Strategies employers can use to corral drug costs and change the system

Drug costs have risen astronomically over the last few decades. Twenty years ago drug spending accounted for just 7% of healthcare spending, but now, many employer groups allocate half of their healthcare spending toward prescription benefits. Since approximately half of Americans take prescription drugs, cost is an issue for both employees and employers.

Given that companies have such tremendous spending power, it would be logical to conclude that employers would be exerting unprecedented pressure on their pharmacy benefit managers, those organizations that exist to reduce prescription drug costs through aggregated buying power and market leverage. So, it may be surprising to learn that the relationships employers have with their PBMs are often their least cost-effective partnerships. Worse, employers aren’t even aware that they’re entering into unfavorable contracts with PBMs.

A culture without clarity
The relationships aren’t cost-effective because employers never see drug prices. Traditional PBMs shroud their compensation and drug costs, using terms like “annual average guarantees,” “effective rates” and “inflationary adjusted savings,” to describe prices, never committing to numbers. Imagine buying a car without knowing the price. In this environment, PBMs promise savings without disclosing drug costs, bearing no risk and leaving employers to cover the bill when they don’t deliver on projected savings.

Most PBMs use Average Wholesale Price to calculate pricing performance, but its reliability is questioned by its own publisher, which “does not perform any independent investigation, survey, or analysis to determine whether any pricing information reported to it by manufacturers is an accurate representation of drug purchase or sale prices.” If the publisher questions the accuracy, why do PBMs continue using it? Because inaccuracy creates confusion, increasing profitability.

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Without communication between employer groups and pharmacies, the two main parties in PBM transactions, pricing will remain unfair and inefficient. Pharmacies are prohibited from communicating with employer groups about drug prices, so with buyers and sellers isolated, PBMs can charge any price. PBMs earn billions through employer ignorance and price opacity. Full price transparency is the key to reducing drug costs and making the market competitive.

Drawing the blinds
According to the National Alliance of Healthcare Purchases Coalitions, over 60% of employers find drug and medical spending unsustainable.

The good news: employers can corral these costs and change the system with surprisingly simple steps. First, ask for prescription drug prices, in writing. If a PBM pushes back, remember that each supply chain participant has a price. The pharmaceutical company sells to wholesalers, who sell to pharmacies with actual prices. Yet, when employers receive PBM contracts, the prices disappear. PBMs claim to negotiate lower costs, but every employer contract is different, filled with abstract promises that describe potential performance over the course of years. Let’s be frank, we buy everything else in the U.S. with prices, not descriptions.

Second, don’t shoehorn a transparent PBM into a traditional PBM spreadsheet, which only benefits companies that have mastered artificial price manipulation, margin spread, and contractual optics to ensure profitability. Instead, the traditional PBM should abide by the transparent rules and if PBMs don’t want to comply, they should face financial penalties or removal from the bidding process.

Third, request rebates on a per-member per-month basis. It’s more straightforward and certain than a per-claim basis, which can be fungible as specialty lists and rebate definitions change. PBMs can hide behind broad definitions, shift classifications, alter lists and invalidate rebates based upon regulatory changes. However, PBMs can’t redefine a member, so a cleaner approach is switching to PMPM rebates without allowing any escape clauses.

Last, beware of outrageous savings promises or “shared savings” models without third-party oversight. Here’s a hint, if your Stop-Loss Carrier or the reinsurer won’t honor a PBM’s projected savings, why should you? The only way to have confidence in projections is by selecting a financially transparent PBM offering actual prices, PMPM rebates and actual performance risk.

These steps add accountability to the PBM-employer relationship and allow employers to better forecast expenditures, adding cost certainty. A PBM is hired to administrate a benefit, so it should result in what’s best for your employees.

Seeing the full picture
Medication is vital to many Americans’ healthcare, and since employee health is closely linked to productivity – the Centers for Disease Control and Prevention estimates that productivity losses related to health problems cost employers $225.8 billion each year — the advantage to companies is often greater than a line item in the budget.

Like much of U.S. healthcare, the biggest inhibitor to change in pharmacy benefit management is the status quo. In 20 years, the PBM-based drug procurement process hasn’t changed much — other than the costs to payers, but it doesn’t have to be this way. The power is in employers’ hands, if only they seek truth to power.