Buck Bond Group

How to manage pharmacy benefits plans Part 3: As Pharma consolidates, even smaller employers can negotiate

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As pharmacy benefit manager (PBM) providers continue on the path of consolidation that began around 2007, they’re creating a buyer’s market for their services. For a PBM to generate more revenue now, it will need to take business away from its competitors, or absorb them. This creates significant savings opportunities even for smaller employers, opportunities that weren’t realistic even 3 years ago. Part 3 of our series on pharmacy benefits plan management continues with a look at the strategies employers can use to negotiate better deals.

Just 3 years ago, there were few opportunities for employers with 10,000 or fewer covered lives to negotiate with the PBMs. Today, the intense competition among the PBMs for employer business has opened up the possibilities to these employers to strike better arrangements. Competitive bidding by, and follow-on negotiations with, PBMs have enabled larger emploeyrs to achieve even greater savings that before. As a result, virtually all financial and non-financial terms are negotiable.

Strategic decisions that impact PBM pricing include:

  • The choice of retail network: As long as member access isn’t compromised, employers have an opportunity to achieve additional price savings by moving to a narrower network.
  • Managing the appropriate drug channel: Acute, maintenance, and specialty drugs need to be dispensed through the appropriate channel — retail, mail order, or specialty pharmacy — to achieve optimal pricing and savings.
  • Designing the right cost-share structure for the plan: PBM pricing is directly related to a plan’s member cost-share structure. The best pricing can be achieved with a three-tier cost-share structure that has appropriate cost-share differentials between retail and mail order generic, formulary brand and non-formulary brand drugs.

The caveat to this is that, in negotiating with PBMs, you’ll need resources who have a deep understanding of the economics of the PBM marketplace, how they make money, the nuanced language that is contained in their contracts with employers, and pricing benchmarks for employers of comparable size and in the same industry. For example, some PBMs offer high-dollar guaranteed rebates (e.g., $20 guaranteed rebate per brand drug dispensed at retail and $60 or more at mail order). However, in the fine print, the PBM may state that such high-dollar guaranteed rebates assume the plan will have an average days’ supply at retail of 30 and 90 at mail order. If the average days’ supply is less than these levels, the guaranteed dollar rebates would be prorated downward. In reality, these are impossible thresholds to meet. Such “stealth” pricing terms need to be identified and eliminated from a PBM’s pricing offer for employers to achieve optimal contract savings.

Next: Part 4: Specialty drugs, the new major cost driver of pharmacy benefit plans