Spread Pricing and the Quest for Optimal Pricing in Traditional

and Pass Through Models

Robert I. Garis, RPh, MBA, PhDCreighton University School of Pharmacy

Pharmacy Benefit Diagnosis Suite (PBDS) Softwarewww. pbdsuite.com

402.203.0229Pharmacy Benefit Contracting Excellence

Chicago, IL7/22/09

Topics of Discussion

• Definitions: traditional and pass through • Traditional PBM pricing model • Pass through PBM pricing model • Current literature comparing the models• Optimal pricing in the benefit • Resources

Recognized Definitions of PBM Pricing Models

“Traditional” defintion: The PBM retains a network spread as compensation for their service.

“Pass Through” defintion: The PBM charges a sponsor no more than the amount

that it pays the pharmacies in its retail network for brand and generic drugs. PBM retains an agreed upon fee for service.

No industry-accepted definitions

Traditional ModelSpread Pricing Mechanics

Generic drugs have two prices• A High price

• The “sticker price” called Average Wholesale Price (AWP)

• A Low price

• The “maximum allowable cost” (MAC) price• Every organization in managed pharmacy has their

own MAC price

– An example of one generic drug follows–

Copyright Robert I. Garis, PhD All Rights Reserved 5

AWP and Generic Vasotec 5 mg

Manufacturer AWP Price / 100 tablets(Price Alert 4/15/09)

Apotex $ 102.10

Mylan $ 102.00

Ranbaxy $ 102.10

Taro $ 102.72

Vasotec (originator) $ 242.10

Maximum allowable cost (MAC)(Source— Commercial MAC price)

$ 14.00

Copyright Robert I. Garis, PhD All Rights Reserved 6

Differential ContractingBilling terms AWP - 66% to plan sponsor:

AWP = $102.00 - 66% discount ~ $34.00 / 100 tab

Payment terms to pharmacy:

MAC price = $14.00 / 100 tab

Spread to PBM $20.00

($ 34.00 billed - $14.00 paid)

Chronology of the SpreadPre-2000 Not documented

2001-2003 Huge variation probably > $5-$8 /Rx

2004-2005 $3-$5/Rx

2006-2007 $2-$4/Rx

2008-2009 $3-$6/Rx and rising

Copyright Robert I. Garis, PhD All Rights Reserved 7

Why the upward trend in generic spread?

• Generics 60-65% of all Rx– More spread opportunities– Spreads make up for fewer rebate dollars

• Flood of blockbuster brands losing patent – Ambien– Zocor– Zofran– and many, many more

Copyright Robert I. Garis, PhD All Rights Reserved 8

Generic Drug MAC lists— caution• Wide differences in MACs among

PBMs– “Wildcard”

• Get your MAC list regularly as a condition of the RFP

• MACs should be – Comprehensive– Aggressive

• MAC pricing varies greatly among PBM• Numbers of products included• Prices of those products

Copyright Robert I. Garis, PhD All Rights Reserved 9

Spreads Subsidize Contract Offering

Typical Contract Offering:

Brands AWP-17%Generics AWP-66%

Mail Brands AWP -22%Rebates $4.00/Rx

Typical Contract Offering:

Brands AWP-17%Generics AWP-66%

Mail Brands AWP -22%Rebates $4.00/Rx

SPREADPRICING

No Spreads “Weaker” Contract Offering

Typical Contract Offering:

Brands AWP-15.5%Generics AWP-66%

Mail Brands AWP -20%Rebates $3.00/Rx

Typical Contract Offering:

Brands AWP-15.5%Generics AWP-66%

Mail Brands AWP -20%Rebates $3.00/Rx

NOSPREADPRICING

Pass Through Modelno Spread Pricing

• PBM revenue comes from a specified fee for service– $/Rx– $ PEPM– $PMPM

• There is no spread pricing• Newer model in response to sponsor demand

Yeah, but what about our Plan?

• Let’s see what has been said about the two models– PBM industry– Coalitions– Industry Observers– Other benefits

professionals

Literature comparing pricing Models• Beste P. Eberle B. The Transparent PBM Pass-Through Model: Managing Drug

Spending Through Aligned Incentives. Employee Benefit Plan Review 62:7. Jan 2008. Pub. WoltersKluwer Company NY.

Articles from the following AIS compilation:PBM Contracting and Transparency Issues and Models. Erin Trompeter, Ed. Susan

Namovicz, Managing Editor. Pub. Atlantic Information Services, Inc. Washington DC. :• PBM Transparency Deal May Lower Rx Drug Spending, but Won’t Shake Up the

Industry.• More PBM Transparency May Not Cut Costs but Could Boost Trust.• Client’s Transparency Demands Spawn New Firms, Shake up Other PBMs’ Strategies.• Experts Offer Advice to Payers on Comparing Transparent PBM Bids.

• Drug Benefit News 9:(24). December 12, 2008. PBMs Tout Their ‘Transparency’, but Model Doesn’t Always Lower Clients’ Drug Costs. Neal Learner, Managing Editor. James Gutman, Executive Editor. Pub. Atlantic Information Services, Inc. Washington DC.

Literature warning on pass through

• Remove spread the PBM could lack the incentive to negotiate aggressively for network discount and drug manufacturer rebates.

Traditional & Pass-through Compensation

Traditional Model Pass Through Model

Retains the spread

+Retains Drug Manufacturer Administration Fee

Retains a full and fair fee:• Per-Rx • PEPM, or •PMPM

+Retains Drug Manufacturer Administration Fee

Literature endorsement of Spread Model

• Sponsor may have less risk with spread model because the PBM is at risk for any pharmacies that charge a higher rate.

Consider this

• Why would the pharmacies in the network even know whether a sponsor in their PBMs book of business is a pass through or a traditional account.

• If the pharmacy contracts for one rate for one model (spread) why not the other model (pass through).

The literature and auditing

Many recommend a contract with an auditor or oversight agent as “Mutually acceptable” to the PBM and pharmacy.

– The sponsor should be in sole control of who audits their plan

– Sponsors get your Rx transaction data every quarter

Literature warning on pass through• “Risk” to the sponsor that rebates will go

down if generic drugs become available. No rebate guarantee.

– Seems like a benefit to me since $1.00 rebate income requires $5.00 drug spend

Availability of generics is NOT a risk to the sponsor

Confused???

• The pros and cons of traditional and pass through are confusing

• Let’s look at an alternative evaluation of models—Optimal Pricing

• We will consider the resources we have– Pharmacy data are rich in information

• PBM has your data in exquisite detail—get your Rx data!

– Public information on pricing

Copyright Robert I. Garis, PhD All Rights Reserved 22

Optimal Pricing v. Pass-through

• Optimal Pricing: Charging the Plan the lowest reasonable price that the retail pharmacy will accept or the PBM-owned mail order pharmacy’s MAC list used in the retail program.

• Common “Pass through” defintion: The PBM will charge a sponsor no more than

the amount that it pays the pharmacies in its retail network for brand and generic drugs.

Copyright Robert I. Garis, PhD PBDS Rx Analytics All Rights Reserved 23

What if…

• In what situations might the PBM pay a pharmacy more than the lowest reasonable price that pharmacy will accept?

– Strategic decision?

Copyright Robert I. Garis, PhD All Rights Reserved 24

Assumption in examples

• Optimal price of drug 5¢/tablet– Acceptable to the pharmacy– Good value to the sponsor

Copyright Robert I. Garis, PhD All Rights Reserved 25

PBM affiliated pharmacy

PBM

Chain Rx#1

5¢/tablet

PBM-affiliatedRx

12¢/tablet

Chain Rx#2

5¢/tablet

IndependentRx

5¢/tablet

Copyright Robert I. Garis, PhD All Rights Reserved 26

PBM buys favor with pharmacy– a walk through

• On pass-through accounts the PBM is revenue neutral

• PBM offers some pharmacies better reimbursement on selected (pass-through) accounts, if

• Pharmacies agree to lower reimbursement on traditional (spread model) accounts– www.oag.state.ny.us/media_center/2008/jul/

july29a_08.html Case was settled with no admission of guilt

Copyright Robert I. Garis, PhD All Rights Reserved 27

PBM buys favor with pharmacy

PBM

Chain Rx#1

5¢/tablet

Chain #3Higher rate on

Transparentaccounts

12¢/tablet

Chain Rx#2

5¢/tablet

IndependentRx

5¢/tablet

The distinction

• Optimal price (to the sponsor) = 5¢ /tab

• Pass-through (to the sponsor) = 12¢/tab

Copyright Robert I. Garis, PhD All Rights Reserved 28

Optimal Pricing in the Benefit

• Examples of optimal pricing• Why it is important • Sponsor activity

– Spot checks with publicly available prices

Copyright Robert I. Garis, PhD All Rights Reserved 31

State Medicaid MAC Lists• Minnesota—http://www.dhs.state.mn.us/main/groups/business_partners/documents/pub/dhs_id_016923.pdf

• Illinois—http://www.mslcillinois.com (Then click on “State MAC List”)

• Virginia—http://www.dmas.virginia.gov/downloads/pdfs/pharm-va_mac_list.pdf

• Washington State— http://fortress.wa.gov/dshs/maa/pharmacy/smaclistforbi03.xls

• South Dakota-- http://www.primetherapeutics.com/mac/macsearch.asp

Pharmacy Benefit Diagnosis Suite• Web application to monitor

“optimal” pricing• Videos on spread pricing and

mail order pharmacy service• www.pbdsuite.com

• Call with questions 402.203.0229

• More on topics discussed on web Google “garis and pharmacy benefit”

Copyright Robert I. Garis, PhD All Rights Reserved 32

Summary • Sponsors get your Rx transaction data from

PBM regularly (Quarterly)• Sponsor get the MAC list regularly (Quarterly)

– Confidentiality agreement will be necessary

• Spread pricing is a significant threat to our benefit• Complicates proposal evaluation• Excess cost to the sponsor

• Confusion abounds traditional v. pass through• Consider optimal pricing in your PBM model

Copyright Robert I. Garis, PhD All Rights Reserved 33

Thank You for the Opportunity!