Pharmacy Benefit Administrators Act II

1. Pharmacy Benefit AdministratorsAct II Performance By Emmanuelle Mirsakov Pharm.D. Candidate 2007 USC School of Pharmacy 12-8-06

2. What is Act I? • PBMs (Pharmacy Benefit Managers) [AKA: Third-Party Payers] • An organization that provides administrative services in processing and analyzing prescription claims for pharmacy benefit and coverage programs • Operate on behalf of employers, insurance companies, and unions • Originally developed to issue drug cards for ID, account tracking, and offer their groups cost-effective services as well as reliable claims information

3. PBM Services • Contracting with network pharmacies • Claims processing • Establishing payment levels for provider pharmacies • Negotiating rebate arrangements • Developing and managing formularies • Preferred drug lists • Prior authorization programs • Step-therapy programs • Maintaining patient compliance programs • Operating disease state management programs • Some may operate mail order pharmacies

4. The Secret Games of PBMs • PBMs play “games” with rebate accounting and pricing practices • PBM would promise artificially low or free administration fees, but would recoup those fees by exploiting other revenue streams related to the clients’ business, with, or without, their knowledge • A call for transparency came about in light of many practices that were viewed as misleading which resulted in higher costs to plan sponsors and plan members, but significant profits for the PBMs.

5. The Secret Games of PBMs • Examples of hidden revenue streams: • A portion of the negotiated pharmacy network discount for branded products • A portion of pharmacy network maximum allowable cost (MAC) discounts on generic products • All or a portion of the rebates negotiated with pharmaceutical manufacturers • Administrative or access fees negotiated with pharmaceutical manufacturers • Market share and other incentives negotiated with pharmaceutical manufacturers • Revenue from data sales

6. The Secret Games of PBMs • A PBM might claim it is transparent, but it offers a certain percentage as a rebate, yet really gets more than that amount through its agreements with the pharmaceutical manufacturer • In addition, the PBM might take that % that was not disclosed and use it to offset a more aggressive Average Wholesale Price (AWP) that it offers to the client, and which is actually lower than the AWP it pays to the pharmacy

7. The Secret Games of PBMs • Example of spreads and non-transparent rebates: • Non-transparent Claims (spread): • PBM offers an “average or effective” AWP-X% for brand • PBM has a proprietary MAC list so purchaser does not know what is on the list, but will offer an “average” AWP-50% • PBM may have more than one MAC list for purchaser and for pharmacy, PBM keeps the difference • Non-transparent Rebate : • PBM will offer “100%” of the rebate, but does not claim the exact amount of the rebate they are receiving

8. The Secret Games of PBMs • Medicare Modernization Act of 2003 was the most significant step towards addressing transparency. • It included specific language mandating transparency for any provider of pharmacy benefit services in the program

9. The Secret Games of PBMs • Despite a push for transparency, there is little in the way of regulations outlining what transparency is. • Most within the industry define transparency as the full disclosure of rebate revenue and other profits made by the PBM through a specific client’s business. • Not enough, won’t give the whole picture • For some health plans, there are entities beyond the PBM (e.g., claims administrator or the provider of the transaction process) that also make profit in the claim transactions

10. The Secret Games of PBMs • Why do PBMs have partial transparency? • To have better looking bids (Request For Proposals (RFP)) • Many traditional PBMs are willing to structure their bid in a transparent pricing model, but they are likely to seek the same level of revenue through administrative fees as they would anticipate under a contract driven by rebate revenue. This can lead to “sticker shock” and scare off clients from a transparent bid. • Payers that pursue transparent contracts should expect to pay significantly higher administrative fees

11. Why Do We Want a Transparent Model? • Although a true 100% transparent model creates immediate increases in administrative fees and up front costs, the long term benefit outweighs this immediate financial burden • A nontransparent model fosters misaligned incentives

12. Why Do We Want a Transparent Model? • Examples of misaligned incentives: • A financial model based on per transaction fee versus a per member, per month fee; therefore, there is no room for utilization review • Clinical decisions based upon high rebates or pharmaceutical manufacturer incentives for the PBM, versus lowest net cost and safety or efficacy • Avoidance of cost containment programs in order to preserve claims volume and dollars • A nontransparent PBM model rewards the PBM for making decisions not in the best interests of the plan sponsor.

13. Act II: Pharmacy Benefit Administrators (PBAs) • A new model designed to address transparency • Structurally a PBM and a PBA appear to be the same • PBAs however have full disclosure models • E.g. Health Trans is a full disclosure model that offers full pass-through (i.e., the price paid to the pharmacies is the same price charged to health plans for the drugs) and passing 100% of rebates to clients. • PBAs also allow the customer to retain how they manage their benefits • E.g. some health plans have prior-authorization or step protocols in place that they view as successful, so the PBA would just support their use of those tools

14. Act II: Pharmacy Benefit Administrators (PBAs) • PBA business model: • No spreads • No money on rebates • Completely transparent claim adjudication • Charge a higher administrative fee to process claims, but costs the client less in the long run from revenue lost to spreads • PBA offers similar services as a PBM, however the PBA does not take risk, so will not offer disease state management, step-therapy, cost-management programs, etc … • Services offered: • Claim administration, network of pharmacies, formularies, mail order

15. Act II: Pharmacy Benefit Administrators (PBAs) • Example of transparent claims (no spreads) • Offer pass-through pricing: • Whatever the pharmacy submits (AWP-13%, or AWP-17%) will be the price you get charged. The PBA will not skim off the payment and since pharmacy is getting the whole amount they might offer a bigger discount • Offer guarantee on the pass-through pricing: • Will allow the purchaser to review all invoices to see all of the charges being made and where the money is going to • Example of transparent rebates: • Will show what rebates they are receiving from the manufacturer and will pass on 100% of those rebates

16. TIPPS • One more step in the direction of a more transparent model was made by the HR Policy Association, a policy group representing about 250 employers ( Caterpillar, Ford, and IBM). • The association felt that members had to know more about the financial arrangements that PBMs have with pharmaceutical companies • They created a certification process as a criterion for contracting. • The certification process — named Transparency in Pharmaceutical Purchasing Solutions (TIPPS) — requires PBMs to disclose to their clients the actual acquisition costs for retail and mail-order drugs. In addition, PBMs would be required to pass drug company rebates, now rarely disclosed, on to their clients directly. • The net result is that all TIPPS credentialed PBMs would charge employers a straight administrative fee instead of making their profits through the drug industry

17. Examples of PBA Models • Informed Rx [(SXC) Systems Xcellence] • Offers a full range of pharmacy benefit services on an a la carte basis with transparent pricing (claims processing, pharmacy networks, data warehousing and information analysis, rebate contracting and formulary management, clinical initiatives, and consumer web services) • The claim: • “ Straightforward, full pass-through model puts financial control where it belongs, with Client XYZ, and offers the opportunity to eliminate misaligned and/or diametrically opposed incentives and excessive revenue streams tied to your drug spend that are typically present in a PBM vendor arrangement”

18. PBA Not For Everyone • PBA model does not work for someone who does not want a lot of control • Some clients will want a traditional model where the PBM retains a portion of the rebates and charges no administrative fees.

19. Third-Party Administrator (TPA) • Third-Party Administrator (TPA): An organization that is responsible for claims administration services of a self-insured group’s benefits programs. • Unlike an insurance company, a TPA does not assume any risk associated with the programs.

20. Third-Party Administrator (TPA) • TPAs play a role like a certified public accountant hired to handle the paper work involved with filing taxes. • TPAs are hired to handle varying amounts of the paperwork and processing of client-employee benefit plans while the plan sponsor remains legally responsible • TPAs get paid either a set amount per covered employee per month or charge for each claim/transaction

21. Third-Party Administrator (TPA) • A TPA can be structured exactly like a PBA or can be similar to a PBM and not have full transparency (e.g. won’t give invoices paid to the pharmacy…) • E.g. a TPA can offer a flat AWP-15% fee , however, this may not be the lowest fee and the most transparent cost.

22. Third-Party Administrator (TPA) • Have a direct interest in keeping their customers satisfied because clients can simply leave and start with another TPA the next day, unlike with insurer where a new policy has to be written • Services provided: • COBRA administration, case management, prescription drug cards, precertification, data management and reporting, employee communication, government reporting, electronic claims, hospital audits, and more.

23. Third-Party Administrator (TPA) • E.g. Argus • Argus combines a traditional PBM model with flexibility of choices of services • Will allow full transparency with fully auditable revenues • Will allow a customer to handle designing the benefit (like a PBA) or take over the design and implementation themselves

24. Pro Pharma Involvement • Craig and Carol review RFP bids for their clients. Most recently there were RFPs for MSI • Mitch has done some secondary audits on PBM rebates • Prairie mostly works with the RFPs, currently she is working on SeaBright RFP (bringing in the responses for analysis)

25. Closing Act • PBMs are flawed because of their non-transparent models • PBMs that have full transparency charge more up front fees making them less competitive in the biding market • PBAs are based on 100% full transparency models, disclosing any rebates and other revenue streams • TPAs are very flexible and can be structured in a a PBA model or a partially transparent model

26. Intermission Prior to QuestionsPharmacist Humor A doctor is to give a speech at the local AMA dinner. He jots down notes for his speech. Unfortunately, when he stands in front of his colleagues later that night, he finds that he can't read his notes. So he asks, "Is there a pharmacist in the house?"