A PBM of a Different Stripe: A New Player, New Rules

Edward Reynolds is in an unusual position. He’s the owner of Bainbridge Pharmacy in Bainbridge, Ga., he’s the mayor of the town, and he’s the chairman of the board and an investor — along with other independent pharmacists — in RxPreferred Benefits. As a result he has direct knowledge of the three key components of the commercial prescription benefit: provider, sponsor, and administrator.

Reynolds first took a hard look at the PBM question after hearing through the grapevine at his buying group and a performance group he belongs to about a city school board member who had done some analysis of pharmacy claims — looking at what the pharmacy was paid compared to the rate at which claims were billed back to the sponsor. Reynolds figured he could do the same. “As the mayor of the city of Bainbridge, I talked to our city manager about doing an analysis of pharmacy claims that I would provide as owner of Bainbridge Pharmacy,” he explains. So the city, a self-insured sponsor, asked its PBM for a detailed analysis of claims, including date filled, amount dispensed, days’ supply, the NDC number, and the amount charged. “What I could do then was look at the claims filled at my pharmacy and compare what we were paid on the claim with what the city was charged for the prescription,” says Reynolds. What he found was very interesting to him. On average there was $13 per claim added to the amount adjudicated to the pharmacy. “Wearing my mayor hat, that didn’t seem right to me. It didn’t seem as if the PBM had done anything to really earn that amount in a self-insured environment,” he says.

Edward Reynolds, R.Ph.
Bainbridge Pharmacy
Bainbridge, Ga.

Pharmacy has been in the family since 1959. Edward began working with his father, Bill, as a pharmacist there in 1989. Bill was mayor of Bainbridge for 28 years, and Edward is the current mayor.

The Spread

This amount, referred to by Reynolds as the spread, is a prime way PBMs extract revenue from the prescription fulfillment process. “I think PBMs have recognized their position in the market,” he says, “and, in my opinion, they are taking advantage of that position and they are taking a pretty significant amount of money out of the system.”  What he sees as a result is a real opportunity to reduce the cost of these services. 

The issue is that with the typical PBM, a sponsor such as the city of Bainbridge does not know what the transaction fee amount is. The sponsor does not see, according to Reynolds, the details of costs either in the projections of healthcare spend the PBM provides or in the bills it pays. “There is a formula in the contract that explains how the PBM will adjudicate claims,” says Reynolds, “but what’s not understood by the vast majority of HR managers, and even the brokers, is that this formula, even in a self-insured situation, is significantly different from the formula used to calculate the payment for claims when a pharmacy enrolls as part of the network.” In other words, the PBM takes care not to show to either side of the transaction the spread it’s paying itself.

Solution: Transparency

Reynolds didn’t like what he saw. “PBMs are setting up closed networks, even in Part D, and I felt as if these same people were both controlling our market and also taking advantage of their position and the ability to offer contracts with different payment formulas to each side of the process,” he says. So he got fired up, as he puts it, and started asking the question: “Don’t you think we need to try to have more say about what’s happening in our business environment?” The end result was a decision to set up a PBM, which from the beginning would have transparency as its core principle. “We wanted not only for a sponsor to be able to see its claims, but also to be able to track them back to what the pharmacy was paid and see the PBM transaction fee for processing those claims,” he says. “We wanted to let the sponsor see exactly what its costs are and then help it better manage these costs.” 

The result was RxPreferred Benefits, which Reynolds describes as wholly owned by and focused on business to independent pharmacies. “And independent pharmacists can buy stock,” he notes. Equally as different from the norm as the ownership structure is the specialized software that RxPreferred offers that lets sponsors see what the pharmacy was reimbursed, what the co-pay was, and what RxPreferred’s transaction fee was. This level of detail and ready access to data is definitely not the norm at your average PBM. For example, it took four months for the city of Bainbridge to receive detailed claims data when the city manager requested it, according to Reynolds. Now, keep in mind that RxPreferred Benefits is a for-profit company. So in order to be viable, this model of providing transparency in costs has not only to provide value to sponsors, but to satisfy investors as well.

Finding More Value

While the spread is the most prominent and easiest cost to reduce for sponsors, according to Reynolds, rebates are another area where transparency offers value. Branded products will frequently come with manufacturer rebates designed, for example, to keep them on formulary. As it turns out, many PBMs write contracts so that they are permitted to withhold some part of these rebates. Not only do sponsors have no choice in this typical arrangement, but it’s again often not clear just how much rebate money is being held back. “In the case of the city,” says Reynolds, wearing his hat as mayor, “we could never figure out why it was, but we had a hard time ever determining just how much we were due.” 

So here was another standard practice that a transparent PBM model can have in its sights. And RxPreferred’s contracts do in fact stipulate that it pass all rebates back to the sponsor, according to Reynolds. These flows can be tracked electronically through its software platform as well.

Outfoxing Mail Order

Reynolds has another good example of where transparency has an impact: analyzing the supposed savings from mail order. “When you are asking the PBM to document savings from mail order,” he notes, “you are asking the fox to count the chickens and then prove that he didn’t take one.” If sponsors were really able to analyze the promised cost savings from mail order, Reynolds suspects they’d find them less than impressive. “In most cases, and as we’ve talked about,” he says, “sponsors can’t see and so don’t realize what’s built into the costs of their claims processing. Next, you have to consider that most of the big mail-order houses have a direct relationship with PBMs. In some cases they are owned by the PBM.” What’s typically happening then in these cases, according to Reynolds, is that the PBM can show a lower cost simply by reducing the spread it is charging. Therefore, what looks like savings turns out to be just a slightly lower fee from the PBM in exchange for limiting plan participants’ choice and pushing business out of the community pharmacy and into a mail-order house with possible connections to the PBM. “I think that if you did an analysis of the true cost of claims filled at community pharmacies compared to mail order,” says Reynolds, “you’d see that retail pharmacies are paid less in many cases than mail order was paid.” 

Empowering the Sponsor

The immediate effect of complete transparency is, of course, reduced cost for sponsors. However, Reynolds sees even more benefit coming from developing a collaborative plan design process that empowers sponsors and plan participants to help make decisions. For example, the city of Bainbridge is creating a health committee made up of city employees and staff that will look for benefits that may help to improve health and reduce costs, and then bring these as suggested plan changes to RxPreferred Benefits.

This empowerment is also a significant change in the normal relationship between PBM and sponsor. “Right now, when it comes to the total prescription spend, most HR departments have no choice but to take the PBM at its word,” Reynolds says. “They don’t know where their costs are or where the rebates come from, and so they aren’t empowered to make good decisions about the benefit.” For example, he explains, some PBMs — even RxPreferred — will bring suggestions for plan changes to the sponsor. “Let’s say that a plan pays for Nexium, which might be a $150 claim and a $20 co-pay,” offers Reynolds by way of example. “But it could be covering the generic for $17.50 and a $10 co-pay. If the patient decides on the brand and doesn’t mind the extra $10, the cost to the city just went from $7.50 to $130.” So one reasonable plan change might be to increase the branded co-pay. If this change comes from the PBM, it may not be well received by plan participants, since all they would see is the increased co-pay. “However, if you have engaged both the sponsors and the plan participants so that they understand that choosing the brand costs the sponsor, their employer, a lot more, they may agree that the generic savings are worth it,” says Reynolds. “But they have to see the whole cost, not just their co-pay.” By developing an understanding of this kind of decision at the sponsor level, a company or other entity and its employees can be proactive in making the choices and choosing the plan design that not only provides the right benefits, but contains costs, too. And transparency here means that there’s no concern about hidden agendas. “They won’t just have to go with the traditional PBM’s idea of the best way to manage costs,” says Reynolds.

“We wanted not only for a sponsor to be able to see its claims, but also to be able to track them back to what the pharmacy was paid and see the PBM transaction fee for processing those claims. We wanted to let the sponsor see exactly what their costs are and then help them better ‚Ä®manage these costs.”

Looking to the Future

Reynolds predicts other important developments in benefit administration as sponsors gain knowledge about costs and take on the task of managing benefits more effectively. For another example of what’s coming, Reynolds points to progressive sponsors that are getting more interested in creating targeted wellness programs. “So if a person covered under a plan wants to be on a smoking cessation program,” he explains, “the right kind of PBM can focus the benefit and say, ‘Yes, we are going to pay for the program and the NicoDerm patches for that specific patient.’ Or people who are taking part in health and wellness programs will be given additional benefits on the prescription side.”

Ultimately, it gets back to the fact that once you have transparency in costs, the plan sponsor can tailor incentives so that reduced costs come from improved health, and not arbitrary plan decisions. Reynolds explains further with the following example. “Say we want to do something more aggressive for diabetics,” he says. “We can say that if you are taking in your blood glucose numbers to your doctor or nurse practitioner on a regular basis, we can reduce your co-pay. If you can really recognize where your costs are, you can incentivize the pharmacy, the doctor, and the patient, and really impact those costs.”

The Game Is Changing

All this makes a lot of sense, and while RxPreferred Benefits and a small group of similar companies dedicated to transparency are making the first moves, the question remains: What needs to happen to really effect a seachange? First and foremost, according to Reynolds, is encouraging sponsors to have HR staffs that are more educated about making plan decisions. Next will come the step of involving plan participants in the decision process, as is underway in the city of Bainbridge. But the biggest game changer right now is the impact that transparency makes on the spread and rebate dollars. “Yes, you can drill down into your costs and use the information to make better-informed plan design decisions,” says Reynold, “but if you don’t want to do that because you don’t have staff or you aren’t ready to manage at that level of detail, just gaining transparency alone is going to save you a large enough amount on your total spend that it will be worthwhile. You can take those next steps when and if you are ready.”

What’s Old Is New

In the end, Reynolds sees the idea of bringing transparency to PBM operations as both an old idea and a revolutionary one. It’s an old idea because there’s been a strong push in the recent past for greater regulation of traditional PBMs and more information about just where they are making their money. The idea becomes revolutionary when it’s put into practice by a new breed of PBM, without waiting for the mainstream to come to account. This helps the healthcare system understand what transparency can do in the most convincing terms, providing practical examples of increased health for plan participants and lower costs for plan sponsors.

Do You Know or Don’t You?

It’s an ongoing effort, of course, and one in which not all the barriers to change are clear to everyone. Even Reynolds is still learning about details of the system. “What we’ve seen even in my area is that there continues to be things about PBM operations that we don’t know,” he says. For just one example, Reynolds points out that he’s recently come to understand that there are health insurance brokers that are getting fees not just from sponsors, but directly from the PBMs as well. “If a sponsor — fully self-funded — is paying a fee to a brokerage company to manage and advise it on its healthcare package, but that brokerage is also receiving a management fee from the PBM — perhaps ostensibly for its role in entering and removing people from the system,” says Reynolds, “well, to me that’s a conflict of interest.” Reynolds reports that RxPreferred Benefits encountered just such an arrangement when bidding for a sponsor’s business recently. The lack of transparency became clear when the brokerage asked about maintaining the management fee arrangement it had in place, but decided to drop it after RxPreferred said that it could do so only if it showed the fee as a separate item on the bill back to the sponsor. “I say this all only to point out that there are obstacles to transparency that we continue to come across and that tell us that it is a very complex, very convoluted environment,” says Reynolds. “As we press into this we are continuing to get pushback from the mainstream insurance and PBM players, because this is a pretty close-knit relationship. To be honest, I think there are many participants in the PBM process who are often unaware about the benefits transparency can provide to the bottom line. There are a lot of people out there who don’t know what they don’t know.” But Reynolds and RxPreferred Benefits are betting that a little transparency can make things much, much clearer. CT

Will Lockwood is senior editor at ComputerTalk. He can be reached at will@computertalk.com.

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