Episode 14 – Market Check and Pricing Improvement Analysis

Mike Stull (0:09)

Hi, everyone. This is Mike Sull, and welcome to this month’s episode of the Employers Health HR Benecast, your source for expert commentary and insights on current health benefits, news, and strategies. I hope that everyone was able to listen to our last episode where I sat down with Rachelle Firestone, Director of Benefits at Kenan Advantage Group and the recipient of our 2019 Excellence in Benefits Award.

I really enjoyed my conversation with Rachelle, and I encourage you to give it a listen if you haven’t already.

We had a number of entries into our listener drawing from that episode, and Heather Beal from Joanne’s Stores is our winner. Heather submitted the correct keyword, excellence, and will receive a $50 Visa gift card.

Be sure to listen for the keyword in this episode and enter for your chance to win. I’ll share the keyword later in the show or even during the interview, so be sure to listen closely.

On today’s episode, I’m talking with Dave Uldricks about the current Pharmacy Benefit Management Marketplace and the results of our 2020 market check.

Dave is an attorney on our team who leads our PBM contracting strategies and has experience both on the employer side and the PBM side. I’ll let Dave talk more about his background once we get into the interview and be sure to stay tuned afterwards for some Employers Health news and feel free to submit questions or topics that you’d like to see covered on a future episode of the Benecast. So with that, let’s jump into the interview.

Welcome, Dave.

Dave Uldricks (1:45)

Hi, Mike. Nice to talk to you.

Mike Stull (1:47)

To kick things off, can you tell the audience a little bit about yourself, your background, and current role at Employers Health?

Dave Uldricks (1:54)

Sure. Sure, I can. So I am Vice President of PBM Contracting and Strategy here at Employers Health.

In that role, I lead the clinical team, the analytics team, and I have a lot of interaction with our legal team to support the contract and making sure that it is as competitive as it can possibly be for our members and it’s up to date, current, and it’s modified over time to keep up with the times. As far as my background, really, to get into that, I would have to start before I got into the PBM industry. Before I was in the PBM industry, I was working with PricewaterhouseCoopers in their state and local tax department as an attorney there.

And I had an epiphany while I was there that I hated taxes. So I decided to get into a Master of Law program. And while I was pursuing that, a guy I go to church with, he was a pharmacist at a small consulting firm, which did benefit design consultation for regional health plans.

And he was talking to me about how many of his clients were fed up with the PBM game and how they wanted something different. So he hired me to come on board and develop a portfolio of rebate contracts with all of the manufacturers and develop a formulary for these clients. We did that.

We established a P&T committee, a pharmacy and therapeutics committee, developed formularies of our own, and we administered those of some of our clients that had their own formulary. And we collected and dispersed rebates. That was a very successful venture.

So, so successful, in fact, that eventually that portion of the business was purchased by SXC Health Solutions. So I began working for them in 2003, and that lasted until about 2008. So at SXC Health Solutions, I was their director of industry relations and more or less held the same role.

Mike Stull (4:02)

So 25 years ago or so, clients were fed up with formulary games by the PBMs, and it seems we’ve we’ve come full circle.

Dave Uldricks (4:12)

Yeah, that’s correct. So at least the clients that we had at that time, it was an interesting time.

We had certain clients that had managed Medicaid populations, and they had closed formularies, which were, of course, highly successful at managing spend and trend because they were able to exclude certain drugs from the formulary and focus only on those drugs that really made clinical and financial sense. And some of those same clients also had more commercial populations as well, and they could see the large disparity between the financial results driven by a PBMs formulary versus their own. And a lot of that was suspected was due to preferring high-cost drugs in order to gain rebates.

So they engaged us to develop a formulary that focused on the lowest net cost in each therapeutic class. And so that’s exactly what we did. The program did have a lot of success.

As I mentioned, we were able to manage trend at that time at a rate of about 6% to 7% cost inflation. And that is at a time when pharmacy costs were, generally speaking, increasing at a double-digit clip.

Mike Stull (5:32)

Mm-hmm.

Yeah. I know a lot of the drugs at that time that had a lot of price inflation were impacting 7%, 10%, 15% of the population versus today where a lot of the specialty drugs are only impacting less than 1%.

Dave Uldricks (5:54)

That’s true.

That’s true. Very different times we’re in today. It does seem as though over time the stakes have just gotten higher simply because exactly what you mentioned.

It’s sort of a game of Russian roulette almost. If you have a patient that has a rare disease, you’re going to be impacted by cost because these drugs are so expensive, but they do only apply to a very select few patients.

Mike Stull (6:25)

Mm-hmm.

So let’s jump into the PBM marketplace. And before we get into things like the market check, let’s just set the stage regarding the marketplace as it is today. There’s obviously a lot of change.

And even though I say that it sounds like from our conversation so far, the more things change, the more they stay the same. But we do have a lot of change right now, a lot of consolidation out in the marketplace. It continues to be a driver with CVS acquiring Aetna, Cigna acquiring ESI.

You have Anthem starting to transition lives early to its new in-house PBM from Express Scripts. And OptumRx continues to have a great selling season this year. We have a lot of regulatory and legislative activity at both the state and federal levels.

And those are focused primarily on pricing models and pharmacy reimbursement, copay coupons, accumulator programs, rebates. And then thirdly, I was thinking of some of these collusion allegations against both generic and brand manufacturers, which particularly on the generic side doesn’t make us feel all that great. And new medications coming to market, like we said, to treat rare conditions, and those are being launched at prices that are predicted to be in the millions.

And so really unsustainable for the single plan sponsor. So just a lot of different things that are driving the marketplace today. I’m curious from your perspective, in what ways has all of this change impacted our approach or really any plan sponsor’s approach when it comes to contracting with a PBM?

Dave Uldricks (8:20)

Well, I guess the answer to that is, well, twofold.

There’s never any shortage of issues going on in the pharmacy landscape. I mean, I can’t remember a year where we haven’t had some sort of a holistic change to the pharmaceutical landscape that we haven’t at least had to think about from the advent of Obamacare. No one knew how that would impact the marketplace.

And as it turns out, at least from our perspective, it didn’t have a whole lot of impact, but we had to be prepared for that. So I guess the second part of the answer is, in practical reality today, it hasn’t had a whole lot of impact. None of those things have had a whole lot of impact currently, but it has required us to at least start talking about and investigating potential options that we may need to pursue in order to service the demand of our clients.

And ultimately our contracting efforts are driven by our client demand. With that, I think we do a pretty good job of understanding what our clients need and desire. And then when we have a significant amount of interest in a particular program, that’s when we implement it.

As an example, some of the consolidation that you’ve talked about, we have at least looked into some strategies that may be more of a fully insured type of situation. Not sure whether we’ll go down that path or not. We have investigated some of those.

Certain of our PBM partners have come up with some alternate strategies that may help address some of the issues relative to rebates. Point of service rebates have been something the PBMs have offered for some period of time, but there is renewed interest in that. And certainly we’re able to act on that if there are any members that are truly interested in going down that path.

But as I said, there’s not been a whole lot of demand for that to this point, but we are in a position of readiness in case any of our clients do express an interest to move in that direction.

Mike Stull (10:33)

Great. Thanks.

In terms of responding to this change, one of the things that we have as a tool is the annual market check. Could you give us some background on the market check, what it is, when do we do it, what steps do we take to ensure we’re negotiating a competitive deal?

Dave Uldricks (10:53)

Sure. Yeah.

And that is exactly what the market check is. It’s a process that we undertake. And really, it’s continuous.

It really never ends, but there is sort of a formality to it. Bottom line is, it’s a process we go through each and every year to ensure that the pricing in our contract primarily is competitive with what is out in the marketplace today, so that if any of our members were to go out to bid, we would remain competitive. A market check provision in a PBM contract is not exactly common.

And most PBM contracts are what I call a static three-year contract, where the pricing is set at the beginning of the first year of the contract, and it remains constant throughout the entire term. There may be some escalators in pricing elements that take effect in years two or three, but the difference is that those are preset at beginning of the contract term. Typically, in those types of arrangements, the pricing tends to go stale by the second year, certainly by the third year.

With our contract, we renegotiate the price points each and every year. In that way, we ensure that our pricing is market competitive really at all times. So as far as the formal process is concerned, typically that starts really in the fourth quarter of each contract year, and contract year is the same as a calendar year.

Typically, at that point, we sort of regroup internally as a team. So I’ll meet with you, Mike, the lead of sales and marketing, and my team, and we’ll sort of go over where we were strong over the course of the year and where we need some improvement. We’ll also include the leader of our account management team, that’s Zach Hostetler, in the discussion and get his perspective from the viewpoint of our current members.

So we regroup and define our strengths and weaknesses, and we internally come up with things that we would like to go for for the next market check, which would take effect December 31st of the following year. So after we do that, we have a meeting with each of our PBM partners, or all of our PBM partners, and we go over what we think we need to accomplish for the following year. Now, as I said, this is a continuous process, and typically in any particular market check year, we will focus our efforts primarily on the changes for the upcoming contract year, but often we will also have discussions about how we want to change the contract in future years as well.

So we’ll take all of that, we’ll meet with our PBM partners, define what our objectives are for the upcoming year, we’ll reach agreement with them on those and maybe any other objectives that they may have, and we solidify those. And then shortly thereafter, we’ll engage some national pharmacy practice leaders to review our contract in terms of our pricing relative to the market as it stands at that particular time. So we have our contract reviewed, obviously, over the course of the year when we’re pursuing new business and trying to retain business, and then we give it another set of eyes for national pharmacy practice leaders, sort of give us a benchmark as far as where our contract falls in their eyes, and all of these national pharmacy practice leaders are those that tend to place a lot of business with not only the PBMs that we work with, but others as well.

So we get, in that way, a pretty good viewpoint of where the market is at that particular time. After we get that, that report typically comes to us sometime in January, and shortly following that, we’ll get our first proposal from our PBM partners as far as what they believe our price point improvements need to be for the following year. We will review their offer, and typically at that point, it just becomes a straight negotiation on the price points.

The way we go about that is we will analyze what we anticipate to be changes in the drug marketplace in terms of both utilization changes that may result from different formulary changes, but also in terms of the drug pipeline, what new drugs are coming out, what generics are going to appear, that sort of thing. We’ll get an idea of what we believe the overall price inflation will be, and that sort of sets a floor for where we think the negotiations should be set at. That plus the benchmarking that we get from third-party consultants really helps to anchor our negotiations for the upcoming year.

We typically try to have the entire process complete by June. That is a timeline that we’d like to try to achieve so that we can communicate the results over the course of the summer. It’s pretty rare that we actually achieve that deadline, and that is typically because we generally believe that we are not yet where we need to be in the June time frame.

A lot of that is driven by what is going on in the marketplace at that particular time. From about January through June, as you know, Mike, I interact a lot with you and your sales team as far as how are we doing on opportunities that we’re bidding on. I also will interact with Zach to determine how we are doing on our efforts to retain business, and if we have a situation, as we did this year, where it seems like the market is changing very quickly, we’ll have to continue negotiations, oftentimes through the summer, to ensure that we have the best deal possible.

Once we do conclude negotiations, we move to the contracting phase, which can take some time. A lot of times, commas and periods make a difference as far as how a particular provision will be interpreted. It’s a pretty exacting process, but we take the time to make sure that that is correct.

Once we have the contract complete, then we focus on communicating the results to our members. That can take a number of forms, but generally speaking, we will get those results out to our members by the end of August each year. What we attempt to give our clients is an analysis of what the results of the market check are for them, and a summary of changes that we have made on their behalf.

Mike Stull (17:56)

Great. With that, from a high-level perspective, how did this year’s market check go? What should our clients expect to see when they get the results this year?

Dave Uldricks (18:08)

I’m very pleased with the market check results this year. In terms of improvement relative to price inflation, we did very well.

We anticipated that price inflation would be somewhere in the 4.2 percent on an overall basis. That would include brand, generic, specialty, and all manner of drugs. Our market check improvement on an overall basis, we were roughly between 6 and 7 percent overall improvement.

Now, that does vary and can vary greatly on an individual group level, and that’s based primarily on their particular plan design or utilization patterns. When you look at it on the whole, our contracting efforts this year significantly outpaced inflation.

Mike Stull (19:01)

Right and you didn’t get two law degrees not to throw caveats in there.

Dave Uldricks (19:07)

That’s right. That’s exactly right.

Mike Stull (19:12)

This has been a very interesting year, at least from my perspective.

As Dave mentioned, the market has changed quite a bit. PBMs respond to the way that employers are purchasing PBM services, and a lot of times that has to do with the consultant. And so, as consultants change their models, or if one big PBM does something from a pricing perspective and wins a big piece of business, then the other large PBMs tend to follow suit with those same types of what I’ll call pricing maneuvers.

So, maybe they include a drug, they exclude a drug, a different type of claim. So, it’s really, at the end of the day, it’s about how do we make our numbers on the spreadsheet look bigger, and that may result in, again, bigger numbers on the spreadsheet and in your contract, but it actually may not result in lower spend for you as the employer. And so, I know one of the things we try to do is you see contracts out there that typically they’ll have really great pricing, and they’ll have really bad terms and conditions and definitions, and so the pricing doesn’t really mean anything.

Or, you’ll have a contract that’s really buttoned up from a contracting perspective but has lousy pricing. I think what we’ve been able to do is really try to balance those two extreme ends of the spectrum there to make sure that, yes, we have a contract that is very prudently managed, that has good definitions and very tight controls, and that we also do a good job of leveraging our size to get the best price points that we possibly can.

Dave Uldricks (21:18)

Well, I’d agree with that up to a point.

I like to think that our contracts are written well regardless of the model, but you’re right. This particular year has been very interesting, and again, what I said at the beginning, our contracting efforts really are driven in large part by market demand. And when certain consulting houses are evaluating PBM programs in a certain way and require certain contracting elements that may differ, well, if that’s what the market is demanding, then we’ll develop a model that will fit that and be more aligned with that.

And ultimately, through their consultant, that’s what clients are demanding. So, that’s what we put out there. At least me and my team, we sort of view these differences in PBM contracts and approaches.

We more or less just view it as a math problem. We feel it’s our job to understand the differences between all of these programs, how much value to assign to these differences, and ultimately, at the end of the day, we try to ensure that the underlying value that goes into any contract is market competitive regardless of what approach is taken. So, that’s sort of how we view things.

But again, you’re right. It has been an interesting year in that regard.

Mike Stull (22:46)

Absolutely.

So, finally, Dave, you know that I mentioned earlier that we’re giving out a keyword for listeners to enter into a drawing for a $50 Visa gift card, and I wonder if you’d like to provide that keyword for our audience.

Dave Uldricks (23:06)

I sure would, Mike. The keyword is results.

That’s R-E-S-U-L-T-S, results.

Mike Stull (23:16)

So, there you go. Enter the keyword results along with your name and email address using the link on the Benecast page of the Employers Health website to be entered to win, and we’ll announce the winner on the next episode.

And as a caveat, neither Dave nor I are eligible to win. So, again, the keyword is results. So, thanks again, Dave, for the discussion.

Really appreciate it and really appreciate the work that you and your team do on behalf of our clients.

Dave Uldricks (23:49)

My pleasure, Mike. Thanks for having me.

Mike Stull (23:51)

Absolutely. So, I hope you were able to take away the importance that the annual market check has on ensuring our contract is able to deliver the most competitive deal, really, each and every year. A lot of work negotiating and analyzing our data, and the contract goes into the process.

So, again, thank you to Dave and his team for all their hard work.

Now on to some Employers Health news. So, join us September 17th from 3 to 4 Eastern time for a webinar with UnitedHealthcare that will cover trends on the medical side of the benefits equation and also an overview of our group purchasing initiative with UHC.

This webinar is open to plan sponsors and their consultants. Also, save the date, November 20th, for the Employers Health annual meeting to be held in Canton, and you can check out all our upcoming meetings at www.employershealthco.com/events. Again, www.employershealthco.com/events.

Our fall winter issue of EH Connect will hit mailboxes in November. Our featured client for this issue is Disabled American Veterans. With Veterans Day being November 11th, we thought it only fitting to feature the good work that the team at DAV does throughout the entire year.

From a new business perspective, we’ve added clients spending more than $100 million for 2020 so far. We still have about a month to go, so stay tuned to see how we finish the year. That’ll conclude this month’s show.

Thank you again to Dave for joining us today, and thank you, the listeners, for taking the time to listen and for your continued interest and participation in Employers Health. Our next podcast will feature a discussion with leadership from UnitedHealthcare. We’ll also make up our discussion with leadership from EnvisionRx.

I apologize that we weren’t able to do that this month. We had to reschedule due to some calendar conflicts, but we’ll make sure we get that one in towards the end of the year. Also, don’t forget to submit your questions or topics for upcoming editions of the podcast.

Make sure, again, you enter that keyword Dave gave you during the interview for your chance to win the Visa gift card.

We hope everyone has a safe and happy Labor Day.

Be well, and we’ll see you soon.