Negotiating and Contracting With Pharmacy Benefits Managers

^“Inside a Drug Pricing Contract,” one headline exclaimed. “The Drug Pricing Contract Express Scripts Doesn’t Want You to See,” blared another. If you didn’t know any better, you might think that Axios—the news and information site founded in 2016—uncovered the secret sauce to pharmacy benefit management (PBM) success, and was about to bring the industry to its knees. 

The reports centered on an Express Scripts contract template, that a source provided Axios, who in turn published what came across as an expose of the PBM process and how it keeps drug prices artificially inflated. First Report Managed Care saw this as an opportunity to examine what goes into negotiating with a PBM, why the deck may not be as stacked in the PBMs’ favor as some think, and best practices to employ when selecting and working with a PBM partner. 

We assembled an impressive panel of experts from across the managed care spectrum to analyze these issues, including:  

• Melissa Andel, MPP, vice president of health policy at Applied Policy

• Catherine Cooke, PharmD, research associate professor at the University of Maryland School of Pharmacy

• Charles Karnack, PharmD, BCNSP, assistant professor of clinical pharmacy, Duquesne University

• David Marcus, director of employee benefits, National Railway Labor Conference 

• Lynn Nishida, RPh, FAMCP, area vice president, Solid Benefit Guidance

• Marissa Schlaifer, RPh, principal, Schlaifer & Associates

• Helen I Sherman, RPh, PharmD, senior vice president and chief pharmacy officer, Solid Benefit Guidance

• Arthur Shinn, PharmD, president, Managed Pharmacy Consultants 

• Daniel Sontupe, executive vice president and director market access & payer marketing, The Bloc Value Builders

• F Randy Vogenberg, PhD, RPh, principal, Institute for Integrated Healthcare

Before we get into the nuts and bolts of PBM contracting, do you see value stemming from the leaked Express Scripts contract template? 

Ms Andel: I am not quite sure where the outrage is supposed to be. Express Scripts is offering a service, with terms and conditions. None of this is outside of the bounds of normal business practices. Express Scripts has a lot of weight, but so do large pharmaceutical manufacturers and chain pharmacies. 

Mr Sontupe: Bringing these kinds of things to light is very important, even though I think the reports’ approach was very one-sided. It points to the number of different organizations profiting off of pharmaceuticals, from manufacturers, distributors, wholesalers, retailers, PBMs, and consultants. The only ones paying the tab are the employer and the member.

Dr Sherman: There’s nothing new in what was reported. It reflects the realities, sophistication, and complexities of the PBM business model, including what many payers don’t know and what frustrates payers that do know.  

The report paints a picture of helpless payers/employers. But isn’t this really a case of “negotiator beware”?

Ms Andel: Exactly. I doubt some of the largest employers and larger health plans aren’t sophisticated enough to analyze their contracts and determine whether or not the PBM is adding value. If they felt like they could do the contracting in house for less money and administrative burden, then they would and in some cases, they do. 

What about the smaller organizations?

Ms Andel: Clearly a smaller employer or health plan has little leverage because it is much less likely to walk away from a PBM’s services. But at the end of the day, the PBM still has to provide value. The employer/plan generally has three choices: offer no pharmacy benefits, manage their own pharmacy benefits, or contract with a PBM. 

Mr Marcus: Payers and employers with little to no bargaining power may limit ability to negotiate away from a PBM’s standard contract. Those with bargaining power can extract favorable terms. Every contacting party has the right to compare competing PBM bids and select the one that most aligns with its interest. Thus, in one sense, caveat emptor applies here as it does anywhere else. 

Ms Schlaifer: Regardless of size, buyers need to compare offerings from multiple PBMs before selecting a business partner. 

Ms Nishida: Yes, it’s up to the organization to negotiate in a savvy manner. The PBM is going to start out with a template contract that works best for them. 

Dr Shinn: The bottom line is the client who is working with the PBM really needs to understand the essence of the contract and its terms. If they don’t have a handle on it, then they need to work with someone who does. It’s that simple. 

Mr Sontupe: Most employers use high-powered consultants to help decipher the proposed contract. In-depth proposals are submitted and contracts are negotiated very aggressively. The payers and employers are not “keystone cops” and absolutely understand how to work with PBMs.

Is the playing field starting to shift now that employers and payers are becoming more engaged with the PBM process?

Dr Vogenberg: Somewhat. Lack of full transparency around all revenue sources, as well as lack of access to truly competitive rates, remains a problem. And while I agree that templated contracts are just a starting point, why use them at all? Today it is probably better to start fresh and develop a simpler contract arrangement. 

Dr Karnack: Lack of transparency is a problem for many of the smaller organizations. They lack the size—meaning members and expertise. Think of how small businesses interact with large banks. Banks are not philanthropic—they aim to be profitable and pay shareholders. PBMs are no different in that regard.   

Let’s stay with the issue of transparency. No matter how savvy an organization might be, is the deck still stacked against them because of this? 

Dr Vogenberg: Not knowing the real meaning of all terms, true costs, and revenue flows is problematic. The contractual chain created by PBMs suffocates transparency amongst all parties in the supply chain.

Dr Karnack: PBMs hold most of the cards. Administrative fees can include prior authorizations and so-called clawbacks. It’s amazing how difficult it is for some independent pharmacies to determine what their rate of reimbursement will be for filling a prescription.

Mr Sontupe: Still, the ability to review and redline the initial contract, as well as conduct audits to make sure contract terms are being met, makes it feel as if transparency is available. But the payer/employer needs to push for it. 

Mr Marcus: Absolutely. A savvy payer/employer with substantial enrollment can get a contract that protects their interests. Lack of transparency does exist in some features—such as inflation protection. But, for most part, an equitable contract can be written.

Ms Nishida: Sometimes there’s a need for education about what goes into the price of a prescription drug. From the drug getting written to dispensed to delivery of care. Fees get tacked on, and sometimes payers are not aware. But as Dr Vogenberg noted earlier, organizations are asking more questions about pricing. And once they start breaking down the rate in a very granular way, payers are awestruck [at what’s involved]. 

When it comes to transparency, should payers and employers be careful what they wish for?

Dr Sherman: Not only that, there’s no standard definition for transparency, and having it does not necessarily equate to top of the market, favorable rates, highest value, or lowest overall costs.

Ms Shlaifer: The bottom line is that payers and employers have the opportunity to compare contracting opportunities offered by a number of PBMs in a very competitive industry. 

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Competitive? Even though there are only three major PBMs?

Ms Schlaifer: Despite focus on the so-called big three, a lack of competition couldn’t be further from the truth. There are quite a number of PBMs, both large and small. Large PBMs have many tailored offerings to meet the requests of clients. However, if a buyer doesn’t find that a large PBM meets their individual needs, they may find a smaller one willing to be more flexible on alternative plans design and other offerings.

The process must be working. Otherwise, why use PBMs? 

Ms Schlaifer: It is complicated to contract with a pharmacy network, develop top-notch clinical offerings, negotiate rebate agreements with pharmaceutical manufacturers, operate a P&T committee, stay in compliance with federal and state regulations, establish prior authorization and formulary exception processes, and monitor for opioid misuse and abuse—all while doing so in the most cost-effective manner possible. 

Ms Nishida: It takes a lot of resources to do this yourself—even for the bigger organizations. Plus, you have to have the right people in place. That is what goes through an organization’s mind when they’re deciding whether or not to work with a PBM. 

Ms Andel: If an employer or health plan feels that they could negotiate a more competitive price than the PBM with the same or lower costs, I would hope and expect that they would take that option. 

Contracting with a PBM is a lot like the many other calculations that Americans make in their daily lives. For instance, I pay a flat fee to a local grocery store to deliver my groceries most weeks. I have decided that the cost of this service is less than the cost of my time to go to the grocery store, so that overall, I am better off even though I am spending money on fees that I would not have to pay if I went to the store myself. 

It’s an oversimplification, but PBMs operate in a similar manner. They charge administrative fees in exchange for managing and administering a complex benefit. They provide a service to their customers and their customers see value in that service. Manufacturers and network pharmacies get access to the PBM’s members, health plans and employers save the time and cost associated with managing the benefit themselves, and benefit from economies of scale. 

Dr Vogenberg: The idea that the PBM process must be working so why question it has allowed the PBMs to chant the same mantra for the last 25 years. It’s a big reason why I think PBMs can’t demonstrate their value. I’d like to see how PBMs drive efficiencies in the areas of biologics and specialty drugs, the categories that now drive the spending. 

Dr Cooke: I see both sides of the issue. The belief is that PBMs are getting better drug prices than plans or employers can on their own. PBMs have the experience and large member volumes to more effectively negotiate with pharmaceutical manufacturers and drug dispensers. However, looking only at an individual drug price provides a narrow view, and may be misleading to those purchasing PBM services.   

Dr Sherman: Affordability to fund medication benefits is generally the top priority of most payers, and their ability to influence prescribers and members is a differentiating driver to securing top of the market, favorable rates. 

If all else fails, organizations—at least those of a certain size—can venture out on their own. 

Ms Andel: Yes. We saw this with Anthem and Express Scripts. Anthem discontinued the relationship and is now planning to launch a new PBM with CVS Health. 

Mr Marcus: It’s easier said than done, though—and would likely result in higher costs. Even Anthem sees that. They may be taking their PBM in house, but they are relying on CVS’ expertise and leverage to help make it work.

Mr Sontupe: Many have considered and passed on bringing the PBM capability in house. When smaller organizations contemplate negotiating directly with pharma, they (1) are overwhelmed by the sheer number of manufacturers they would have to deal with and (2) soon realize they lack leverage. 

Dr. Cooke: It can work in some instances. One health plan I worked with moved all nonadministrative PBM functions in-house. There was greater awareness of the actual dollars spent on drug therapy, and more flexibility to negotiate plan-specific arrangements that provided greater benefit to the plan and its members. But admittedly there are barriers such as availability of sufficient resources, benefit design inertia, and insider politics that make continuing with a PBM the path of least resistance. 

Since most will continue down the path of least resistance, what best practices do you recommend when negotiating with PBMs?  

Ms Schlaifer: It seems obvious, but don’t sign a contract without some knowledge of the business and the review of an attorney. 

Dr Shinn: Business knowledge is key. Even if lawyers sign off, that doesn’t make the elements and the benchmarks that are in the contract appropriate. A lawyer is not going to know any more than a novice.

Ms Schlaifer: When comparing PBMs, review the formularies, pharmacy network, benefit design, and clinical offerings of each. Then choose the best one based on the needs of plan members.

Dr Sherman: Be sure to apply the same definitions across all PBMs you are comparing to pricing terms, structure, guarantees, reconciliation procedures, and services.  Consider issuing a model contract reflecting your minimum requirements in order to get an apples-to-apples comparison.  Also, keep in mind that although a so-called “pass through contract” might limit the PBM from collecting multiple fees, it does not necessarily mean that the payer is securing the best rate. 

Dr Shinn: If nothing else, remember to word the contract so that your organization gets “100% of the rebate with a minimum guarantee.” I like this approach because if you end up getting above the guarantee, it is not that concerning if it is slightly less than 100%. To me it’s not worth auditing because you have gotten above the minimum. 

You also should have a clear understanding of how inflation protection guarantees are handled. Don’t let the PBM tell you it is part of the rebate and leave it at that. Make sure it is shown in a separate bucket so you can see it. 

Ms Nishida: I have three main points: 

1)Get clear definitions for branded, generic, and specialty drugs. Ask for details on how each is handled because they can be treated differently from one PBM to the next.

2) Watch out for so-called “offsetting” language in contracts that lets PBMs keep revenue from overperforming channels that the payer should be getting. For instance, if the retail channel has overperformed but the specialty channel has underperformed, offsetting language allows the PBM to apply the overage in the former to the shortfall in the latter. 

3) Consider embedding “service level” in the form of a contract requirement, subject to contract breach, in lieu of guarantees tied to financial penalties. PBMs often take little issue in paying a “small or minute” financial penalty rather than the contract terms that make performance that would be a contract breach.

Mr Marcus: Transparency in pricing is certainly key and employers and payers should push for contractual provisions that encourage it.  Even if transparency is less than optimal, the PBM contract should grant an employer or payer comprehensive audit rights to ensure administration is consistent with the contract.

What about best practices when it comes to auditing a PBM? 

Ms Andel: Companies should be judicious with their money with regards to audits. The transparency and rebates issue is getting complicated due to the increase in health plans with a deductible and/or coinsurance instead of a flat copayment fee. When patients were faced with flat copayments and no deductibles, it was harder to argue that the rebates should always be passed through. However, when the patient is responsible for all or part of the cost, it is reasonable to
expect them to benefit from the same pricing as the PBM. 

Dr Shinn: When I audit, I want to make sure I am getting rebates at or above the minimum guarantee. I don’t concern myself with other revenue that might be going to the PBM. That is between the PBM and the pharmaceutical company.

Dr Vogenberg: Audits have limited value depending on size of company or number of claims, and typically occur long after the fact—sometimes as long as 12 months or more. I’d argue for continuous monitoring that can eliminate the need for auditing results.

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