Managed Care - April 2008 - (Page 32) sult, even though many brand drugs have lost their patents — and many generic drug have become available at far lower costs — PBMs retain a large portion of available generic savings, rather than passing through all such savings to their insurer clients. Many other contract definitions allow PBMs to manipulate contract terms to increase their profit margins and insurers’ costs. In short, to decrease their costs, insurers must rewrite most PBM contract definitions and eliminate all definition loopholes. STEP 3 Require real pass-through pricing The new buzz word in the prescription coverage industry is “pass-through pricing.” Almost all PBMs claim to be providing such pricing, but almost none actually do. Real pass-through pricing requires PBMs to invoice clients with the exact cost the PBMs are paying for each drug dispensed. Therefore, if a PBM contract provides real pass-through pricing, it must require the PBM to invoice its client for every retail, mail, and specialty drug dispensed, at the PBM’s actual cost. Real pass-through pricing also requires a PBM to pass through to its client all rebates, discounts, and other fees the PBM obtains from drug manufacturers and other third parties. Unfortunately, while almost all PBMs claim to be providing pass-through pricing, their contracts incorporate none of these requirements. Instead, PBMs write their contracts to require them to pass through their retail pharmacy costs but to allow them to continue to impose spread pricing for all mail and specialty drugs dispensed. As a result, PBMs purchase their mail and specialty drugs at relatively low costs, but invoice their clients far more, thus making large spreads. Moreover, by increasing their spreads on mail and specialty drugs beyond what they previously earned, PBMs take back whatever profits they may have relinquished under their agreement to provide pass-through retail pricing. Similarly, PBMs write their contracts with their clients to pass through all rebates the PBMs may earn from drug manufacturers and other third parties; however, PBMs simultaneously state they can retain whatever discounts or “administrative or other fees” the PBMs may earn from its manufacturer and other third-party contracts. As a result, PBMs avoid passing through to their clients most “financial benefits” they receive by labeling most “financial benefits” as “discounts” and other “fees” in their contracts with drug manufacturers and other third parties. Accordingly, every MCO should rewrite its PBM contract to ensure real pass through pricing, requiring the PBM to invoice the MCO for every retail, mail, and specialty drug using the PBM’s actual costs, and to pass through to the MCO all “financial benefits” received from all drug manufacturers and other third parties. Moreover, PBM/MCO contracts should make clear that the only profits the PBM will be allowed to make will be from a flat permember per-month (PMPM) administrative fee. By reducing PBMs’ profits to a single administrative fee, insurers will force PBMs to compete against each other on three criteria, and three criteria only: • The extent to which each PBM is willing to reduce its PMPM fee, • The guarantees that each PBM is willing to provide to ensure that its pass-through pricing is as good as is available in the marketplace, and • The guarantees that each PBM is willing to provide to ensure that its services will be performed properly. As insurers force PBMs to compete on those three criteria, PMPM fees will decrease, financial and performance guarantees will improve, and the entire prescription marketplace will become more competitive. STEP 4 Require real financial guarantees Almost all PBM contracts already contain financial guarantees, but most are unenforceable or useless. For example, almost all PBM contracts include a “generic savings guarantee” warranting a specific AWP discount on all generic drugs for which the PBM creates a “MAC” (maximum allowable cost). Unfortunately, almost all PBM contracts fail to 32 MANAGED CARE / APRIL 2008
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