Transcript Shell into which the CBI will go

Spread Pricing and the Quest for
Optimal Pricing in Traditional and
Pass Through Models
Robert I. Garis, RPh, MBA, PhD
Creighton University School of Pharmacy
Pharmacy Benefit Diagnosis Suite (PBDS) Software
www. pbdsuite.com
402.203.0229
Pharmacy Benefit Contracting Excellence
Chicago, IL
7/22/09
Topics of Discussion
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Definitions: traditional and pass through
Traditional PBM pricing model
Pass through PBM pricing model
Current literature comparing the models
Optimal pricing in the benefit
Resources
Recognized Definitions of PBM Pricing
Models
“Traditional” defintion:
The PBM retains a network spread as compensation for
their service.
“Pass Through” defintion:
The PBM charges a sponsor no more than the amount
that it pays the pharmacies in its retail network for
brand and generic drugs. PBM retains an agreed upon
fee for service.
No industry-accepted definitions
Traditional Model
Spread Pricing Mechanics
Generic drugs have two prices
•
A High price
• The “sticker price” called Average Wholesale
Price (AWP)
•
A Low price
• The “maximum allowable cost” (MAC) price
• Every organization in managed pharmacy has
their own MAC price
– An example of one generic drug follows
–
AWP and Generic Vasotec 5 mg
Manufacturer
AWP Price / 100 tablets
(Price Alert 4/15/09)
Apotex
$ 102.10
Mylan
$ 102.00
Ranbaxy
$ 102.10
Taro
$ 102.72
Vasotec (originator)
$ 242.10
Maximum allowable cost
(MAC)
$ 14.00
(Source— Commercial MAC price)
Copyright Robert I. Garis, PhD
All Rights Reserved
5
Differential Contracting
Billing terms AWP - 66% to plan sponsor:
AWP = $102.00 - 66% discount ~ $34.00 / 100 tab
Payment terms to pharmacy:
MAC price = $14.00 / 100 tab
Spread to PBM $20.00
($ 34.00 billed - $14.00 paid)
Copyright Robert I. Garis, PhD
All Rights Reserved
6
Chronology of the Spread
Pre-2000
Not documented
2001-2003 Huge variation probably > $5-$8 /Rx
2004-2005
$3-$5/Rx
2006-2007
$2-$4/Rx
2008-2009
$3-$6/Rx
and rising
Copyright Robert I. Garis, PhD
All Rights Reserved
7
Why the upward trend in generic
spread?
• Generics 60-65% of all Rx
– More spread opportunities
– Spreads make up for fewer rebate dollars
• Flood of blockbuster brands losing patent
– Ambien
– Zocor
– Zofran
– and many, many more
Copyright Robert I. Garis, PhD
All Rights Reserved
8
Generic Drug MAC lists— caution
• Wide differences in MACs among
PBMs
– “Wildcard”
• Get your MAC list regularly as a
condition of the RFP
• MACs should be
– Comprehensive
– Aggressive
• MAC pricing varies greatly among
PBM
• Numbers of products included
• Prices of those products
Copyright Robert I. Garis, PhD
All Rights Reserved
9
Spreads Subsidize Contract Offering
Typical Contract Offering:
Brands AWP-17%
Generics AWP-66%
Mail Brands AWP -22%
Rebates $4.00/Rx
SPREAD
PRICING
No Spreads “Weaker” Contract
Offering
Typical Contract Offering:
Brands AWP-15.5%
Generics AWP-66%
Mail Brands AWP -20%
Rebates $3.00/Rx
NO
SPREAD
PRICING
Pass Through Model
no Spread Pricing
• PBM revenue comes from a specified fee for
service
– $/Rx
– $ PEPM
– $PMPM
• There is no spread pricing
• Newer model in response to sponsor demand
Yeah, but what about our Plan?
• Let’s see what has been
said about the two
models
–
–
–
–
PBM industry
Coalitions
Industry Observers
Other benefits
professionals
Literature comparing pricing Models
•
Beste P. Eberle B. The Transparent PBM Pass-Through Model: Managing Drug
Spending Through Aligned Incentives. Employee Benefit Plan Review 62:7. Jan 2008.
Pub. WoltersKluwer Company NY.
Articles from the following AIS compilation:
PBM Contracting and Transparency Issues and Models. Erin Trompeter, Ed. Susan
Namovicz, Managing Editor. Pub. Atlantic Information Services, Inc. Washington DC. :
• PBM Transparency Deal May Lower Rx Drug Spending, but Won’t Shake Up the
Industry.
• More PBM Transparency May Not Cut Costs but Could Boost Trust.
• Client’s Transparency Demands Spawn New Firms, Shake up Other PBMs’ Strategies.
• Experts Offer Advice to Payers on Comparing Transparent PBM Bids.
•
Drug Benefit News 9:(24). December 12, 2008. PBMs Tout Their ‘Transparency’, but
Model Doesn’t Always Lower Clients’ Drug Costs. Neal Learner, Managing Editor.
James Gutman, Executive Editor. Pub. Atlantic Information Services, Inc. Washington
DC.
Literature warning on pass through
• Remove spread
the PBM could lack the
incentive to negotiate aggressively for
network discount and drug manufacturer
rebates.
Traditional & Pass-through Compensation
Traditional Model
Retains the
spread
Retains Drug
+ Manufacturer
Administration Fee
Pass Through Model
Retains a full
and fair fee:
• Per-Rx
• PEPM, or
•PMPM
Retains Drug
+ Manufacturer
Administration Fee
Literature endorsement of Spread
Model
• Sponsor may have less risk with spread model
because the PBM is at risk for any pharmacies
that charge a higher rate.
Consider this
• Why would the pharmacies in the network
even know whether a sponsor in their PBMs
book of business is a pass through or a
traditional account.
• If the pharmacy contracts for one rate for one
model (spread) why not the other model (pass
through).
The literature and auditing
Many recommend a contract with an auditor or
oversight agent as “Mutually acceptable” to
the PBM and pharmacy.
– The sponsor should be in sole control of who
audits their plan
– Sponsors get your Rx transaction data every
quarter
Literature warning on pass through
• “Risk” to the sponsor that rebates will go
down if generic drugs become available. No
rebate guarantee.
– Seems like a benefit to me since $1.00 rebate
income requires $5.00 drug spend
Availability of generics is NOT a risk to the sponsor
Confused???
• The pros and cons of traditional and pass
through are confusing
• Let’s look at an alternative evaluation of
models—Optimal Pricing
• We will consider the resources we have
– Pharmacy data are rich in information
• PBM has your data in exquisite detail—get your Rx
data!
– Public information on pricing
Optimal Pricing v. Pass-through
• Optimal Pricing: Charging the Plan the lowest
reasonable price that the retail pharmacy will
accept or the PBM-owned mail order
pharmacy’s MAC list used in the retail
program.
• Common “Pass through” defintion:
The PBM will charge a sponsor no more than
the amount that it pays the pharmacies in its
retail network for brand and generic drugs.
Copyright Robert I. Garis, PhD
All Rights Reserved
22
What if…
• In what situations might the PBM pay a
pharmacy more than the lowest reasonable
price that pharmacy will accept?
– Strategic decision?
Copyright Robert I. Garis, PhD
PBDS Rx Analytics All Rights Reserved
23
Assumption in examples
• Optimal price of drug 5¢/tablet
– Acceptable to the pharmacy
– Good value to the sponsor
Copyright Robert I. Garis, PhD
All Rights Reserved
24
PBM affiliated pharmacy
Chain Rx
#1
Independent
Rx
5¢/tablet
5¢/tablet
PBM
PBM-affiliated
Rx
Chain Rx
#2
12¢/tablet
5¢/tablet
Copyright Robert I. Garis, PhD
All Rights Reserved
25
PBM buys favor with pharmacy– a walk
through
• On pass-through accounts the PBM is revenue
neutral
• PBM offers some pharmacies better
reimbursement on selected (pass-through)
accounts, if
• Pharmacies agree to lower reimbursement on
traditional (spread model) accounts
– www.oag.state.ny.us/media_center/2008/jul/july29
a_08.html Case was settled with no admission of
guilt
Copyright Robert I. Garis, PhD
All Rights Reserved
26
PBM buys favor with pharmacy
Chain Rx
#1
Independent
Rx
5¢/tablet
5¢/tablet
PBM
Chain #3
Higher rate on
Transparent
accounts
Chain Rx
#2
12¢/tablet
5¢/tablet
Copyright Robert I. Garis, PhD
All Rights Reserved
27
The distinction
• Optimal price (to the
sponsor) = 5¢ /tab
• Pass-through (to the
sponsor) = 12¢/tab
Copyright Robert I. Garis, PhD
All Rights Reserved
28
Optimal Pricing in the Benefit
• Examples of optimal pricing
• Why it is important
• Sponsor activity
– Spot checks with publicly available prices
State Medicaid MAC Lists
• Minnesota—
http://www.dhs.state.mn.us/main/groups/business_partners/documents/pub/dhs_id_016923.pdf
• Illinois—
http://www.mslcillinois.com (Then click on “State MAC List”)
• Virginia—
http://www.dmas.virginia.gov/downloads/pdfs/pharm-va_mac_list.pdf
• Washington State—
http://fortress.wa.gov/dshs/maa/pharmacy/smaclistforbi03.xls
• South Dakota-http://www.primetherapeutics.com/mac/macsearch.asp
Copyright Robert I. Garis,
PhD All Rights Reserved
31
Pharmacy Benefit Diagnosis Suite
• Web application to monitor
“optimal” pricing
• Videos on spread pricing and
mail order pharmacy service
• www.pbdsuite.com
• Call with questions
402.203.0229
• More on topics discussed on
web Google “garis and
pharmacy benefit”
Copyright Robert I. Garis, PhD
All Rights Reserved
32
Summary
• Sponsors get your Rx transaction data from
PBM regularly (Quarterly)
• Sponsor get the MAC list regularly (Quarterly)
– Confidentiality agreement will be necessary
• Spread pricing is a significant threat to our
benefit
• Complicates proposal evaluation
• Excess cost to the sponsor
• Confusion abounds traditional v. pass through
• Consider optimal pricing in your PBM model
Copyright Robert I. Garis, PhD
All Rights Reserved
33
Thank You for the Opportunity!