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Brian AndersonConsultantMillimanSan Diego, California

Effective Pharmacy Benefit Management Contracting and the RFP Process

Overview

Drug Delivery

Trends

RFP Process

Contracting

Case Studies

5A-1

THE PBM INDUSTRYDrug Delivery:

Role of the PBM

Provides administrative services to managed care organizations, self-insured companies, and government programs for processing and analyzing prescription claims for pharmacy benefit programs.

Services may include:

– Contracting with a network of pharmacies and negotiating drug prices and rebate arrangements

– Developing and managing formularies, preferred drug lists, and prior authorization programs

– Processing claims for prescription drugs

– Maintaining patient compliance programs

– Performing drug utilization review

– Operating disease management programs

– Operating mail-order and specialty pharmacies

5A-2

Six main stakeholders:

– Manufacturers

– Wholesalers

– Pharmacies

– Group Purchasing Organizations

– Pharmacy Benefit Managers

– Plan sponsors

– Consumers

5

Pharmacy Benefit Supply Chain

Graphic Source: Pacific Business Group on Health

PRESCRIPTION DRUGSTrends:

5A-3

Annual Spending

Source: 2011 Milliman Medical Index

Breakdown of Spending

Source: 2011 Milliman Medical Index

5A-4

Trends

Source: 2011 Milliman Medical Index

REQUEST FOR PROPOSALSSelection:

5A-5

PBM Selection

Some questions to ask when evaluating the current PBM or considering a new one are:

– Does the PBM fulfill the organization’s needs in terms of costs, customer service, range of drugs available, and other factors?

– Is the organization getting the best possible financial arrangement?

– Is the contract written in a way that allows for transparency?

– Is the PBM willing to contract auditable and sustainable terms that the organization finds acceptable, such as transparency and fiduciary responsibility?

– Is the organization geared up to change PBMs (i.e., to go through with the implementation process and the oversight of PBM operations)?

Overview of the RFP Processes

Prepare RFP

Distribute

Obtain questions

Conduct a bidders conference call or in-person bidders meeting

Respond to the questions

Analyze financial bids

Grade responses

Summarize the responses

Make recommendations for finalists

Interview finalists

5A-6

Draft Request for Proposal

Financial requirements

– Requested traditional and pass-through pricing bids

– Requested minimum discount

– Requested minimum per claim guarantees for rebates from manufacturers

Qualitative requirements

– Administer current plan design and current formulary

– Maintain pharmacy access

– Performance guarantees

– Utilization management capabilities

– Various other contractual provisions

Next Steps

Select finalists and request best and final offers

Determine need for site-visit or on-site PBM presentation

Review pros and cons of traditional vs. pass-through

Review contact terms

Begin implementation

5A-7

CONTRACTINGImportant Provisions:

Effective Contracting

Effective contracting is crucial to the success of the plan’s pharmacy benefit.

Plans should consider doing the following every two years:

– Renegotiate

– Request aggressive renewal terms

– Procurement

Contract enforcement

– Audits

– Reconciliations

– Invoice reviews

5A-8

Contract Negotiations Key issues involved in negotiating a contract:

– Aggressive financial discounts

• Network (30-day and 90-day)

• Mail

• Specialty

• Dispensing fees

• Rebates

• Administrative Fees

– Measurable performance guarantees

– Effective auditing provisions

– Termination clause

– Clear definitions of products (e.g., what is a brand drug and what is a generic?)

– Customer service and member communications

– Compliant and cost-effective Medicare Part D

Key PBM Contracting Issues

Key contracting issues include:

– “Lesser of” pricing for all network and mail-order pharmacies

– Defining the pricing guarantees

– Defining minimum rebate guarantees

– Defining key terms, such as transparency or pass-through

– Quarterly or year-end financial guarantee true-ups

– Agreeable termination clause

– Clear definition of a generic drug

– Measurable performance guarantees

– Auditing provisions

5A-9

Exhibits to the PBM Contract

A PBM contract requires the attachment of numerous important documents. If these items are not included, a plan sponsor’s ability to perform effective audits and collect any recoveries due may be limited.

These documents include:

– List of administrative services

– Financial terms

– Performance guarantees

– Proposed maximum allowable cost (MAC) list

– Specialty drug price list

– The original proposal

– HIPAA business associate agreement

– Plan design document

– Plan pharmacy program specifications

– Performance guarantee definitions

Average Wholesale Price (AWP) Litigation

Health plans and plan sponsors should ask:

– Do we understand the methodology by which our prices are determined, and are we comfortable that the method has been implemented correctly?

– Do we monitor and audit our plan’s pricing regularly, and are we satisfied with the results?

– Are the results what we expected from the contract terms we signed?

– What’s next?

5A-10

Post-contract Oversight Audit

Once the PBM’s operations are in place, an audit is necessary to:

– Ensure the integrity of the contracted arrangement

– Verify that the PBM is providing the sponsor and its members all contract benefits

The audit should involve a thorough assessment of administrative functions, including:

– The accuracy and timeliness of cost controls, systems, and procedures

– The accuracy of management information

– The accuracy and timeliness of claim payments and rebates

– The effectiveness of internal controls

CASE STUDIESSavings Opportunities:

5A-11

Client A: Initial RFP

Current Plan/PBM

PBM A PBM B PBM C PBM D PBM E

Brand $9,131 $9,162 $9,168 $8,893 $9,034 $9,174

Generic $10,881 $8,152 $7,331 $6,384 $6,184 $6,719

Brand $5,168 $5,102 $5,164 $5,059 $5,152 $5,099

Generic $2,982 $2,122 $2,013 $1,738 $1,600 $1,737

Retail and Mail Combined

Total $28,163 $24,538 $23,676 $22,074 $21,971 $22,729

Retail $831 $341 $1,203 $1,912 $1,603 $1,542

Mail $257 $225 $606 $1,236 $920 $919

Total $1,088 $567 $1,809 $3,148 $2,524 $2,461

$831 $623 $618 $578 $411 $626

$1,216 $799 $636 $1,109 $912 $611

$29,122 $25,394 $23,120 $20,612 $20,770 $21,504

0.00% -12.80% -20.61% -29.22% -28.68% -26.16%

$0 $0 $60 $0 $105 $30

$29,122 $25,394 $23,060 $20,612 $20,665 $21,474

0.00% -12.80% -20.81% -29.22% -29.04% -26.26%

$3,727 $6,061 $8,509 $8,456 $7,647

Total (in thousands) - Pass Through PricingFor Contract Years 2012 through 2014

Retail

Mail

Rebates

Dispensing Fees

Admin Fees

Total Estimated Costs Less % of Current Contract

Implementation Allowance

Total Including Implementation % of Current Contract

Total Estimated Savings

Client A: RFP Best & Final Offers

Current Plan/PBM

PBM A PBM B PBM C

Brand $9,131 $8,893 $9,012 $9,159

Generic $10,881 $6,384 $6,184 $6,719

Brand $5,168 $5,059 $5,152 $5,099

Generic $2,982 $1,738 $1,600 $1,737

Retail and Mail Combined

Total $28,163 $22,074 $21,949 $22,714

Retail $831 $1,912 $1,603 $1,601

Mail $257 $1,236 $920 $913

Total $1,088 $3,148 $2,524 $2,515

$831 $578 $411 $626

$1,216 $1,109 $819 $611

$29,122 $20,612 $20,655 $21,436

0.00% -29.22% -29.07% -26.39%

$0 $30 $143 $30

$29,122 $20,582 $20,512 $21,405

0.00% -29.32% -29.56% -26.50%

$8,539 $8,609 $7,716

Total (in thousands) - Pass Through PricingFor Contract Years 2012 through 2014

Retail

Mail

Rebates

Dispensing Fees

Admin Fees

Total Estimated Costs Less

% of Current Contract

Implementation Allowance

Total Including Implementation

% of Current Contract

Total Estimated Savings

5A-12

Client B: Contract Renewal Negotiations

Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3

Brand 12.71% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.25% 16.50%

Generic 60.00% 66.00% 66.00% 66.00% 76.00% 76.00% 76.00% 70.00% 70.50% 71.00%

Brand 16.87% 22.00% 22.00% 22.00% 25.00% 25.00% 25.00% 24.00% 24.25% 24.50%

Generic 60.00% 69.00% 69.00% 69.00% 76.00% 76.00% 76.00% 73.00% 73.50% 74.00%

Brand 12.72% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.25% 18.50%

Generic 60.00% 69.00% 69.00% 69.00% 76.00% 76.00% 76.00% 73.00% 73.50% 74.00%

12.71% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00%

Retail 80% 100% 100% 100% $4.10 per Claim $4.10 per Claim $4.10 per Claim 100% 100% 100%

Mail 80% 100% 100% 100% $21.00 per Claim $21.00 per Claim $21.00 per Claim 100% 100% 100%

$2.00 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25

$0.14 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Admin Fees

Retail

Mail (35-90 Days)

Mail (1-34 Days)

Specialty

Rebates

Current Contract

PBM A - Original Offer Recommended Targets PBM A - Final Offer

Dispensing Fees

Client B: Contract Renewal NegotiationsTotal Cost Over Contract Period (in Thousands)

Current Pricing

PBM A - Original Offer

Recommended Target

PBM A - Final Offer

Brand $9,536 $9,176 $9,176 $9,149Generic $9,540 $8,109 $5,724 $7,030

Brand $3,822 $3,586 $3,448 $3,482

Generic $2,506 $1,942 $1,504 $1,659Brand $37 $34 $34 $34

Generic $20 $16 $12 $13$2,947 $2,836 $2,836 $2,836

Retail/Mail/Specialty Combined Total $28,407 $25,700 $22,735 $24,204Retail $1,324 $1,558 $1,656 $1,558Mail $632 $744 $760 $744

Specialty $0 $0 $0 $0

Total $1,956 $2,302 $2,415 $2,302$808 $685 $685 $685

$61 $0 $0 $0

$27,319 $24,083 $21,005 $22,588

0.00% -11.85% -23.11% -17.32%

$0 $3,236 $6,314 $4,731

Retail

Mail (35-90 Days)

Mail (1-34 Days)

Specialty

Rebates

Dispensing Fees

Admin Fees

Total Estimated Costs (Costs less Rebates)

% of Current Contract

Total Estimated Savings

5A-13

Questions

5A-14