PBM transparency could be inevitable

February 1, 2009

Lobbying efforts by the pharmaceutical industry and timing concerns have prevented CMS from requiring that all Part D plans move to pass-through pricing

The pharmacy benefit management (PBM) industry has come under intense scrutiny to become more transparent in its contracts with health plans and employers. Some PBMs have embraced transparency and see it as an inevitable shift in how pharmacy benefits are delivered. Others have stuck to their guns, maintaining that historical contracting practices enable better pricing deals than could be achieved in fully transparent contracting environments. So which is it: a passing fad or an inevitable change?

"Transparency" is a fairly loose term, with a variety of different meanings in the healthcare arena. For purposes of this discussion, transparency is defined narrowly in PBM contracts as a distinction between one of two contracting approaches:

1. Lock-in pricing. This term refers to a contract in which the PBM receives higher rebates and/or better pharmacy discounts than are shared with the employer or health plan with which it contracts. The result is that the PBM can keep its explicit per-claim fee low or even have no per-claim fee at all. For example, a PBM may contract to pay a pharmacy to dispense a prescription of Lipitor at 16% below the average wholesale price (AWP-16%). However, the PBM may charge an employer AWP-14% for the same prescription, retaining the 2% spread to cover its administrative costs and margin.

The transparency issue gained traction within health industry circles through the Medicare Part D program beginning in 2006, with the Centers for Medicare & Medicaid Services (CMS) dictating it would require pass-through pricing. However, CMS reversed its requirement in each of the past three years, allowing PBMs to administer benefits under either approach. CMS again proposed the change, this time beginning in 2010.

The issue also has become more publicized to the general public. All else equal, the following effects would likely occur if pass-through pricing were adopted as the pharmaceutical industry standard:

1. Employer and health plan contracts would benefit from higher discounts and rebates, likely at the expense of higher administrative costs. It is important to keep in mind that a transparent pass-through contract is simply a different way of contracting and not necessarily a better approach financially. For example, the higher administrative costs may more than outweigh the higher discounts and rebates.

2. Given lower point-of-sale prices at the pharmacy, patients would generally see lower cost-sharing amounts (particularly with coinsurance-style plan designs). This lower cost sharing would likely be offset by higher premiums that capture the explicit PBM per-claim fees.

3. PBM contract terms would be more available and widely known in the industry. Some PBMs argue that by making such information more readily available, they would lose some negotiating clout with pharmaceutical companies and be less able to demand volume-based pricing deals, to the detriment of their employer and health plan clients.

4. The question of "Can we trust our PBM?" would be somewhat mitigated because employers and health plans would have a better understanding of how much they are paying and what they are getting for those payments. Trust has always been an issue with healthcare, and transparency is a logical way to address it.

What will ultimately happen?

To date, strong lobbying efforts by the pharmaceutical industry and timing concerns have prevented CMS from ultimately requiring that all Medicare Part D plans move to pass-through pricing. Early indications show that lobbying efforts may be decreasing and that CMS has allowed more time for this change to take effect for 2010. The more general push for transparency in the healthcare industry has also helped PBM transparency gain traction. A sense of inevitability seems to be the current state of the issue, but only time will tell.

Should the change occur in Part D, it would undoubtedly shake up the contracting landscape for commercial plans serving the non-Medicare market. Many PBM contracts use the same terms for both Medicare and non-Medicare business, so different approaches between the lines of business is unlikely. As with so many other health-related issues, the giant healthcare payer known as the Medicare program leads the way and everything else follows eventually.

Troy Filipek is an actuary in Milliman's Milwaukee office.