Episode 3 – Savings Metrics Simplified: Breaking Down Price, Cost and Avoidance

Madison Connor (0:10)

Welcome to another episode of Benefits Bites. I’m Madison Connor and with me here today.

Mike Stull (0:15)

Mike Stull.

Madison Connor (0:16)

Our topic today is the differences among price improvements, cost savings, and cost avoidance.

So Mike, what spurred this topic?

Mike Stull (0:24)

Yeah, there’s a few things that helped spur this topic. One is just the sheer amount of RFPs and evaluations that we go through. On an annual basis this past year, we were right around 500 evaluations.

And so we get a lot of feedback from those evaluations and typically, sometimes I should say, not typically, but sometimes we get feedback that say you’re x percent behind or so far behind and we have to figure out why that’s the case. The second piece is there are a number of third-party vendors out there that want to do business with our clients. And so they sometimes will put together a savings analysis.

And when we look at it, we think to ourselves that if the savings were much higher, they would have to start paying clients to actually provide the benefit. So again, how could this possibly be? Even our clinical team, when we look at our custom clinical edits that we have for clients, sometimes they will come back with, you know, what’s the quantifiable value of this clinical program?

And it’s really high. And we wonder, well, how can that be? And then the third piece is the market check process.

So six, seven, eight years ago, we stopped calling what we were calculating in the market check to be savings because that’s not really what they are. They’re more what we would call price improvements. So we changed that terminology.

Instead of calling it market check savings, we call it market check pricing improvements.

Madison Connor (2:11)

But Mike, isn’t that just semantics?

Mike Stull (2:14)

Well, I think to some degree, yes. But we know that clients are using many of these measurements when evaluating different programs and what to do.

Madison Connor (2:28)

So what’s the problem?

Mike Stull (2:32)

So I think we can think about these through the lens of an RFP. I think we’ll hit all three if we do that. And in the case of an RFP, you’re trying to quantify a PBM’s offer.

And so you’re going to assign value to pricing, so the discounts and the rebates. You’re going to assign value to the clinical programs that the PBM has. You’re going to assign value to the formulary that a PBM has.

Do you give credit for preferring biosimilars or lower-priced drugs over higher-priced drugs? Typically for pricing, you’re going to use historical claims data. So if we were running a bid here in 2025, we would use 2024 claims data and we would evaluate 2026 pricing and discounts and apply those to that historical claims file.

But we know that we probably need to adjust those claims so that they’re reflective of what they’re going to be in 2026. So what are the things that you would adjust? You would adjust the prices of drugs.

So we would expect some level of inflation, particularly for brand-name drugs. We would expect some drugs to have gone generic. We would have expected potentially some biosimilars to launch.

So there’s all kinds of things that will impact the prices or the baseline as we move forward into 2026. Heck, you may put a plan design in place that’s going to affect utilization and so you would want to make sure that you account for that. If you don’t make any assumptions and you just take your future pricing and apply it to your historical claims set, then certainly what you’re showing is going to be pricing improvements versus savings that probably aren’t going to materialize.

And that’s an age-old trick in the industry. Take future pricing, apply it to old claims and old pricing, and show the difference as savings. And again, that rarely materializes.

Madison Connor (5:09)

So what’s the key takeaway here for clients?

Mike Stull (5:12)

Yeah, I think the key on this, and you’ll hear me say this again as we go through here, is understand your baseline when you look at an analysis. Understand the assumptions that were either made or not made and make sure that you ask questions.

Madison Connor (5:34)

So then what about the difference between cost savings versus cost avoidance?

Mike Stull (5:40)

Yeah, so I think of cost savings as you have an expense on your plan, you’ve put this program in place, and you’ve saved X dollars. So existing cost, here’s the intervention, price comes down or cost comes down, that’s savings. Cost avoidances, there are a number of things out in the marketplace that could potentially hit your plan, but they haven’t yet because either you’re lucky or, excuse me, or you have some sort of plan design or clinical program in place to avoid those costs.

So savings I associate with expenses that are on the plan that we remove, avoidances not on your plan today, and you want to keep it that way.

Madison Connor (6:38)

So then how would a wasteful spending clinical program fit in here?

Mike Stull (6:43)

Yeah, that’s probably the best example that we have between the two. So if you put a wasteful drug clinical program in place, so we’re thinking about high price, low value drugs that don’t need to be covered by the plan. If they’re currently on your plan, you put this program in place, you remove those costs, I consider that savings.

If you, again, are lucky and don’t have a lot of utilization of these low value, high price drugs, you put this plan, you still want to put this plan in place because it’s going to avoid those that utilization from ever hitting your plan. And I mean, really, that’s what we’re hoping for is that we can be proactive and put these plans in place in order to avoid cost avoidance, avoid plans from hitting in the future.

Madison Connor (7:48)

So then what happens if you have a clinical program in place, then a third party comes in, looks at your data, quotes savings associated with the program that does the same thing as the one that you already have?

Mike Stull (8:01)

Yeah, we would call that double counting. And you want to try to avoid that or else your budgets are going to be all screwed up. And so, again, I think clients need to be aware of what they have in place today and how well it’s working.

And, you know, for example, you might have a GLP-1 program in place today, meaning a prior authorization for a GLP-1 that targets everyone, you know, with a BMI under 30. And so you have another vendor comes along, they look at your drug spend, they see a bunch of GLP-1 claims, and they assume, well, if I put my program in place, my PA with the same exact criteria, I’m going to save this client money. And we know that’s just not the case, because unless your criteria is more stringent, you as the client have already knocked that utilization out of your mix.

So it’s not in your baseline. You can’t count it twice.

Madison Connor (9:12)

So let’s wrap this up. These are benefits bites, Mike. Can you give us two to three takeaways to send it home?

Mike Stull (9:20)

So I think the first one is really understanding what you’re looking at and why you’re looking at it. So are you trying to compare PBMs through an RFP process? Are you trying to evaluate a program that you have in place today?

Are you trying to evaluate maybe a program that you want to put in for the future? You’re going to have different types of results from each of those processes. And understanding what you’re actually looking at is really important.

And then also know the context. So know what you have in place today. Know how it’s working.

And that way when you look at a claim of savings, you know, is this something that I’m already experiencing in my plan today? Are these truly ways to lower my price where I can take my budget for the future and actually lower it? Or is it cost avoidance?

So just making sure that things don’t hit my plan in the future.

Madison Connor (10:26)

So I guess the final question that comes to mind, different PBMs in the marketplace are adopting a per member per month model. Does this solve the problem?

Mike Stull (10:36)

It would be nice if they did. I think without caveats, without caps on the reconciliation, without exclusions, certainly they could get there. I think a lot of people would consider those insured products.

And certainly that’s not exactly what we’re seeing out in the marketplace. We actually in our latest episode of HR Benecast when we talk with MedImpact, we talk about its PMPM model. And so I think there’s some good discussion in there.

I mean, at the end of the day, I think there’s value in those types of guarantees, but they’re not the cure all that maybe some marketing makes them out to be.

Madison Connor (11:26)

Well, thank you so much for sharing your insights with us today, Mike. And thanks to our audience for tuning in. We’ll see you next time.