Looking for healthcare savings? (Who isn’t?) Start with a look at your prescription drug costs, says Scott Haas, CLU, RHU, vice president of Wells Fargo Pharmacy Consulting.
Haas and his colleagues sought a way to get drug costs down for clients. They peered beneath the surface and didn’t like what they found, Haas said in a recent interview with BLR.
From Purely Transactional to Cost Management
Pharmacy Benefits Management programs (PBMs) started out in a purely administrative role, Haas says, helping to process retail pharmacy transactions and manage prices of prescription drugs through pricing negotiations. “They have evolved into clinical management organizations for pharmaceuticals, basically overseeing people’s utilization of drugs,” Haas says.
In the early days of PBMs, the majority of prescribed drugs were brand drugs, as opposed to generic drugs (those that have been around long enough for their patents to expire). Once that occurs, other manufacturers are free to make their own versions of the drug, and the price for these now-generic drugs drops significantly. Haas believes it could be more.
“As the market has evolved and more and more drugs have come off patent and moved to generic status, the PBMs have created tremendous revenue streams for themselves by using what’s known as spread pricing. Spread pricing is a part of the pricing metrics used in the PBM industry,” Haas says.
“The key component is Average Wholesale Price, referred to as AWP. AWP prices of brand drugs and of specialty drugs are published, so you can easily get that information. These are drugs that are still patent protected, and they are basically manufactured by a single source because they are protected under their patents.
“Generic drugs, when the drugs go off patent and move into a generic status, then have multiple manufacturers of that chemical compound that can compete in the marketplace,” Haas continues.
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AWP ‘Fictional’ When Applied to Generic Drugs
The problem, according to Haas, occurs when the AWP is applied to generic drugs. “In the 80s and 90s, the majority of drugs were brand rather than generic,” he says. The PBMs would negotiate pricing with the pharmacies, based on the AWP, then charge the plan sponsor or member a higher figure and keep the difference.
“For example, they might pay a pharmacy AWP minus 10%, then charge the plan sponsor or the member AWP minus 8% and keep that 2% spread as revenue. But what has evolved as more and more drugs have moved to generic is that PBMs saw the opportunity to create revenue by applying the same methodology to generic drugs.
“And this is the basis of what we do to save plan sponsors and participants money,” Haas says. “We subscribe to the premise that AWP for generic drugs is a fictitious number that doesn’t exist. It’s a number created by PBMs. So what’s going on is that these AWP schemes that are employed by PBMs on generic drugs are creating one price schedule that is charged to the plan sponsor and to the consumer, while the pricing schedules they use to pay the pharmacies are based on a different methodology. So you’ve got pharmacies being paid on one schedule and plan sponsors and consumers being charged and billed on another fee schedule.”
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Like Buying Froot Loops
Haas compares the situation to one with which we’re all familiar: a trip to the grocery store. “Let’s say we used a PBM to purchase Froot Loops® from a grocery store,” he says. “You go to the store and buy a box of Froot Loops for $3. We’ll say the PBM is Visa® and you use your Visa card to pay for that box of cereal. When you get your bill 30 days later, it shows you were charged $9 for the box of Froot Loops, because Visa added $6 to the transaction and didn’t disclose it to anyone. That’s basically what the PBM industry is doing.
“So in reality, what occurs is that under an AWP scheme for generic drugs, the consumer and the plan sponsor for a particular generic drug may be charged 50 cents per pill when in fact the pharmacy for that exact same pill and that exact same transaction is getting paid 5 cents per pill. Then that 45 cents per pill difference is the spread revenue that is generated and retained by the PBM, and it’s very rarely disclosed to the marketplace.”
In tomorrow’s Advisor, Haas’s negotiating strategy for employers concerned about pharmacy costs.