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How to pare health plan Rx costs: with pharmacy coverage costs continuing to spiral upward, an attorney and consultant specializing in cost-containment strategies offers advice about how to lower plan expenses.

For more than two decades, soaring prescription coverage costs have plagued every corporate, union and government health plan in America. However, every health plan can decrease its prescription costs, and do so in only a few months, by implementing the following simple steps.

Step 1: Scrutinize and Rewrite Your Contract

The major determinant of a health plan's prescription coverage costs is its contract with a Pharmacy Benefit Management (PBM) company. Unfortunately, virtually all PBM contracts are filled with "loopholes" that continuously drive up health plans' costs. Moreover, while most PBMs claim to be providing "pass-through pricing" and "fully transparent" contract contracts, almost none actually do so.

By drafting a real "pass-through pricing" contract--and including "transparency" requirements--a health plan can dramatically lower its prescription coverage costs. By using the leverage of a request for proposal (RFP) to demand that new contract terms be accepted by a PBM, your health plan will obtain the contract terms it has drafted.

Here's how to accomplish both goals.

Step 2: Require REAL Pass-Through Pricing

Real pass-through pricing requires a PBM to invoice its client with the exact cost it is paying, for each drug dispensed, meaning each retail, mail and specialty drug dispensed. Real pass-through pricing also requires a PBM to pass through to its client all rebates and discounts (and other fees) the PBM obtains from all drug manufacturers and other third parties.

Unfortunately, while virtually all PBMs claim to provide pass-through pricing, their contracts incorporate none of the above terms. Instead, their standardized contracts typically contain pass-through pricing terms for retail pharmacy drugs, but allow PBMs to continue to impose "spread pricing" for every mail and specialty drug dispensed. As a result, PBMs purchase their mail and specialty drugs at relatively low costs, but invoice their clients far more, thus making large profit "spreads."

Moreover, by increasing their "spreads" on mail and specialty drugs beyond what they previously earned, PBMs re-take whatever profits they may have relinquished via their agreement to provide pass-through retail pricing. Similarly, PBMs write their contracts with their clients to pass through all "rebates" they may earn from drug manufacturers.

However, PBMs avoid passing through to their clients most "financial benefits" they receive, simply by re-labeling "rebates" with a different name in their contracts with manufacturers. For example, PBMs characterize "rebates" as "discounts" or "administrative fees" or "health management fees," thereby retaining the monies they would otherwise have been required to pass through.

Thus, to lower their costs--and increase their savings--every health plan must rewrite its PBM contract to ensure real pass-through pricing, requiring the PBM: 1) to invoice the health plan for every retail, mail and specialty drug using the manager's actual costs; and 2) to pass through to the health plan all "financial benefits" received from all drug manufacturers and other third parties.

Moreover, health plans must clearly state in their PBM contracts that the PBM's only profits will be based on a flat, per employee per month (PEPM) administrative fee.

Step 3: Require Real Transparency

Real "transparency" requires that a PBM provide every document and all data necessary to enable a health plan to verify that the manager is satisfying its contract obligations. Such transparency also requires a PBM to allow a complete audit conducted by an auditor of your choice.

However, almost all PBMs currently write language into their contracts stating that certain documents and data are "proprietary" (meaning they will not have to disclose the documents and data to your health plan). Moreover, almost all PBMs include contract language stating that they must "mutually approve" your choice of auditor--giving them the opportunity to veto the very auditors most likely to protect health plans' interests.

Furthermore, unbeknownst to health plans, almost all PBMs require health plans' auditors to sign a PBM-drafted "confidentiality agreement" before audits begin. Such agreements typically preclude auditors from sharing certain information with their own clients--health plans like yours.

Thus, PBMs' claims of "transparency" are eviscerated by a few contract words--"proprietary," "mutual approval" and "confidentiality agreement"--that may appear benign to health plans and their lawyers, but are anything but benign in reality.

To achieve real transparency, health plans must eliminate all such terms. They must also draft and demand contracts that: 1) list every document and all data that a PBM must provide to enable the health plan to verify that all contract terms are being satisfied; and 2) make clear that the health plan has an unfettered right to choose its own auditor.

Health plans should also attach their own form of auditor confidentiality agreement to the PBM contract as a contract exhibit to protect the confidentiality of PBM information, but allow health plan auditors to disclose all audit information to their clients.

In short, if a health plan wants a truly transparent contract, it must transform a contract that contains a few deadly terms like "proprietary." This revised contract must contain a lengthy laundry list of all information that must be disclosed to the health plan and its auditor, and the confidentiality requirements for all such disclosure.

Step 4: Require Real 'Financial Guarantees'

Given a health plan's new demand for real pass-through pricing, it must also demand that the PBM provide as good pass-through pricing as is available in the marketplace. To do so, the plan must write financial guarantees into the contract, requiring the PBM to warrant that its pass-through prices for each type of drug (retail brand, retail generic, mail brand and mail generic, etc.) will provide certain aggregate discounts at the very least.

Most PBM contracts already contain certain "financial guarantees"; however, you cannot allow those financial guarantees to suffice. Why? Because in virtually all PBM contracts, they are drafted so as to be essentially unenforceable.

By way of example only, virtually all PBM contracts include a "generic savings guarantee" warranting a specific "average AWP discount" on all generic drugs for which the PBM sets "MACs" (maximum allowable costs). Unfortunately, almost all such contracts fail to indicate how many generic drugs the PBM must price for in the MAC.

As a result, if a PBM creates a MAC for only 500 generic drugs, the PBM's "generic savings guarantee" will only cover those 500 drugs; all other generic drugs will be "outside" the guarantee's coverage. Thus, every health plan must rewrite its generic savings guarantee--as well as all other contract guarantees that are ineffective and unenforceable--in order to dramatically shrink its costs.

Similarly, to gain control over spiraling specialty drug costs, every health plan contract should contain an exhibit list of all (500-plus) specialty drugs, and a mandatory minimum discount for each drug listed.

By writing and demanding enforceable and auditable financial guarantees, every health plan will not only lower its costs, but it will also enable itself to evaluate and compare each PBM's guaranteed, minimum "pass-through prices," thereby ensuring that the health plan has obtained the best pass-through pricing available.

Conduct a New Form of PBM RFP To Obtain Airtight Contract Terms

The contract terms described above are unlikely to be obtained from any PBM simply by asking for them. In fact, experience shows that "airtight" contract terms can only be obtained if they are extracted from a PBM during a PBM RFP in which managers are competing for a health plan's business.

Unfortunately, most health plans have historically conducted RFPs using outside consulting firms, and those consulting firms--lacking lawyers--have failed to even discuss specific contract terms before finishing a RFP for their clients. Instead, most consulting firms use RFPs merely to ask PBMs a series of questions, and rely on benefit managers' unverifiable and nonbinding answers in the selection process.

These facts were borne out by a poll taken during a recent Web seminar on PBM RFPs. More than 80 percent of attendees who had conducted RFPs indicated in the survey that they had never negotiated any PBM contract terms until after their RFP was concluded.

The PBM RFP a health plan conducts should be entirely different, and should use the leverage of the RFP to extract the contract terms needed to pare your costs.

Before the RFP begins, retain a consulting firm with lawyers knowledgeable about PBM contracting, and have those lawyers draft an entirely different form of contract, eliminating or modifying all substantive terms that are against your health plan's interests. Include "blank lines" in your contract for each PBM contestant to identify its PEPM fee and each financial guarantee.

When you issue your RFP documents, attach your contract to those documents, and require every PBM contestant to mark up the contract, identifying every change the contestant will want to have made, if it is selected as the finalist. Warn all contestants that any PBM that significantly alters the letter or spirit of your contract will be eliminated from the RFP process. Then, require every contestant to execute its contract markup, binding itself to the contract terms it has written.

After each PBM contestant returns its RFP, eliminate those managers that significantly changed the proposed contract, and have your consulting firm use the remainder of the RFP process to ensure your contract will remain airtight, with the best available PEPM fee and guarantees. Do so by having your consultant repeatedly negotiate with each PBM contestant, forcing all contestants to compete against the best terms offered by rivals.

Before a finalist is selected and announced, make sure all contract changes that you have extracted during negotiations have been written into a binding contract. Then require each PBM contestant to execute its contract and a final binding certification stating it will honor its executed contract, without any further changes, should it be selected as the finalist.

Now you can evaluate each PBM's binding contract terms, and select a finalist based on the binding pricing and guarantees it has offered--sending your health plan is on its way to realizing far lower costs and far better performance.

Health Plans CAN Change the Marketplace

Numerous health plans and consulting firms currently take the position that PBMs will not provide decent contract terms, and "nothing can be done" about that. If you accept this view from your own staff--or a consulting firm--your plan will be destined to execute another flawed PBM contract that will result in ever-higher prescription coverage costs.

But it doesn't have to be this way. While almost no PBM contracts in the marketplace are airtight--and almost all PBM contracts are stuffed with loopholes that are driving up clients' costs--relatively small corporations and unions have used PBM RFPs to draft and negotiate contracts that have dramatically reduced their costs. In theory, at least, all health plans can obtain the same result.

Moreover, as soon as numerous health plans insist upon airtight contract terms during RFPs--and health plans thereby create a competitive marketplace requiring PBMs to win business by providing ever-lower PEPM administrative fees, and ever-better financial and performance guarantees--the entire prescription marketplace will improve.

In short, health plans have the power to not only materially lower their own costs, but to transform the marketplace into a competitive one that health plans and not PBMs control. Every health plan should exercise that power, and bring about the change that the prescription coverage arena so desperately needs.


* The major determinant of a health plan's prescription coverage costs is its contract with a Pharmacy Benefit Management (PBM) company. Unfortunately, virtually all PBM contracts are filled with "loopholes" that continuously drive up health plan costs.

* By drafting a real "pass-through pricing" contract--and including "transparency" requirements--a health plan can dramatically lower its prescription coverage costs.

* If a health plan wants a truly transparent contract, it must transform a contract that contains a few onerous terms like "proprietary," which can keep information even from the plan's own outside auditor.

* When numerous health plans insist upon airtight contract terms during RFPs and the marketplace becomes more competitive, pharmacy costs should become more manageable for everyone.

LINDA CAHN is an attorney and President of Pharmacy Benefit Consultants, a nationwide consulting company that assists corporations, unions and government entities in rewriting their PBM contracts and conducting successful PBM RFPs. For further information, contact Pharmacy Benefit Consultants at 973.975.0900, or go to
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Title Annotation:HEALTHCARE
Author:Cahn, Linda
Publication:Financial Executive
Geographic Code:1USA
Date:Jul 1, 2008
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