Pharmacy benefit plan costs typically represent 20% or more of an employer’s total health care benefit plan costs, and these costs will continue to grow. It is expected that the cost of biotech/specialty drugs (already at 50% or more of pharmacy plan costs) will increase as the FDA approves more specialty drugs and expands treatment indications for current specialty drugs.
With this level of investment being made, companies want to ensure their pharmacy benefit program operates in the most cost-effective way. Typically, your Pharmacy Benefit Manager (PBM) is under contract with you to provide expertise in managing the program – but are they negotiating the best prices?
PBM contracting is complex. To be successful in achieving optimal contract terms, an employer needs to understand how PBMs make money and how to achieve optimal financial and non-financial terms through PBM negotiations.
There’s good news—and bad
The good news is the employer marketplace is a “buyer’s market” for PBM services – for new business. Virtually all financial and non-financial terms are negotiable because the PBM marketplace has consolidated over the past 10 years and fewer PBMs are competing for employer pharmacy plan business. Result: Virtually all pricing and other contract terms are negotiable.
However, these marketplace pricing improvements do not affect an employer’s current PBM contractual pricing terms. Result: Current pricing terms can become quickly outdated, and outdated pricing represents a lost savings opportunity on every pharmacy plan claim. PBM contracts often contain intentionally complex pricing and other terms, employing “stealth pricing” to maximize profit.
How to navigate this new marketplace
Negotiating a best-in-class PBM contract is the foundation from which employers can aggressively manage the pharmacy benefit. To be successful in achieving optimal contract terms, companies really need to retain a pharmacy benefit consultant with the clinical resources, industry expertise, and analytical capabilities, as well as the tools and benchmark data, to help negotiate optimal results.
This is achieved through a competitive-bidding approach that may require multiple “best-and-final offers” from competing PBMs to see significant improvements in prescription drug pricing and non-financial terms.
And we mean “significant”
Here’s what we mean by significant improvements.
Working on behalf of a client recently, we required two PBM finalists to improve their offers four times following their initial proposals before we were satisfied that optimal financial and non-financial terms were achieved.
In this case, the result produced projected three-year savings net of rebates, relative to current contract pricing, that exceed $30 million—or more than 28%, which was almost triple the savings generated by those first proposals.
Staying current
There are many dynamic factors that drive change and influence costs and trends in pharmacy benefit plan management: new offerings, changes in the marketplace, and opportunities to better manage the plan’s “trend and spend.”
For instance, many PBM contracts include a market check provision, which allows an employer’s consultant to compare current PBM pricing terms with those of comparable employer plans (usually in the second or third quarter of the second contract year). A market check ensures that PBM contract pricing in the third year of a three-year contract remains marketplace competitive. Typically, if savings from this analysis exceed the savings threshold in the market check provision (usually 1% – 2% of net plan costs), then improved pricing terms can be negotiated with the PBM for the upcoming plan year.
Speak up!
Sponsors need constantly question whether their PBMs are performing diligently in accordance with the contract terms and coverage policies to ensure a high quality, cost-effective pharmacy benefit programs is run without costly mistakes.
In this buyer’s market for PBM services, an employer’s philosophy needs to be, “If you don’t ask, you don’t get!”