Transparency
In the aftermath of the 2009 average wholesale price settlement, 2010 is proving to be a year of increased scrutiny in the pharmacy benefit management industry. Employers know more than they did a year ago, after the complex pricing schemes between drug manufacturers, pharmacies, and pharmacy benefit managers (PBMs) were brought to light through the high-profile class action lawsuit.
As a result, employers are taking action to eliminate wasteful spending in their pharmacy benefit programs by implementing minimum rebate guarantees, auditing provisions, generic classification guarantees, rigorous financial valuations, and strategic formulary management. As a result of their efforts, some employers are saving an average of $100 per employee per year, which equates to approximately 1 percent of their total healthcare spending—all without cost shifting to employees.
However, the industry has a long way to go on the path to transparency. For example, less than 12 percent of the 400 employers that responded to the Pharmacy Benefit Management Institute’s 2009-2010 Prescription Drug Survey were able to quantify and report on their rebates.
AWP Settlement: AWP (average wholesale price) is the most common price benchmark for
prescription drugs. A class action lawsuit claimed
that the publishers of AWP wrongfully inflated base
prices, resulting in many drug purchasers overpaying
for certain drugs. The 2009 settlement forced
publishers to lower AWP prices, which would have
resulted in employer savings. However, in response
to the settlement, some PBMs proposed contract
modifications that decreased promised employer
discounts, thus eliminating the employer savings.
Minimum Rebate Guarantee: The employer is
guaranteed to receive a stated dollar amount per
brand script in rebates. If the guarantee is not met at
the end of the year, the PBM must pay the employer
the dollar-for-dollar difference.
Auditing Provisions: In order to reconcile the
PBM’s performance to financial guarantees, these
contract provisions should allow the employer to
complete an annual, independent audit of every single
claim.
Generic Classification Guarantee: This guarantee
protects employers from the common PBM practice
of "flipping" drugs between generics and brands. A
generic classification guarantee defines which drugs
are "generics" and which are "brands," in order to
compare discounts on an apples-to-apples basis. The
PBM must pay a penalty for any deviation from the
classification.
Rigorous Financial Valuation: A claim-by-claim
repricing analysis on a full 12 months of data covering
all components of a drug’s cost may be used to tell
employers if they are really getting the guarantees
promised in the contract. It may also be used in the
marketing processing when selecting a PBM.
Formulary Management: The formulary list of
preferred brand drugs should contain drugs that cost
less than other brand equivalents and are just as
clinically effective. Financial and clinical expertise is
needed for ongoing management of the formulary.
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Cutting Out the Middleman
In 2009, Caterpillar struck a deal with Wal-Mart and Walgreens to get direct pharmacy purchasing for their employees, without the PBM in the middle. This cost-plus pricing arrangement takes discounts, rebates, administration fees, and other traditional spread-pricing components out of the equation. Cost-plus pricing is simply the cost Walgreens or Wal-Mart pays for a drug from the manufacturer plus distribution cost, filling cost, and profit.
While it is too early in the year to quantify the dollars, Caterpillar executives tell the media they are indeed seeing significant savings, and other employers are catching on. Most recently, news broke that Delta Airlines is considering a similar arrangement with Walgreens.
Savings in the Genes
A new decade brings a new era of genetic testing in personalized medicine. The larger PBMs have begun encouraging doctors to use genetic testing before prescribing particular specialty drugs, the idea being to save money and increase drug efficacy. Thousands of dollars can be wasted on a single patient when an ineffective drug is dispensed—not only is the wasted specialty drug expensive, but many times the patient is readmitted to the hospital because the condition was not treated.
Here is how the genetic testing program works: When the PBM’s system identifies a physician’s order for a drug in the program, they call the doctor and recommend a genetic test before the drug is dispensed. A call is also made to the patient. The doctor and patient must both agree to the test before a testing kit is sent out.
Medco Health Solutions, Inc. has already signed up 200 employers and 7,000,000 members, and CVS Caremark has also launched a similar genetic-testing program. |
U.S. Prescription Drug Spending Trend
Historical and Projected
The drop in the rate of national drug growth in 2008 is thought to be a result of the poor
economy—as patients substituted low-cost generics for expensive brand name drugs and cut
back on their number of fills. Increases in generic utilization from 2006 to 2009 also kept the
trend down, but this will begin to be offset by the increasing use of high-cost specialty medication
to treat chronic and acute conditions.
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| Please contact your Lockton Representative
for further information regarding any information
contained in this market update. |
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Sarah Klein
Consulting Actuary
Kansas City, MO
Tel: 816.960.9150
E-mail: sklein@lockton.com |
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