The familiarity of a traditional PBM contracting can create the sense that you know what you are actually getting when, in fact, many PBMs work hard to make sure that you don't. (Photo: Shutterstock)

Today, pharmacy benefits managers offer two distinct types of contracting as they vie for your client's business: traditional and pass-through. When working on behalf of clients to evaluate PBMs, it is important to understand how these two types of contracting compare − not just in terms of the numbers calculated for things like discounts and rebates, but also in terms of how they function and align (or fail to align) with your client's interests.

Unexpected differences

For years, the vast majority of PBMs have used a traditional contracting approach. This "status quo" approach often includes hidden revenue streams and complex caveats designed to take advantage of fee-for-service health care business models. This increases profits for the PBM without regard for the best interests of plan sponsors−or their members.

Related: Resolving to control drug costs: Your PBM contract really matters

Often, clever language makes the offer sound advantageous. This wording disguises the true cost to clients in terms of [higher] overall spending. Traditional contracting is based on "lowest unit cost," which sounds great, but doesn't actually look at the whole prescription spending picture. Simply reducing how much a client pays per unit of a drug does nothing to manage the volume of spending. In a traditional contract, the PBM profits every time a claim is processed.

Despite how easily traditional PBM contracts can work against clients, they are familiar. This familiarity can create the sense that you know what you are actually getting when, in fact, many PBMs work hard to make sure that you don't.

Enter "pass-through" contracting. This approach was designed to address the increasing need for transparency in the PBM industry and provide clients greater visibility into the management of their pharmacy benefit. A pass-through contract will often contain clear language that allows you and your client to see exactly how the PBM makes money and what your clients are paying for.

When properly aligned with your clients' best interests, a pass-through contract will pursue the lowest net cost. This means obtaining not only the best possible discounts and rebates on prescription drugs, but also working to reduce overall spending. A true pass-through arrangement is free of hidden revenue streams that encourage the pursuit of profits to the detriment of clients and their members.

Still, the pass-through approach to contracting is often less familiar to clients, which can prompt hesitation. This means that benefits professionals must be able to provide clients with a comprehensive evaluation and comparison of competing offers that identify the full range of advantages and disadvantages.

How to assess the real offer on the table

During the proposal process, it is important to consider the differences between each style of contract and define how you want the prescription benefit program to operate financially. If this is not clear, it will be difficult to assess each offer fairly when traditional and pass-through arrangements are compared against each other.

Here are some key differences that are important to understand when selecting the best prescription benefit package for each plan sponsor:

Administrative fees

Traditional: Administrative fees are charged on a per-claim basis. This reduces incentive to confirm the appropriateness of each prescription prior to it being dispensed, which puts patients at risk of adverse drug reactions and contributes to abuse of addictive medications – and wasteful spending.

Pass-through: Administrative fees may be assessed on a per-member, per-month basis. The number of claims processed does not directly impact revenue. Instead, the PBM's claim processing is driven by clinical considerations and preventing wasteful, inappropriate, and potentially dangerous prescription dispensing. The PBM reviews each claim from a purely clinical perspective to ensure patient safety and reduce costs.

Average wholesale price (AWP) discount guarantee

Traditional: AWP discounts specified in the contract are simply book-of-business averages. They are not what the client will actually receive. For instance, the PBM may propose a discount of AWP minus 18% (or AWP-18%) for a particular drug when the actual discount is AWP-19%. Under the traditional contract, the PBM keeps the 1% difference–which can be hundreds or thousands of dollars per claim that the PBM retains−instead of passing this along to the client.

Pass-through: The discount specified in the contract is the guaranteed minimum. If the PBM promises a minimum AWP-18%, but the discount for a particular drug is AWP-19%, the PBM passes through the actual discount. That means the client enjoys the full benefit of all negotiated discounts.

Spread-based revenue

Traditional: The PBM charges the plan sponsor more for each prescription than is reimbursed to the pharmacy and keeps the difference. This makes it difficult for plan sponsors to track how much money the PBM is earning. It also creates an auditing challenge on drug spend.

Pass-through: Spread is not included in a pass-through arrangement. The PBM does not profit from every drug that is dispensed. This allows for more accurate audits and tracking of the dollars spent on prescription claims and helps prevent clients from overpaying for their prescription drug benefit.

Maximum allowable cost (MAC) pricing

Traditional: A MAC list defines the price the PBM is willing to pay per unit of a generic drug. It is used to encourage pharmacies to purchase drugs at the lowest possible unit cost so they can maintain their profit margins. However, in traditional contracting, the PBM may hold the client to a different MAC list with higher MAC pricing than the one it requires of pharmacies. The PBM uses these different lists to add to its spread, charging the client more per unit than it pays the pharmacy and pocketing the difference.

Pass-through: Under a pass-through contract aligned with the client's best interests, there should only be one MAC list applied to the client and pharmacies for generic drugs. This means no upcharge to the client, and no additional, hidden spread.

Actual acquisition cost pricing

Traditional: Actual acquisition cost (AAC) pricing is not offered in traditional PBM contracts.

Pass-through: AAC pricing is only available in pass-through arrangements where the PBM owns the mail order and specialty pharmacy. The plan sponsor pays for each drug exactly what the PBM's mail order or specialty pharmacy paid for a medication. This can only be done with an appropriate First In, First Out (FIFO) method for tracking inventory at the price-per-pill level. A set dispensing fee per prescription covers the pharmacy's shipping and processing expenses.

Unlike spread pricing, with AAC plan sponsors can easily see where prescription dollars flow. The PBM does not profit from each prescription filled, which indicates that it is focused on eliminating fraud, waste, and abuse to better serve plan sponsors and members.

Market check price improvements

Traditional: Price improvements are not implemented until the end of quarter or contract. By delaying when price improvements take effect for their clients, the PBM can pay less for drugs than it charges the plan sponsor and pocket the difference until the end of the contracted timeframe.

Pass-through: Price improvements are passed through immediately, not after a market check is conducted. The PBM therefore does not profit by overcharging plan sponsors due to "stale" pricing.

Rebates

Traditional: Rebates are not disclosed and only a portion of rebates is shared with the client creating a spread that generates revenue for the PBM.

Pass-through: One hundred percent of the client rebates received are passed through and rebate contracts are auditable.

Flexibility

Traditional: Contracts for traditional arrangements are often rigid and with complex language offering little ability to customize the program enabling the PBM to maximize all available hidden revenue streams.

Pass-through: When contracting with a pass-through PBM, straightforward language is easily modified to make sure the program being implemented meets the client's goals. This supports full disclosure.

These are just a few key highlights of contractual differences that significantly impact what your clients' spending will look like at the end of the year. It's important to consider not just the spreadsheet comparison, but the full package.

During the proposal process, you can help your client find the right PBM partner by reviewing the contract in detail, including the PBM's customer service, clinical approach, and how many (or which) of the operational components may be outsourced. Each of these factors impacts the overall effectiveness of the program and member satisfaction, which results in your clients' long-term satisfaction.

Hugh Gallagher is a vice president at BeneCard PBF. Gallagher demonstrates the effectiveness of BeneCard PBF's ethical, transparent, and clinically driven business model – a model is fully aligned with patient and plan sponsor interests. Gallagher's consultative approach emphasizes the company's core focus on clinical programs, incorporating clinical discussions with plan sponsors to ensure each program is designed to meet their specific needs.

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