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Tips for Comparing Contracts

October 19, 2021 by Grant Goff, MBA, CEBS

The last 18 months have presented several hurdles as organizations have been faced with unprecedented challenges. On top of that, benefits professionals are expected to navigate an increasingly complex pharmacy benefits industry. These individuals are faced with high list prices, rising specialty costs, high-cost/low-value drugs, and limited transparency from pharmacy benefit managers. Tricky contractual language and games don’t make sorting through this environment much easier. Understanding key components of the Pharmacy Benefit Management (PBM) contract can go a long way in saving the plan sponsor a significant amount of money. Below are key components of the Employers Health pharmacy benefit contract, as well as a few things to consider when analyzing contracts in RFP settings.

At Employers Health, we are proud of the transparency our contract provides. As an employer-founded, employer-led coalition, it’s our job to do the heavy lifting for plan sponsors. One area of focus surrounds the negotiated price points, but we also make sure we have a clean and straightforward contract. For example, something as simple as having solid definitions for what’s considered a brand drug and what’s considered a generic drug can make a difference.

When going out to bid, or comparing PBM contracts, here are a few things to consider:

Understanding the types of formularies is very important. Three common formularies are an open formulary (no exclusions or utilization management), a standard formulary (exclusions or utilization management) and a more restrictive formulary. The most important take-away is that when comparing PBMs, ensure you’re comparing the same types of formularies. It should be noted that a standard formulary may include drug exclusions or prior authorizations and step therapies that ultimately drive utilization to the same preferred therapy. The lack of exclusions does not always indicate an open formulary. It’s also important to be cautious of low-value drugs put on formularies by PBMs to inflate rebate amounts. In these instances, a plan may attain higher rebate levels, but also pay more at the point-of-sale for the higher list price drugs. Finally, plan sponsors should always consider the disruption that comes with the adoption of these different types of formularies. Keep in mind two things about your current PBM’s formularies: (1) it likely has either a more restrictive or less restrictive formulary than what you’re currently using and (2) with the approval of additional brand and generic drugs in the marketplace there will always be some level of disruption. Therefore, you may not have to go to bid in order to find a formulary that meets your needs and, conversely, your plan will experience some level of disruption regardless of which PBM you use.

Over the years, there has been an increase in generic dispensing rate, or GDR, throughout pharmacy plans. Much of this increase has been a direct result of brand drugs losing patent protection. By law, when this happens, a generic version of the brand drug can be produced, including the same active ingredients as the original brand drug, and sold exclusively without competition for a period of time, thereby given the name of a “single source generic”. The caveat to understand in this case is that some PBMs include single-source generics with brand scripts. As a result, both the generic and brand discounts inflate, making a plan sponsor believe they are receiving a high generic discount rate, which is certainly not the case. Additionally, on the topic of brand and generic drugs, we have begun to see PBMs adopt strategies that prefer certain brand drugs over the generic equivalent. With these strategies, the brand drug is a lower net cost, after the application of rebates, to the plan, therefore saving plan sponsors money in the process. Remember, this strategy may result in lower net costs and higher rebates, but it will also mean higher prices to the plan at the point-of-sale.

There is no doubt that PBM contracts are complex. With the addition of specialty drugs and their rising costs for payors, it is more important than ever to consider the terms and definitions explained below as they can greatly influence the pricing in a PBM RFP.

  • Specialty Rebates
    • When comparing one contract to another, one might point out that the other contract’s specialty rebates are higher or inflated. With specialty accounting for nearly 50% of a plan sponsor’s drug spend, there are plenty of dollars to move around via contractual guarantees, definitions and caveats. You must be clear about which claims qualify for the specialty drug rebate guarantee and which drugs do not. Are there other requirements to qualify for the full value of the rebate guarantee, such as a days’ supply threshold or that the plan has incurred some cost as a result of the claim. Finally, be sure clinical management or coupon savings aren’t included in rebate guarantees.
  • Limited Distribution Drugs (LDDs)
    • On average, LDDs make up around 25% of specialty drugs. Most commonly, PBMs exclude LDDs from the rebate guarantee, which inflates its value. Understanding a PBM’s LDD list, both at the time of your evaluation and at the time of your go-live date, is an important aspect to account for when considering the impact it can make.
  • Specialty Drug Lists
    • When changing to a different specialty drug list, there are things one needs to consider or look out for. For example, HIV drugs can be included in specialty guarantees or they can be included in traditional brand guarantees. Additionally, specialty drug lists may change within the same PBM. This matters because whether a drug is classified as “Specialty” within your contract will determine which discount guarantee and which rebate guarantee applies. While discounts may be similar for brand drugs, the rebate differential between specialty and retail is usually significant.

Ultimately, plan sponsors deserve transparency from pharmacy benefit managers. At Employers Health, we continuously evaluate trends within the pharmacy industry and how they contribute to the growing costs of health care benefits. We work as a resource to help maximize the efficiency of the pharmacy benefit for plan sponsors. Navigating the pharmacy benefits industry doesn’t have to be so confusing when you have Employers Health as an extension of your team.

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