Compare traditional and non-traditional PBMs

May 1, 2005

Cost management attributes compared

I. Background

Pharmacy benefit managers (PBMs) came into existence to administer and manage prescription drug programs for at-risk health plans/payers and their employee participants. Today, some payers contend that the primary focus of the traditional PBM has shifted away from the original charter of plan management.

This concern among some health plan payers is that traditional PBMs can no longer objectively represent the payer interest because they more financially advantaged through new customer relationships to others such as pharmaceutical manufacturers where rebate revenues now comprise a more significant share of revenue.  The traditional PBM now places secondary importance on cost management as these other revenue streams in rebates, in retained network discount “spread”, in mail-order profits have diverted the attention from managing the cost.  Today, these new customers and revenue sources reward the traditional PBM for increased utilization and the dispensing of expensive manufactured drugs.

To further complicate this situation, traditional PBMs own their own mail-order service. Through the acquisition of this and other delivery components, PBMs have assumed the dual role of cost manager and provider to the health plan. This is the equivalent of a medical TPA purchasing a hospital or group of physicians and then directing all referrals to these owned providers. But this just doesn’t happen in medical cost management-and some question if it should occur in pharmacy benefit management.

The overall impression among some payers is that the traditional PBM model has lost objectivity in managing the drug benefit program on behalf of the payer. These payers are beginning to recognize the conflicts inherent in the PBM industry because today’s drug plans account for 20% or more of the insurer premium (up from single digits in the early 1990s).

II.Purpose

This paper was developed to provide an overview of traditional PBMs and demonstrate the marked difference between traditional and non-traditional approaches to pharmacy benefit management. Today’s PBM buzzwords are “full disclosure” and “transparency”.

This paper will illustrate that:

1. In order to achieve optimal cost management, a PBM that offers true transparency and full disclosure must establish the payer as the only customer.

2. Benefit design and formulary are more critical than administrative fees, discounts, and rebates in generating reduced net ingredient costs.

3. The PBM can not own delivery components and still maintain objectivity in managing the pharmacy benefit on behalf of the client payer.

4. Details of the PBM’s true intentions can be found in the proposed contract with the health plan/payer.

III.Non-Traditional Model Defined

This study distinguishes between what is referred to as the “traditional” model, which emerged in the early 1980s, and the new “non-traditional” model, which is still in its developmental stage.

A non-traditional PBM is best characterized as a benefit manager that acts as a vendor and advisor to the payer, whereas a traditional PBM controls all facets of the program and owns delivery components. The non-traditional model ensures a focus on the payer’s interests because the administrative fee is the only revenue source.   With this approach, the PBM is not distracted by other interests (retained discounts, data wholesaling, and rebates) and works to achieve the payer’s goals and objectives. 

The non-traditional approach is not for everyone.  If a payer remains interested in working through one organization with all of the components (mail order, administrative, clinical) provided under a common entity, then the traditional PBM remains the best approach for that payer. 

Non-traditional PBMs are similar to medical TPAs in that this type of PBM functions as a pharmacy benefit administrator (PBA) with no ownership in the program’s delivery components-such services (mail order, network, formulary/rebate) are subcontracted to outside sources.

IV.Summary

Some payers share the concern that traditional PBMs no longer cost effectively manage the pharmacy benefit of their health plan clients. Their focus has shifted away from managing their clients’ dollars to maximizing their own revenue potential through pharmaceutical manufacturers, network terms, data wholesaling and owned delivery services such as mail order. Traditional PBMs have conducted business practices that are not in their client payers’ best interests by creating:

· Preferred drug lists (PDLs) that recognize higher priced drugs for retained rebates.

· Retained discount “spreads” between what is negotiated at the pharmacy versus what is passed through to the health plan client.

· Benefit designs that encourage mail order, but the employer winds up paying more in copays than it gained through discounts.

· Contract language that masks unethical business practices.

The traditional PBM has become both cost manager and provider to the payer/health plan. They are no longer able to play an objective role in cost management because they profit more from mismanagement.

A new non-traditional model in pharmacy benefit management is taking hold among informed payers. This option distinguishes itself from the traditional model by aligning its business practices to work for the health plan client as the only customer.

For a full copy of this white paper contact Pharmacy BenefitDirect at 800-774-0890.

 

This paper is presented by Pharmacy BenefitDirect a privately held program that offers health plans new proprietary approaches for managing the pharmacy benefit. Rick Goebel is vice president of marketing and sales. For more information, contact Rick at 800-774-0890.