with market trends at the end of each year.

Mercer also gets its PBMs to agree, for the most part, to a 90-day termination-without-cause clause stating that, if the client provides a 90-day notice for getting out of the contract, "they will generally agree to it," Dross says.

His most potent advice to the companies he serves is this: " 'Does your contract allow you the flexibility to do what you want to do in terms of strategies for handling healthcare reform?' "

He also advises employers "do a checkup" on whatever utilization-management program they're using and whether they're getting their money out of it. (Generally, many of his clients are discovering they're not, he says.)

In addition, he suggests everyone prepare for significant price increases in the near future for specialty biotech medications. Right now, says Dross, such medications account for about 15 percent of total pharmacy spend, but that number could be going to 40 percent and even 50 percent of pharmacy cost with fewer and fewer big-name drugs going generic. That movement -- brand-name to generic -- has, he suggests, "reached its saturation point" and the specialty drugs -- such as for rheumatoid arthritis and hepatitis C -- are going to "skyrocket in price."

What's more, adds Burns, "when you look at these contracts' terms and language [around generics], what appears to be a good deal may not be a good deal." For instance, you might be following "a benchmarked best practice for generics," he says, "but if your definition of generics is different from the PBM's definition of generics, then your numbers will be different from what you're seeing as benchmarked."

Buck's definition, for instance, "is going to be very specific [whereas] a PBM's is going to be more broad and might include some brands," says Burns.

"You need to be prepared for these numbers differentials," he says, "and [feed what you find into] the little gamesmanship you'll need when you're negotiating your contract."

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