Episode 4 – Cost-Plus Pricing: What Plan Sponsors Should Know

Madison Connor (0:10)

Good afternoon, and welcome to another episode of Benefits Bites. I’m Madison, and I’m joined here by my co-host, Mike. And today’s topic on our episode, we’re going to talk about cost plus pricing, something you may be hearing about in the industry.

And so Mike, as we begin, how would you like to set the stage for us?

Mike Stull (0:29)

Yeah, so cost plus isn’t necessarily new. We’ve had it around for a number of years. We’ve seen it in offers put out by mail order pharmacies, typically standalone mail order pharmacies, standalone specialty pharmacies.

It was a way for those entities to distinguish themselves in the marketplace by offering a new pricing model that was different from what everybody else was doing. We’ve seen it more recently from entities like Mark Cuban’s Cost Plus Drug Company has it right in his name. And we’ve also seen it in a lot of state legislation, which I know you’ve been tracking.

Madison Connor (1:09)

Just a little bit. Yes. So several states that are mandating minimum reimbursement to pharmacies.

Sometimes this is tied to NADAC, the National Average Drug Acquisition Cost. Sometimes it’s called actual acquisition costs. So various ways that this cost plus pricing is defined.

Sometimes it’ll apply to all claims in a given state. Sometimes it only applies to claims filled at independent pharmacies. But overall, I would say that while it’s not new, we’re hearing a lot more about it, whether it’s state legislation, Mark Cuban Cost Plus, or just other things that we’re seeing on LinkedIn.

Mike, how do you view cost plus offers and are they inherently better pricing?

Mike Stull (1:52)

Well, again, not necessarily. It really depends on how you define cost. Whose cost is it?

And the second piece is what’s the plus? So if I have cost plus $10 versus cost plus $100, that’s very different. So in terms of what I like about cost plus arrangements, A, it gets us closer to the actual price of the drug, and B, it typically provides greater transparency.

So as it relates to the first on getting to the actual price of the drug or getting closer to the actual price of the drug, certainly for generic drugs, Mark Cuban’s company has done a great job of helping us understand what the actual price of generic drugs is and in particular, the price of specialty generic drugs. So that is good. And these cost plus drugs get us closer to that, gets us away from the traditional price benchmark of using average wholesale price and contracts, and then discounting it by 80, 85, 90%.

When you discount a price benchmark by that much, you know it’s not really accurate. And then on the second piece, in terms of transparency, there is typically a lot of language in contracts around reconciliations and audits. And so it helps you make sure that you’re getting the actual price that you agreed upon.

There are some PBMs that are putting out new pricing models that, where the PBM tells you what its cost is and its mail order or specialty pharmacy. And some of the critics have, you know, rightly so said, well, that’s not very transparent. But I think what I would argue is that it does at least put the price in a dollars and cents on a drug level basis.

And so that is better than lumping all brand drugs or all generic drugs with an AWP discount. So it’s not completely transparent, but it is a step in the direction of more transparency.

Madison Connor (4:13)

We talked about some of the different pricing benchmarks used, whether it’s NADAC, actual acquisition costs. And we know these aren’t necessarily perfect averages. It all depends on who’s reporting to some of these surveys.

Is it voluntary to try and determine the true acquisition costs of a drug? It is very difficult. So from your perspective, what are some of the drawbacks to a cost plus pricing arrangement?

Mike Stull (4:39)

Well, I mentioned it at the beginning. It’s how do you define cost and whose cost is it? So from a definition perspective, are you including all of the off invoice discounts that naturally occur within the marketplace?

And the second piece is, are you taking the cost benchmark from an entity or a sample of entities that have leverage in the marketplace? So I could go out and buy a bunch of whatever commodity you want. If we say paper towels, I could go out and buy a bunch of paper towels and I could sell them to you and say, hey, this is a cost plus arrangement.

This is the best deal you’re going to get. And you would rightfully say, I don’t think so, Mike. I’m going to Walmart or I’m going to Amazon.

I will pay their spread and still get a better deal than I’m going to get through you because they have leverage. And we saw this with small to midsize PBMs before they started purchasing through the big GPOs with their rebates. They would say, hey, I’m giving you 100 percent of what I’m negotiating with the pharmaceutical companies.

This has got to be better than what you’re getting through the big PBMs. And we would say, no, it’s not because their deals were so much better that they could keep 10 or 20 percent of it and still offer you a more competitive price out in the marketplace. So ironically, it’s those big GPOs with the big PBMs that have allowed over the past couple of years for the mid-market players to more effectively compete with them.

Madison Connor (6:27)

Bottom line it for me, Mike.

Mike Stull (6:28)

Yeah, I think bottom line, it’s again, what’s the definition of price? Can you audit it? And is it from an entity that has leverage and will be continued to incentivize to drive costs down?

Madison Connor (6:45)

So now we’re going to do a lightning round of questions. This one pertains to state legislation. So we know that states like Kentucky, Indiana, West Virginia mandate reimbursement at NADAC plus the dispensing fee.

So what happens to PBM contracts if states continue to mandate cost plus pricing?

Mike Stull (7:03)

Yeah, quick answer. It takes it off your list of things to negotiate with PBMs. You just need to make sure that your PBMs are complying with the state mandates in terms of reimbursement. You focus more on mail order pricing, specialty pricing, rebates, all of the performance guarantees, things that are important outside of retail network pricing.

Madison Connor (7:27)

Is transparent pricing the same as cost plus?

Mike Stull (7:30)

Technically, no. And depending on how you’re looking at transparency versus pass through. In the case of the state mandated reimbursement to retail pharmacies, those will be pass throughs for PBMs. So in that case, you’ll be paying a PMPM fee or a per script fee instead. And so in that in that sense, it will act the same as a pass through deal.

Madison Connor (8:00)

That’s something that plan sponsors need to always keep in mind to the extra admin fees that may apply for states that mandate this, as well as just any other PBM fee that may apply on a cost plus basis. Next question. Does lesser of logic still factor in?

Mike Stull (8:16)

Yes. And this was a question that we got at our Health Care Headlines live at the annual benefits conference. So if you haven’t had a chance to join the thousands of people who I’m sure have gone on and watched it.

Madison Connor (8:29)

Don’t walk. Run.

Mike Stull (8:32)

Run to your favorite podcast hosting site and download the Health Care Headlines live.

But it was a question from from the conference. And the answer is, yes, lower of logic will still apply for participants. So if the flat dollar copay that you have or the co-insurance amount is less than the reimbursement for that drug, then the participant will pay the lower of of those two.

Madison Connor (9:05)

Last one, cost plus pricing is mentioned in Express Scripts Federal Trade Commission settlement. Any comments?

Mike Stull (9:13)

Well, you know, this is lightning round, so we could spend forever talking about this. I think it is in there and it it’s really not going to matter so much. What’s going to matter is what are the individual state requirements for minimum reimbursements?

That’s ultimately what will matter.

Madison Connor (9:33)

Yep. And this is a good time to remember everyone or remind everyone that those state reimbursement laws that require NAADAC plus the dispensing fee or some other type of level, the Supreme Court held in 2020 that those laws are not preempted by ERISA. So there’s no question of, does this apply if I’m an ERISA plan?

The cost regulation rules will apply.

Mike Stull (9:56)

Not getting away from it.

Madison Connor (9:57)

Nope, absolutely. Well, that’s all we have time for today, folks. Thank you so much for joining us and we’ll see you next time.

Mike Stull (10:03)

Thank you.