BY KEVIN MANAHAN
Going to Walgreens to pick up a generic prescription drug may only cost about $8. But while that’s the price at the transaction, the cost to you as an employer could actually be $16. Why the mark-up? Pharmacy benefits managers (PBM) often use a practice called spread pricing as a revenue source, costing companies much more for their prescription benefits than they should be paying.
Terry Killilea of Wells Fargo Insurance Services held a breakfast seminar on the topic yesterday morning at the KOIN Center in downtown Portland. Having worked with PBMs in his previous careers, Killilea discussed ways employers can cut down on their prescription benefit costs simply by knowing how to negotiate a contract with the PBM – a move that can save a company at least $10 per employee per month. “It’s unfortunate that virtually every customer of a PBM is running at such a fiscally inefficient fashion,” Killilea said. “The fact is that they’re spending a large amount of money, more than they need to, on prescription benefits.”
Part of the problem lies in poorly negotiated contracts, which often allow spread pricing to take place. Spread pricing is an agreement that allows PBMs to charge employers a higher price for prescriptions than what is actually paid at the point of sale, with the PBM pocketing the difference. While PBMs historically earned revenue through administrative fees and mail-service margins, it wasn’t until the use of generic prescriptions rose in the late 2000s (and the need for manufacturer rebates diminished) that PBMs began gathering the majority of their earnings from spread pricing.
As a result, generic prescriptions are more expensive to the employer than necessary, while the PBM profits. In addition to spread pricing, badly written contracts also put the power and rights in the hands of the PBM, make co-pays less affordable, provide little audit rights for the employer and increase plan costs. “This is the norm, but it doesn’t have to be the case,” Killilea said. “You can negotiate or contractually stipulate all these options out of your arrangement.”
But how do so many find themselves in these situations? Companies often tell Killilea that their PBM contracts are the best their consultants could find, and that they’re paying low administrative and dispensing fees as part of the agreements. But Killilea says those companies are looking at the wrong things; where a PBM cuts back on upfront fees, it makes up for in spread pricing.
To avoid high prescription costs, companies need to negotiate strategically. “Establish a contract that gives you the freedom to do what you need to do,” Killilea said. Specifically, develop a client-centric contract that says the cost of a claim must be the same as the cost at the point of sale, eliminating the surprise fees and saving your company a lot of money. Also make sure the contract allows your company or consultant to review or modify the generic pricing list every quarter, and that you are able to choose an auditor. Meanwhile, the PBM will make its money the old-fashioned way, from mail orders, administrative costs or other upfront fees.
The average gross cost reduction: a 500-person company can save at least $50,000 a year by improving or changing its PBM contract, Killilea said. “Get to the point where your members can afford it, you don’t have inflation, and you can get on to running your business instead of worrying about your health-care costs.”
Kevin Manahan is the online editor for Oregon Business.