Managed Care - September 2008 - (Page 32)

even if the PBM creates a strong MAC for the drug (say equal to AWP minus 90 percent), the PBM is not contractually obligated to use that discount when invoicing its client. After all, the PBM’s “formula” does not contain a provision that the PBM must invoice at the “lowest of ” the two stated alternatives. Therefore, the PBM can create a MAC price that represents a better discount than AWP minus 50 percent, but still invoice the client at AWP minus 50 percent. In short, regardless of how PBMs manipulate their mail pricing formulas, it is highly likely that clients will be robbed of potential mail generic drug savings and that PBMs will retain enormous profit spreads from mail generic drugs. In fact, if PBMs passed through to their clients the actual discounts that they obtain when purchasing drugs for their mail order pharmacies, they would be passing through discounts of approximately AWP minus 80 percent or greater. Instead, most PBMs provide average mail generic discounts of between 40 percent and 60 percent, and thereby retain a large portion of available generic drug savings. for all other generic drugs at whatever prices the PBM selects. As a result, PBMs take back whatever savings they may have provided by way of their limited generic guarantees. For example, a typical contract provision enabling a PBM to include only a subset of generic drugs in its generic guarantee looks something like this: Generic guarantee: PBM warrants that all drugs on PBM’s MAC list will be guaranteed to have an average annual discount of AWP minus 64 percent. “Generic guarantees” When our consulting firm describes how PBMs manipulate MAC definitions and “pricing formulas” in PBM contracts, most PBM clients immediately exclaim, “But our PBM contract contains a generic pricing guarantee that ensures that our generic drugs have an average discount that’s far better than the discounts you’ve described.” In fact, we’re frequently told by PBMs’ clients that they have obtained generic pricing guarantees of, say, AWP minus 55 percent. Sometimes, we’re even told that contracts contain generic guarantees as high as AWP minus 60 percent or even AWP minus 64 percent. I call this the pointed-to discount. Unfortunately, when we review these PBM clients’ contracts, we almost never see guarantees that every generic drug will be invoiced at the pointed-to discount. In fact, we rarely even see guarantees that all generic drugs that the PBM processes will have an average discount of the pointed-to amount. Instead, the contracts we review contain a gigantic loophole that allows the PBM to include only a subset of generic drugs under its generic guarantee, meaning the PBM can invoice its client Clearly, that is no guarantee at all, since PBMs’ MAC definitions allow them to exclude as many drugs as they want from their MAC lists. As a result, when auditors conduct audits of generic guarantees that are really only MAC guarantees, auditors often find that PBMs have satisfied the contract’s MAC guarantee by providing average MAC discounts of AWP minus 64 percent on a small subset of generic drugs, but the PBMs’ actual average generic price for all generic drugs is far less, frequently as little as AWP minus 40 percent. Another example of a contract loophole that enables PBMs to include only a subset of generic drugs under their generic guarantees arises from PBMs’ manipulation of the definitions of brand drug and generic drug. When PBMs define “brand drugs” to include “generic drugs” — for example, by stating that “brand drugs include any multisource drug that is equivalent to a brand drug” — they can exclude almost any generic drug from their generic guarantees. PBMs accomplish the same result when they write contracts that grant them the sole discretion to classify drugs as brand or generic. Regardless of the methods that PBMs employ, as long as they write generic drug guarantees that allow them to include only a subset of generic drugs under their generic guarantees, they can end-run their guarantees by inflating their pricing on all generic drugs that are not included. In so doing, most PBMs eviscerate generic drug guarantees. A better contract Now that we know the three methods that pharmacy benefit managers use to relieve their clients 32 MANAGED CARE / SEPTEMBER 2008

Table of Contents Feed for the Digital Edition of Managed Care - September 2008

Managed Care - September 2008 Editor’s Memo Contents Legislation & Regulation News and Commentary Medication Management Compensation Monitor Archimedes Lends Hippocrates a Hand Some Other Predictive Modeling Programs Messing With Medicare Advantage The Trouble With MAC MedPAC’s Suggestions Sound Familiar The Leader in Patient Satisfaction Formulary Files Plan Watch Tomorrow’s Medicine Ad Index Outlook

Managed Care - September 2008

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