What is transparency? 6 things to look for in a PBM contract

Transparency is finally having its moment. With the Transparency and Coverage Rule and the FTC’s probe into the major pharmacy benefit managers (PBMs), the topic has gained steam. That’s good news, but if we’re all for transparency now, why doesn’t everyone understand drug pricing  or know their prescription cost when they show up at the pharmacy counter? 

Rather than waiting for these overdue transparency actions to be implemented, there’s something that employers and brokers can do right now: Ask the right questions.  

How does your PBM make money? 

If you don’t know the answer, they’re not transparent. PBMs aren’t incentivized to be transparent because they make money on drugs in many creative ways. So long as this remains true, their interests are not aligned with those of the employer or employees, and being transparent puts their business model at risk. 

For example, it’s an open secret that many PBMs make huge profits by negotiating “rebates” with drug manufacturers in the name of lowering the price of drugs. The truth is that those PBMs run a pay-to-play scheme, excluding from their formularies the drug manufacturers that don’t pay the rebates. The PBMs argue they are now passing the majority of rebates received to employers to reduce drug costs. It should be no surprise that, at the same time rebate revenue has gone down for PBMs, they experienced a commensurate or greater increase in “admin fees” received from manufacturers for “processing rebates.” Whether you call it a rebate or an admin fee, it has the same effect: driving up wholesale drug prices and lining the PBM’s pocket at employer and patient expense.

Another common practice is “spread pricing,” where a PBM adds margin to the price they pay the pharmacy versus what they charge health plans and patients. Who keeps the spread? The PBMs, of course. And pharmacy owners, health plans, and health care consumers paying the price.  

What’s more, the biggest PBMs have become the largest pharmacies in the country. As more of their revenue is generated from the mail order, retail, and specialty pharmacies they own and operate, the PBM becomes a way to steer plan members to their pharmacies, extracting value away from local pharmacies and communities (take note, interested state and municipal policymakers).  

The argument that centralized mail order dispensing reduces drug costs doesn’t hold up.Our analysis over the last five years on actual paid claims shows that PBM-owned mail order pharmacies add 40% to 60% on average to the cost of generic medications in comparison to local community pharmacies. The existence and adoption of Mark Cuban’s “cost plus” mail order pharmacy validates this. Centralized mail order is just another way PBMs control the distribution channel for prescription drugs and take more revenue. 

Last, and certainly not least: the biggest PBMs make money by bundling the pharmacy benefit with their new vertically integrated medical plans. They take the healthy profits they make from your prescription drug plan and use it to subsidize the medical premiums, taking market share away from medical carriers who don’t own a PBM and, therefore, can’t reduce their premiums below market equilibrium pricing with drug profit subsidies. More medical plan members means more bundled pharmacy plan members, which means more prescriptions at their PBM-owned pharmacies (where you’re paying a premium on drugs). If you’re familiar with the concept of a business model flywheel, this is one of the most effective invented, ever.   

6 things to look for in a PBM contract

Transparency isn’t a “I’ll know it when I see it” thing – you must define it. But pharmacy benefits and drug pricing are unnecessarily complex and make it difficult to know if you’re asking the right questions to get true transparency. The following are examples of minimum criteria that should be included in any definition of “transparency” when used in pharmacy benefits contracts. 

What are the definitions? One of the ways PBMs obfuscate profit and increase drug costs is through the key definitions in their contract. Is a “generic drug” really a generic? Are pharma admin fees paid to the PBM included in “rebates”? As any good lawyer will tell you, it depends on how these and many other terms are defined in your contract – and how they are defined in the PBM’s contract with the manufacturers and pharmacies. Did you know you can pay one price for a drug as a brand (more expensive), and the PBM pays a different price for that same drug at the pharmacy as a generic (less expensive)? Guess who keeps the difference? Also, if the PBM guarantees you a $100 rebate for the brand drug but saves $500 dollars by paying for it under a 340B contract, do you get the additional $400 savings? Not unless it’s included in the definition of “rebate.” 

Are you being “MACed?” Maximum Allowable Cost, or MAC, is a fixed price list managed by the PBM that overrides any other pricing agreement with pharmacies. The issue is when your MAC list is different than the MAC list for the pharmacy. Guess who keeps the difference between the two prices?   

Do you own your claim-level data? This is perhaps the most telling consideration. If you don’t have a right to comprehensive claim-level data for what you paid, and what rebates you received, for every drug dispensed, then you don’t have transparency. Think of it this way: Would you go to the grocery store and pay without knowing the charge – or at least having the option for a receipt? Employers do this every day when paying billions of dollars to PBMs. 

What is your expected net plan cost on a per member, per year basis? If you don’t know what your average per member, per year cost should be, after all reimbursements, rebates and discounts, then you don’t have transparency. I can “guarantee” you will receive a $100 “rebate” on a particular drug. Does that tell you what you’re going to pay for the drug? Or how much I paid for it? Or how much I got paid for the drug? The fact is, it tells you nothing about your cost or if you’re optimizing spend and managing cost the most effective way. You’re being “spreadsheeted,” and it’s costing you. In contrast, if I say you’re going to spend $700 per year on average per plan member, and you have 20,000 plan members, now you know something. And you can compare it to someone telling you the cost will be $600 per year per plan member. And if it’s truly transparent, you know how that number was calculated in detail. 

What’s the admin fee they will charge you to unbundle your pharmacy benefits from your medical benefits? Here’s a scenario: You could save 30% on pharmacy benefits through an alternative PBM, but your current medical-pharmacy bundled insurance carrier raises your medical premium to offset that savings and keep your pharmacy business. You’d know at least directionally how much the PBM is making on the drugs, but you’re out the 30% savings. If anyone from the FTC investigating PBMs is reading: Yes, this is a problem, and it could be viewed as using monopoly market share and bundling to block competition that would otherwise reduce cost. 

Is there a contract copay gap? This is where the PBM has negotiated pharmacy reimbursement rates that pay the pharmacy less than the benefit plan’s copay requirement. For instance, if the employee has a $10 copay on a $2 generic, who keeps the $8? Believe it or not, some PBM pharmacy contracts require that the pharmacy ensure the patient pays the higher copay amount and remit the difference to the PBM. (Actually, the PBM just withholds the $8 from the pharmacy’s next payment as a “clawback.”)  

So, you want “transparency?” 

The examples above are only a few of the games that many PBMs play to obscure drug pricing and hide their profitable business models. Employers and brokers can demand more and have a real impact on bringing transparency to the obscure world of pharmacy benefits and drug pricing. But it requires being precise on what the word even means. 

Chris Blackley is the CEO and Co-Founder of Prescryptive Health.