PBM Contract Recommendation

We are not taking a position on the issue of PBM contracts with clients but opening it up for discussion:

Recommendation: For New PBM Contracts with Clients (Payers)

Proposal: All new PBM contracts will contain new language that states:

Administrative charges will be incurred on all prescription transactions that result in a positive monetary result to the client or patient derived from the conditions of the contract.  That is to say there will be no administrative charges for reversals or voids, non-insurance prescriptions, non-filled prescriptions, or prescriptions that do not incur any financial responsibility to the PBM, or the client.

Discussion

1-     Many pharmacies pre-fill refill prescriptions and if the patient does not pick up the prescription they are voided and return to stock.  This entire transaction happens in the course of pharmacy-only efficiency and does not result from any patient-physician-client interaction.

2-     Many pharmacies (especially large chains) have special prescription discount programs that are patient friendly and are below contracted patient co-pays.  Since the patients pay the entire prescription cost many pharmacies do not process these claims through the PBM adjudication system.  This denies the client and the PBM of accurate prescription data.

3-     In addition to the pharmacy discount programs, many pharmacies have free prescription programs as well.  In this case, the patient, the PBM, and the client have no monetary involvement in the prescription.  However, the patient’s profile with the PBM and/or the client will not be accurate if these prescriptions are not included in the patient’s profile.

4-     The only way for the client and/or PBM can accumulate accurate prescription data is to encourage all patients and pharmacies to process all prescriptions through the adjudication system.  Clients and pharmacies have a disincentive to process claims through the system or educate patients to process all claims through the system because of the administrative and/or processing fees for non-revenue or non-PBM involvement claims.

5-     If the client and/or PBM are denied accurate prescription data patient health programs may be compromised.  Many client and/or PBM Medical Management programs might not be offered to patients who need them because they do not have accurate information on file.

6-     And lastly, one of the most important features of the PBM on-line adjudication system is the benefit derived from an accurate patient prescription file no matter where prescriptions are filled.  In many cases, the current system bypasses this advantage by not including all prescriptions filled by a patient.

Conclusion: The current PBM on-line adjudication contracts charge administrative fees for non-administrated transactions.  The current system denies many patients of current “better health” programs and the benefit derived from a comprehensive profile.  Changing the current system by not charging for non-administrative transactions will provide incentives and stimulate clients, patients, and PBMs to set up programs to encourage all participants in the prescription process to improve and maintain the accuracy of patient prescription profiles.

Walmart and Narrower Pharmacy Networks

As the retail pharmacies respond to the influence of PBMs, new options are arising.  It started with chain pharmacies rejecting mandatory mail in favor of 90-day point-of-sale, continued with $4 generics at Wal-mart, direct contracts between chain pharmacies and employers, and now further options with more restrictive networks. We find the introduction of competing options to be of significant interest for benefit designers. Please enjoy.

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EXCLUSIVE: Walmart’s Pitch for Smaller Pharmacy Networks

I have a real treat for you today—an honest-to-goodness Drug Channels exclusive.

Walmart contacted your friendly neighborhood blogger and offered to make Drug Channels the launch pad for a controversial Walmart-penned thought leadership piece called Access Based Network Design: A Walmart Low Price Network White Paper. (They obviously realize that you are the smartest and best-looking web audience out there.)

I recommend you read this paper because it provides an especially compelling rationale for narrower pharmacy networks.

At the same time, we all know payers are not yet adopting these networks, despite the impeccable economic logic displayed in Walmart’s white paper. The models are difficult to implement and there is little hard data on actual bottom-line savings. Payers also may perceive bigger savings opportunities in other areas that have less potential beneficiary disruption.

However, I see the pharmacy and Pharmacy Benefit Management (PBM) industries at a tipping point. It is just a matter of time before smaller, preferred networks are a regular feature of the industry landscape.

Below you’ll find more details along with some previously unpublished information courtesy of my chat with Michael Struhs, Director of Business Development for Walmart’s Health and Wellness business unit and author of the white paper. For instance, Mr. Struhs estimates that payers could see “8-12% cost savings from an access-based network with no more than 20,000 pharmacies nationwide.” Hmmm.

I’m curious to know what Drug Channels readers think, especially since you are getting first crack at the paper. Please take a moment to read the seven-page paper and leave a comment.

THREE PILLARS

The Walmart white paper builds the case for narrower pharmacy networks on three “pillars:”

• Leverage supply and demand to create competition among pharmacy providers resulting in lower costs. Key quote: “It seems there’s a pharmacy on almost every corner. That’s great news for payers because when the supply of vendors is larger than demand, prices can be forced down.”
• Use a ‘bottom-up’ rather than ‘top-down’ approach to network design by building a network based on the number of pharmacies you need rather than the number of pharmacies there are. Key quote: “Force pharmacies to compete against each other to be allowed in this network.”
• Provide financial incentives to plan members to offset any disruption or inconvenience created by network changes. Key quote: “A financial incentive makes any short-term inconvenience easier to swallow.”

These principles certainly warm the cockles of my cold, calculating economist’s heart. In The U.S. Pharmacy Industry: 2009 Economic Report and Outlook, I predict the growth of preferred Pharmacy Networks—the establishment of narrower retail pharmacy networks that use financial incentives or explicit restrictions to direct consumers into specific pharmacies or channels.

SHOW ME THE MONEY

Despite Walmart’s impeccable logic, I am reminded of my most important lesson from graduate school.

In theory, theory and practice are the same.

In practice, they are different.

Walmart’s latest thought leadership piece is very nice, but where are the customers? If these programs are so attractive to payers, why are we not seeing widespread adoption? I was expecting a big client announcement to accompany the release of the white paper.

Mr. Struhs assures me that Walmart has “multiple mid-sized clients” (companies with less than 10,000 employees), but declines to provide a single example beyond the well-known, non-mid-sized Caterpillar-Walmart-Walgreen deal. Caterpillar is a fairly sophisticated payer with geographically concentrated beneficiaries, so it’s not the most general example, IMHO.

Mr. Struhs also claims that existing preferred networks are not sufficiently narrow, which is why payers haven’t seen real savings yet. Alas, he gave me no further details on his 8-12% estimate or whether any client has actually achieved this level of savings.

MOMENTUM?

Despite my misgivings about the lack of evidence to date, I do expect network design to emerge as the next wave of cost-saving strategies by PBMs on behalf of payers. Consider the momentum in 2009-10:

• CVS Caremark (NYSE:CVS) opened up a debate about the potential financial savings from more limited pharmacy networks during its spat with Walgreens. They were apparently following Rahm Emanuel’s advice: “Never let a good crisis go to waste.” I suspect many payers (PBM clients) saw the move as self-serving and unexpected, but the issue gained a lot more attention.
• Drug Channels blog sponsor Restat is marketing a turn-key, cost-plus PBM model called Align that features preferred pharmacy networks.
• Walgreen continues to aggressively market its direct-to-payer model. SeeWalgreen’s PBM Bypass Strategy.
• Walmart is turning up the volume with this new white paper.

Most surprising of all? Independent pharmacy owners may want to play, too.

The National Community Pharmacists Association (NCPA), which lobbies for owners of independent pharmacies, cheered a letter from Illinois Democratic Representatives Debbie Halvorson and Phil Hare to Todd Bisping at Caterpillar. The letter, which is posted on the NCPA web site, reads in part:

“We understand Caterpillar’s contract with Walgreens and Walmart expires in 2012 and urge you to allow the participation of many more independent, local pharmacies well before these contracts expire.”

Could the NCPA actually be (gasp!) showing support for Walmart’s network competition philosophy? If so, independent pharmacy owners can look forward to competing with Walmart to be allowed into a network. Be careful what you wish for!

Are these indicators or illusions? Time will tell.
—
Special thanks to Walmart for letting me bring this white paper to the Drug Channels audience first. In case you’re wondering, I have no business or financial relationship with Walmart beyond shopping at their stores every so often.

source: http://www.drugchannels.net/2010/06/exclusive-walmarts-pitch-for-smaller.html

Craig S. Stern, PharmD, MBA
President
Pro Pharma Pharmaceutical Consultants, Inc.

Medco Expansions: Europe

The article below on Medco’s expansion into Europe indicates that there are new markets for PBMs. Many industry observers have noted that the PBM marketplace was saturated with Medicare Part D and the expansion of pharmacy benefits in the Medicaid programs. Now it seems that the IT infrastructure issues in Europe have been improved to the point that PBM services are of benefit. It will be interesting to watch if the PBM/pharmacy network/purchaser experience is duplicated in Europe.

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Medco Expands in Europe

Medco Health Solutions’ (NYSE:MHS) quest for world domination continues with yesterday’s announcement of a new joint venture with Celesio Ag (ETR:CLS1). See Medco and Celesio Announce Pan-European Joint Venture to Enhance Quality of Clinical Care and Reduce Overall Healthcare Costs.

Medco has good reason to fulfill its self-proclaimed moniker as The World’s Most Advanced Pharmacy®. As I describe in PBMs Go Global for Growth, the global opportunity for Pharmacy Benefit Managers (PBMs) is huge.

Europe lags the U.S. in the use of modern pharmacy care techniques and tools despite being the second largest market behind North America. European health systems have focused on leveraging the state’s single-payer bargaining power to drive down the price of brand-name pharmaceuticals. This model is losing effectiveness as generics take over. In a world of low-cost generics, the quality of care—adherence, compliance, appropriate utilization—becomes much more important than the unit price per pill.
And to our European friends who are not familiar with PBMs: You’re welcome.

Celesio is best known as one of the big 3 pan-European wholesalers. Unlike their U.S. cousins, the big European drug wholesalers directly own pharmacies. Celesio generates 83% of its revenues (but only 57% of EBIDTA) from its wholesale business. In contrast, its consumer-oriented retail and mail-order pharmacy business generates only 16% of revenue but 43% of its EBITDA.

Medco Celesio B.V. will attempt to bring U.S. care management tools to Europe, starting with Germany. The focus will be on patients with chronic or complex conditions—diabetes, asthma, high-cholesterol and heart disease. Note that the joint venture will not provide traditional benefit administration.

source: http://www.drugchannels.net/2010/06/medco-expands-in-europe.html

Craig S. Stern, PharmD, MBA
President
Pro Pharma Pharmaceutical Consultants, Inc.

Tit for Tat: CVS Caremark Kicks Walgreens Out of Its Network

Some of our clients have asked about the rationale for the Walgreens/CVS-Caremark issue. Clearly money is the primary rationale. However, the National Community Pharmacist Association (NCPA) is providing some other rationale from their viewpoint. We thought that you would find this of interest.

NCPA eNews Weekly | June 15, 2010

Two days after Walgreens announced that it would not participate in any future CVS Caremark network plans, CVS Caremark responded by terminating Walgreens’ participation in all its network effective July 9. The giant chain pharmacy/PBM/ mail order conglomerate said it would drop Walgreens from its Medicare Part D network effective Jan. 1, 2011.

When Walgreens announced its decision June 7, it cited many of the same problems experienced by independent pharmacies and prompted NCPA 18 months ago to launch a campaign for a Federal Trade Commission investigation of CVS Caremark’s business and patient privacy protection practices. Last November, CVS Caremark disclosed that it was under FTC investigation. In addition, 24 states are probing the company created by the merger of the pharmacy chain with a PBM/mail order firm. NCPA members have had a number of meetings with FTC officials about their experiences since the 2007 merger.

Those experiences largely mirror those cited by Walgreens:

CVS Caremark limits patient choice by requiring patients in Maintenance Choice and other plans to use CVS retail pharmacies or Caremark mail order facilities.

CVS Caremark provides little or no information when a CVS Caremark prescription drug plan is transferred to a different and differently-priced CVS Caremark pharmacy network, or when CVS Caremark acquires a new prescription drug plan as a client.”

CVS Caremark reimbursement rates are unpredictable and payments for certain drugs often don’t reflect the market.”

“If a large, publicly traded chain with the clout of Walgreens finds the business practices of CVS Caremark untenable, then it’s easy to understand how much greater the problems have been for independent community pharmacists and their patients,” commented Joseph H. Harmison, PD, NCPA president. “The concerns expressed by Walgreens echo and further validate the concerns expressed by independent community pharmacists and their patients.”

“Unfortunately, for most independent pharmacies, simply telling CVS Caremark ‘no’ isn’t a viable business option,” Harmison continued. “The evidence is piling up and hopefully corrective action will be taken that either erects substantial walls between CVS and Caremark or rescinds the merger so that the market can operate equitably without one company abusing the system for its enrichment at the expense of patients and fair competition among pharmacies.”

Craig S. Stern, PharmD, MBA
President
Pro Pharma Pharmaceutical Consultants, Inc.

We commonly receive questions about average pricing contract language. The following is a response to the usual contract language.

PBM contract language often refers to the use of average, rather than per-claim, pricing for drugs. The average pricing issue does not preclude the fact that there are other pressing and relevant issues that need to be addressed from both the contract and audit/accounts payable screening of invoices pre-payment. These issues are the plan/purchaser’s (“plan”) responsibility, and are not open to the discretion of the PBM, but rather to how the plan/purchaser requires implementation of the business rules for claim adjudication. The following summarizes those issues that are not resolved regarding the average pricing language.

Ø Average pricing does not address contract requirements for –

o Situations where the AWP is inflated above Medicaid, above manufacturer published AWP, and above the reference database published AWP – all of these lead to both individual and average higher costs while discount guarantees are met.

o Situations where the generic MAC price is inflated above the FUL and the Medicaid MAC. This makes the average a larger number, but allows for the discount guarantees to be met.

o Drugs coded as brand that should be generic, generic drugs that should be on the MAC, multisource that don’t exist in benefits – these all implicate generic pricing as they are incorrectly priced so they affect all generic average prices.

o Situations where the U&C (e.g., $4 programs) is inflated above pharmacy published prices. This results in the plan paying more than a cash paying patient and improves the average making it easier to meet the AWP guarantee.

Ø Formulary coding, quantity limits, early refills, and COB for Medicare are responsibilities assigned to the plan. The amendment for average pricing does not implicate these benefit issues. The responsibility for benefit definition and what the PBM should use as business rules for claim adjudication are also assigned to the plan. As a result, the PBM cannot modify or apply rules that are other than what the plan requires without plan approval.

Ø Invalid claim administration where claims include invalid identifiers for doctors, pharmacies, drugs, and expired drugs

Ø Retrospective audits do not remove the responsibility for reviewing and remedying plan ongoing issues with the above listed items. Further, issues identified in the bimonthly/monthly invoices require reconciliation at each invoice period, and do not allow for future settlements for claim history outside of the invoice period. The plan has the discretion and the authority to define and ensure that the PBM is complying with plan current business rules for claim adjudication. This is not applicable to average versus per-claim pricing. As the fiduciary, the contract does not allow the PBM to make those decisions without the express approval of the plan.

Ø The retrospective audit process does not address the following issues that are not applicable to average pricing – reconciliation of each invoice, performance guarantees and applicable financial penalties (e.g., level of satisfaction with account client management, pharmacy network training to Count benefits and business rules), rebate reconciliation, network pharmacy audit results, and review of pharmacy network agreements for validation of pass-through pricing.

Note: The lack of oversight of average pricing allows a Pharmacy in the retail network to be paid at different AWP discounts and dispensing fees for brand drugs. This applies across the retail network and disadvantages a pharmacy for some drugs and advantages them for others. While this is not a direct contract with the plan, this is the source for potential pharmacy complaints and lack of compliance with the COB claims. This results in a decision for the plan to determine what parity rules they require for management of their retail network.

Craig S. Stern, PharmD, MBA
President
Pro Pharma Pharmaceutical Consultants, Inc.

Response to Pharmacy Benefit News, Issue 127

Below is an article we published in March, 2010 and a response it solicited from one of our subscribers (published with his permission). We welcome feed back on all of our publications!

AWP CHANGES
On September 26th 2009, the Average Wholesale Price (AWP) for over 95% of brand medications changed. “The New England Carpenters vs. McKesson & First Data Bank” ruling required that effective September 26th 2009, the Average Wholesale Price (AWP) of 1442 specific National Drug Codes (NDC), be reduced from a Wholesale Acquisition Cost (WAC) mark up of 1.25% to 1.20%.
First DataBank & Medi-Span also announced a voluntary roll back of all brand medications that had an AWP markup greater than 1.20%. This voluntary AWP adjustment from First DataBank increased the effected number of NDCs to over 20,000.
Finally, AWP is expected to be replaced by WAC in 2011.
COMMENT: AWP is the basis for PBM payments to pharmacies. Consider changing contracts to WAC now to prepare for 2011. Payers and purchasers are not receiving compensation for the inflated AWPs that they have been paying on for years. Pharmacies, PBMs, Health Plans, etc., don’t want to be disadvantaged so they requested the previous prices be based on AWP = WACx1.25. If you wish to pay a more cost-based price, then consider contracts based on a cost of WACx1.2.

From: John Cronin
Sent: Thursday, March 11, 2010
To: Dr.Craig Stern
Subject: RE: Pharmacy Benefit News #127

Craig:
Couldn’t help but notice the comment in this newsletter that “Payers and purchasers are not receiving compensation for the inflated AWPs that they have been paying on for years.” As you are aware, PBM contracts with pharmacies were quickly adjusted over the years to compensate for the “inflated AWPs” with reimbursements falling from AWP -12% to AWP -17% on average. When the First Data Bank case was settled, many, but not all, PBMs re-adjusted their reimbursement rates to keep pharmacies whole – something that was necessary in order to maintain the pharmacy networks. The major payer who did not make that change in California is the Medi-Cal program, which has had two federal lawsuits challenging their (in)action.
Despite what the federal judge in Mass. has to say on the matter, the reality is that most PBMs were not paying pharmacies based on “inflated AWPs”; how the PBMs dealt with payers is a matter you know better than I. I’m not sure this distinction is clear from your comment and hope you’ll clarify it in a future newsletter.
Thanks
John A. Cronin, Pharm.D., J.D.

Is Flat Fee A New Trend?

Payers understand that one of the major advantages of a PBM (Pharmacy Benefit Manager) is their pharmacy network. PBMs sign up pharmacies, approve and monitor pharmacy claims in real time, set up formularies, and send the pharmacies checks for prescriptions filled.

• Most pharmacies expect to get paid for dispensing prescriptions based on a formula that is outlined in their network contract.
• Most payers expect to pay their invoice for dispensed prescriptions based on the formula that they agreed upon in their contract.

  It is understandable that pharmacies may be paid a different price in one network. One would expect urban dispensers to compete for the network and drive the dispensing fee down. Conversely, a rural pharmacy (possibly the only drugstore in town) would probably get a higher price for filling a small community’s prescriptions.
  
  Networks also contain other dispensers such as mail order pharmacies, specialty products pharmacies, and preferential pharmacies. Each group would probably have a different contract and a different payment formula.

  What about government pharmacies that fill prescriptions in a non-government network? The VA (Veterans Administration) is such a network.

  Government pharmacies buy drugs at special government prices. Many prices are 50-75% below the community pharmacy cost.
  (The government doesn’t need to buy drugs from Canada because it already gets a very special low price.)
  The government, because of their buying advantage, is not supposed to compete with community pharmacy. In many cases, the government gives away prescriptions to the disadvantaged and has many programs to assist states in covering the medical needs of those that can not afford care.

  Based on the government’s goals and purpose in the health care system it is understandable that they would get a special low price on drugs. It is also understandable that the government can dispense drugs for a much lower price than can retail pharmacy. But what about the reverse? What if the government charges a payer more than retail pharmacy – in a flat fee system?
  
  One network (XYZ) that is of interest is with one PBM and the VA on the east coast. Instead of charging a low price for drugs, they are paid $51 for each prescription they fill no matter what the cost. How could this happen? More importantly, why did this happen? Community pharmacy is paid on a cost plus a dispensing fee formula and the VA on the east coast is paid on a flat fee formula?

  We called several VA pharmacies and tried to find out if they knew that they were being paid much more than retail pharmacies on each prescription and no one knew what we was talking about. When the PBM was asked we were told that this is what the VA demanded.

  Should community pharmacy ask for a flat fee too? Is this a new trend in contracting? And even more complicated, should the government give payers the advantage of their lower cost of drugs?

  Please let us know if you have seen any of these issues. We are interested in your comments and opinions.

• Developed by Barry Pascal, PharmD, Pro Pharma Pharmacist