Episode 6 – PBM Pricing Games and How Plan Sponsors Can Avoid Them

Madison Connor (0:10)

Good afternoon. Welcome to another episode of Benefits Bites. I’m Madison.

This is Mike. And today we’re going to be discussing PBM pricing games and how to avoid them. So Mike, why don’t you set the stage for us and talk about what you’re seeing from a macro level in the marketplace?

Mike Stull (0:26)

Well, I just want to start by letting everybody know that Madison didn’t tell me we were filming today. So she dressed up and she sabotaged me by allowing me to wear my golf attire here. So hopefully you all don’t mind, but I am here.

We are recording. Yes. I’ll pull myself together and, uh, and get through this episode, but I find myself in a situation often where a sales lead will come to me and say, we’re behind on this particular opportunity.

And so, I’ll dig in a little bit and ask, well, what are you hearing? What is the consultant telling you? And we’re behind, uh, by, uh, to a certain, uh, competitor and they’re offering something that is X, Y, Z better than, than what we are.

Now, PBMs have always used pricing optics to try to better their position on consultant spreadsheets. And it’s one thing that drives both consultants and employers nuts, but it’s also a direct result of the way that, that we purchase. So, um, in general, what I would say is that we typically see these types of maneuvers happen in three different areas.

The first is rebate credit, which is a relatively newer construct within the PBM contracting arena. Uh, the second are exclusions, which have been around for a long time. And then the third one is the management of lists.

So specialty drug lists, uh, limited distribution drug lists, and the treatment of, uh, drugs on those lists, uh, in ways that may run counter to what you would expect. So I typically will call that re-bucketing of claims.

Madison Connor (2:20)

So let’s start with rebate credit. What are some of the examples of how PBMs will use rebate credit to pump up their guarantees?

Mike Stull (2:27)

Yeah. So, over the past few years, we’ve seen certain brand drugs, particularly those used to treat diabetes that have voluntarily taken list price reductions. And in a lot of cases, what they’ve done is just eliminated the rebate for those products.

So if we had a brand drug that costs $500, that manufacturer may offer a $400 rebate and a net price of $100. Well, what they ended up doing was just eliminating the $400 and selling the drug for a list price of a hundred. So it’s gone from 500 to a hundred dollars, eliminated a $400 rebate.

So as the PBM, I need to account for that, and I can do it in one of two ways. I can either recalculate what my average rebate guarantee is going to be, and I can restate that guarantee, or I can just leave the guarantee alone and on a quarterly basis, when I send you your rebate check, I’m just going to short it by the $400 that I lost on that particular drug.

Madison Connor (3:46)

Rebate credit.

Mike Stull (3:47)

Rebate credit.

Madison Connor (3:48)

That’s a great market.

Mike Stull (3:49)

Yes, yes. They call it rebate credit.

Madison Connor (3:51)

So how do consultants account for this?

Mike Stull (3:54)

So, you either have to make an adjustment to rebates, or you have to make an adjustment to ingredient cost. And a lot of times it depends on what the time period is of the historical claims file that you’re working from. So if I have a drug that lowered its list price in 2026, if I’m running an RFP, I’m probably using a claims file from calendar year 2025.

So in that case, the list price of that drug is the old, inflated price. So if I’m working with a PBM that has submitted a rebate that is already adjusted for that list price reduction, then what I would need to do is actually either lower the ingredient cost or I would need to increase the amount of rebates that I give them credit for by whatever that amount is. Conversely, if I have a PBM that has submitted a rebate that allows for rebate credit on that particular product and I have an inflated cost in my historical claims file, I don’t need to do anything because I’m getting to the correct net cost.

Madison Connor (5:25)

So, what happens if you’re looking at claims data that already factors in the lower list price?

Mike Stull (5:30)

It’s really the opposite. So, if you have a rebate that accounts for that lower list price, you don’t have to do anything. If you have a rebate that’s inflated and otherwise will get rebate credit, then you have to make sure that you apply that to the rebates from that PBM.

Madison Connor (5:53)

Does the same hold true for biosimilars?

Mike Stull (5:56)

So, it’s a similar concept. But what happens is that with a brand drug, it’s the same product. It just took a lower list price.

So it’s the same product from year to year. With biosimilars, you’re actually switching products. And we know that biosimilars can have different prices and sometimes pretty substantially different prices.

And so it just adds some more complexity to the math problem in terms of being able to identify what the historical claim is, what the new biosimilar will cost, and whether the rebates adjusted for the lower list price biosimilar or not, whether you need to take rebate credit or not.

Madison Connor (6:49)

Are all consultants capturing this?

Mike Stull (6:52)

Well, the fact that we’re doing this episode would suggest that our experience would say that no, they don’t.

Madison Connor (7:00)

So, what’s the consequence? What happens when it’s not caught? Well, other than your gray hair.

Mike Stull (7:04)

Yeah, other than my gray hair. Thank you for noticing. Is that if you’re in an evaluation, it’s going to create some false positives.

You’re going to potentially make a decision that you otherwise wouldn’t have made. If you’re trying to do projections or budgeting for the future, then you may run into a situation where once you start actually getting some real experience, it’s not necessarily meeting what you had projected. And that can obviously create some problems.

Madison Connor (7:40)

Okay, so that’s rebate credit. Let’s move on to exclusions.

Mike Stull (7:44)

Yeah, so exclusions I mentioned in the beginning have been around for a long time. The basic concept is if you have a numerator and you have a denominator; you’re trying to figure out what the average is. If you leave the numerator alone and lower the denominator, you’re going to get a bigger number.

If you leave the denominator alone, but you decrease the numerator, you get a smaller number. If you increase the numerator, you get a bigger number. Does that all make sense?

Madison Connor (8:18)

This is why I got into the legal side, Mike. You handle the math problem.

Mike Stull (8:22)

Right, right.

Madison Connor (8:23)

It does make sense.

Mike Stull (8:24)

Good. So what we see is that from an average per brand guarantee perspective, there’s a lot of things that a group can do. But in some of the newer models, we see on a per member per month basis, that’s where they’ll mess with the numerator.

So remember, it’s per member per month. Those are your denominators. The number of members, the number of months in the calendar year.

Pretty tough to mess with those. And so, what you do is you exclude certain claims from your numerator. Lower numerator, leave the denominator the same.

You get a smaller number. And that smaller number can look really attractive in a bid unless you catch that they’re actually leaving those out. The other thing that will happen is that PBM sometimes will reset the number at the effective date.

So they’ll bury somewhere in their caveats that they reserve the right to adjust the PMPM at the effective date based on the receipt of more recent claims data. And so that’s another way that we see that particular form of bidding be maneuvered in order to look more attractive.

Madison Connor (9:53)

So you talk about GLP-1s and specialty drugs over a certain price as exclusions in the PMPM model. How about exclusions to the traditional per brand guarantees? Can you share some examples?

Mike Stull (10:06)

Sure. So limited distribution drugs are the most common. And we see PBMs excluding LDDs from typically specialty rebate guarantees, even if their specialty pharmacy has access to the medications.

OTCs such as diabetes test strips could be excluded from rebate guarantees. Another big one these days are devices like continuous glucose monitors. So having those excluded.

One final exclusion that we can see from both discount and rebate guarantees are claims for products where the participant cost share is mandated by some sort of government regulation. So think of preventative drug lists. Think of HIV prep.

Those are the drugs that that caveat is trying to catch. And then also from discounts, you’ll see exclusions for claims that are in states where there’s some type of minimum reimbursement requirement. And I know that’s something you’ve been watching.

Madison Connor (11:20)

It’s a little bit. Probably about 14 states now have some type of reimbursement law that will impact certain claims in those states. So the third one you mentioned was how PBMs treat drugs that might be considered specialty differently from a rebate perspective.

Can you give an example?

Mike Stull (11:36)

Yeah, we’re seeing a lot of this these days as well, including from some of our own plans and our own PBM suppliers. The best example of this right now is Dupixent. So Dupixent generates about $1,000 in rebates per month.

And when you put that into a specialty guarantee bucket and you pay out a $3,000 or so specialty guarantee every time a Dupixent claim is processed, you’re paying out a guarantee that’s about three times what the actual rebate is on that particular product. And so you have other cases within your utilization where the rebate is more than the guarantee. So across your utilization, it works itself out.

That’s the whole purpose of underwriting. But if you start to see more and more Dupixent claims relative to everything else, then you start to run into problems. And that’s exactly what we’ve seen with that particular drug as it’s gained more and more indications from the FDA for the types of conditions that it’s used to treat.

Madison Connor (12:52)

So what do the PBMs do?

Mike Stull (12:54)

So, in the case of Dupixent, what they’ll typically do is instead of giving it a specialty rebate guarantee, they will assign it a retail rebate guarantee.

Madison Connor (13:10)

So, do you have any other real-life examples of this taking place?

Mike Stull (13:15)

Sure. So we’ll see, for example, a $5,000 specialty guarantee. And if we see that right away, we’ll think, oh, limited distribution drugs must not be included.

Or we’ll hear, hey, your competitors are offering a $600 retail rebate guarantee. And we think, well, OTCs, test strips, there’s something going on there. There’s rebate credit still in those numbers.

So how do we make sure that the consultant’s adjusting for that? Maybe the latest one that we’ve seen has to do with mail order rebates. And we’re used to seeing mail order rebates be $1,200, $1,300, $1,400.

And if you think about the drugs that are typically dispensed at mail, a lot of them are used to treat diabetes. And a lot of those are the same drugs that took list price reductions. So when you do the math, it’s really difficult to get to a rebate guarantee that’s that high.

And so again, when we see that, red flag goes up. We think, OK, what are they doing? What are our competitors doing in order to get to that?

Are they excluding certain products? Are they excluding devices? Now, that’s the new one, exclusion of devices.

And sometimes you got to go back to the definition. So, if you’re getting a per brand drug claim rebate guarantee, and that brand is capitalized and drug is capitalized and claim is capitalized, you got to go back to your definitions to make sure that devices aren’t specifically excluded, even if they’re not in the caveats or the list of specific exclusions. So could be one of those, could be two of those, could be all of those that are driving those abnormally high rebate guarantees.

Madison Connor (15:27)

So bottom line it for us, Mike, what’s the takeaway?

Mike Stull (15:30)

Yeah, so I think that the takeaway is if you’re an employer, make sure you’re working with a consultant that has the modeling tools to be able to capture these types of optics and maneuvers done by the PBMs. The other piece that I would say is that if something seems too good to be true, it probably is. And we still to this day get consultants that will say, bad news, you lost, you lost to this PBM. We’ve been burned by them over and over again.

But for this one, this is what they proposed. And so we presented it to the client and will often say, well, if they’ve burned you before, what makes you think that they’re not going to do it again? And while we don’t have time for me to go through this whole parable, there is a great parable about the scorpion and the frog.

And if you’re not familiar with it, I’d suggest you go read it.

Madison Connor (16:37)

Some ancient philosophy from Mike. Bet you didn’t think you’d get that today on your PBM games contracting webinar.

Mike Stull (16:44)

Well, always want to surprise people.

Madison Connor (16:46)

Right. Well, if you want more, I have a great opportunity for you. So, on September 23rd at 2PM Eastern time, you can join us again for a pharmacy benefits industry update, where we’ll also have one of our clinical pharmacists, Courtney Keefe, joining us. Thank you so much for joining us today. And we’ll see you next time.