pricing audit educational deck 20160412

© 2016 Pharmaceutical Strategies Group, LLC. Proprietary and confidential.

PBM Basics

Definitions

Health Plan

Insurance company responsible for managing the cost of healthcare on behalf of the plan sponsor

Plan Sponsor

A designated party, usually an employer, that establishes a healthcare plan for the organization’s employees

Pharmacy Benefit Manager (PBM)

A third-party administrator of prescription drug benefits; May manage pharmacy spend on behalf of the health plan or directly contracted by the plan sponsor/employer

Employer/PBM Relationships

Self-Funded = employer is responsible for cost of health benefits; contracts with third-party insurance companies to assist with benefit management

Self-Funded Employer Health Plan

Employer contracts with Health Plan for

medical benefits

PBM

OPTION 1Health Plan subcontracts PBM for pharmacy benefits

OPTION 2 *Employer contracts directly with a PBM for pharmacy benefits

*PBM Pricing Audits are relevant to

self-funded employers

engaged in OPTION 2

© 2016 Pharmaceutical Strategies Group, LLC. Proprietary and confidential.

PBM Pricing Audits

PBM Contracting

Self-Funded Employer

Big Chain Pharmacy

PBM

Employer and PBM contractually agree upon how

much the employer will pay for prescription drugs, known as

pricing guarantees

Grocery Store Pharmacy

Locally Owned Pharmacy

PBM holds contracts with each pharmacy which dictate how much the PBM will pay that

pharmacy for prescription drugs

PBM SpreadAdditional margin earned by the PBM when it reimburses the pharmacy less than the plan sponsor reimburses the PBM

EXAMPLE

Self-Funded Employer

Big Chain Pharmacy

PBM

Plan sponsor will not pay PBM more than AWP – 16% for

retail brand drugs

Grocery Store Pharmacy

Locally Owned Pharmacy

Average Wholesale Price (AWP)A calculated benchmark for the cost of a specific drug; similar to a “sticker price” as drugs are actually sold for below this price

PBM will pay pharmacy at AWP – 15% for retail brand drugs

PBM will pay pharmacy AWP – 17% for retail brand drugs

PBM will pay pharmacy AWP – 18% for retail brand drugs

The PBM calculates how much it paid pharmacies in aggregate compared to what benchmark it guaranteed to the plan sponsor (i.e. self-funded employer)

Types of Pricing Guarantees

AGGREGATEPricing guarantee is based on the performance across all pharmacy

benefits

COMPONENTPricing guarantee based on the

type of drug being dispensed; i.e. branded, generic, specialty

CHANNELIndividual pricing guarantees for each channel of distribution; i.e.

retail pharmacy, mail order pharmacy, specialty pharmacy

Component and channel pricing guarantees are more restrictive on the PBM as over performance in one category (i.e. generics) can’t be utilized to offset under performance in another category (i.e. specialty)

Aggregate pricing guarantees are the least restrictive on the PBM because over performance in one category can offset under performance in another category

How PBMs Calculate Pricing Guarantees

PBMs have various contracts with pharmacies which dictate how much the PBM pays the pharmacy. These are often based on a formula like AWP – X% and often greatly vary by pharmacy and drug type.

At the end of the contract period with the employer, the PBM is responsible for calculating what it actually paid to pharmacies versus the contracted rate with the employer.

While the PBM is contractually required to report and true up fees to the employer, it is not uncommon for discrepancies to go unreported by the PBM to the employer.

Third-party companies, including PSG, can conduct a PBM Pricing Audit on behalf of the employer.

Reality Check: Your Fiduciary Responsibility

This is Etta. If you are directly contracted with a PBM she wants you to commission a third-party PBM pricing audit.

PBM Pricing Audits

• She knows independent audits are often funded by the PBM and no cost to the employer.

• She knows it is not uncommon for employers to recoup significant dollars through an audit.

• She believes it is the fiduciary responsibility of HR leaders to ensure contract compliance.

Why Etta cares about pricing audits…

PSG Pricing Audit

PBM provides PSG with claims data during the audit period on behalf of the employer. Employer provides copy of PBM contract.

PSG applies all contract terms to claims data to compare actual charges to the employer against contracted rates.

1

2

If no discrepancy or a minimal discrepancy is found, PSG would likely recommend no further action on the part of the employer.

a If a material discrepancy is found, PSG most likely will conduct a claim level review with PBM to assess the source of the discrepancy. Next steps will be based on results of analysis.

b

Case Study: Large Employer Pricing Audit

C H A L L E N G EA large employer engaged PSG to measure the PBM’s financial performance within each delivery channel and for each drug type across the plan using the contracted terms.

R E S U LT SPSG identified the PBM had incorrectly included U&C claims in the analysis despite the contract specifically excluding these claims from financial guarantees.

$123,000Recouped by the Employer

Usual and Customary Claims (U&C)U&C is the amount a pharmacy charges a patient without insurance. This price can be used by PBMs to reimburse pharmacies below contracted rates.

HR Leaders: Next Steps

1. Review your PBM contract to determine:a) If pharmacy pricing audits are paid for by the PBMb) The begin and end dates of the reporting period

2. Request a pricing guarantee report from your PBM at the end of the reporting period

3. Consider hiring a third-party company, like PSG, to conduct an independent audit

a) Even when the PBM reports the pricing guarantee was met, still conduct audits every few years as errors in the report are not uncommon

Pharmaceutical Strategies Group

PSG is the largest independent pharmacy programs consulting firm in the country. We have over 20 years of experience of optimizing clinical

and financial outcomes for employers.

www.psgconsults.com | 800-687-4404

• PBM Procurement and Management

• Pharmacy Program Diagnostics and Strategy

• PBM Auditing

pricing audit educational deck 20160412

Healthcare