The Role of PBMs and Government Programs

Medicare

PBM executives, analysts, and employers agree that the Medicare Act of 2003 has dramatically increased the nature and intensity of the relationship between PBMs and government-sponsored pharmacy benefit programs. Medicare Part D, the prescription drug component of the Medicare act, which was approved in December 2003 and becomes effective January 1, 2006, creates significant issues for employers to examine as well. The current legislation is expressly written to encourage employers to continue to offer drug benefits to retirees.

In addition to tax savings, the Centers for Medicare and Medicaid Services (CMS) estimates that an average subsidy for employers who offer drug coverage to their retirees will be around $611 per retiree in 2006 costs. Medicare premiums are about $35/month and will be paid by either the employer or the beneficiary. According to Aon Consulting, employers have three primary options when it comes to Medicare Part D:

1. Do nothing and take the government subsidy.
2. "Wrap-around" Medicare which is how most post-65 medical plans currently coordinate Medicare "Part A" and "Part B".
3. Eliminate the Rx benefit and pay the Medicare "Part D" premium for the retiree.

Employers that opt to offer a drug plan will need to do much more than simply provide the benefit. There are a number of regulations and guidelines employers will have to meet. For example, employers must adhere to formulary guidelines developed by Medicare, offer access to certain drugs, ensure access to generics, and provide detailed reports on their programs to CMS. Employers that self-fund their retiree benefits are at risk not only for costs, but also for costs associated with overseeing the entire pharmacymanagement process and for potential challenges that may arise. Retirees can be a demanding group and when there are changes made to their benefit, they will voice their concerns and may fight those changes that affect their pocketbook or their coverage. To meet the demands and challenges of this population, employers will need to ensure utilization and costs are closely managed. They will also need to be more creative in their approaches to program development and benefit design.

Employers that work with PBMs experienced in formulary development, disease management, and member education will be much better able to implement creative programs that adhere to guidelines and minimize risk. For example, a good PBM or pharmacy benefit consultant will be able to sit down with an employer and target areas of weakness and need, such as where drugs are being used inappropriately or areas where there are significant outliers or disease states that affect a large population of retirees. The PBM can then develop targeted programs specifically for that population. This approach is critical for at-risk employees. It is especially important where there are large populations ofemployees with high cost, high impact diseases, such as diabetes, heart disease or cancer. Left unmanaged, such diseases will only escalate in severity and further increasethe cost of the pharmacy and medical benefits to plans and their members.

While the government seems to have high hopes for PBMs and the private sector to control costs, there are areas of concern. A few larger PBMs have come under investigation over the past few years for some of their business practices.

Recognizing that knowledge is power, employers and consultants have begun to more thoroughly study PBM business practices so that they can better ensure they are securing value for their benefit dollars. As consultants and employers become more knowledgeable and sophisticated regarding PBMs, there has been a clear market correction. They are requiring PBMs to more fully disclose information as part of the RFP process. They are asking questions about revenue sources, how income is reported, administration fees, and other pricing policies. As a result, employers have a much better idea of exactly how and where their PBM secures revenue. As a result of this knowledge, those PBMs that have consistently shown a commitment to openness with their customers and that have not been subjected to lawsuits are securing business; those who are less transparent are finding it increasingly more challenging to secure new business.

The market correction the industry has spearheaded on its own accord has led the government to have further confidence in the ability of PBMs and private industry to help control costs. In a recent report from the Federal Trade Commission and Department of Justice, the government stated that when PBMs are allowed to operate in a competitive marketplace, and to use principles such as closed networks and mail service, they could play a significant role in helping plan sponsors manage costs.

Drug Reimportation

One of the most hotly contested topics over the past few years has been the issue of reimportation of drugs from countries where they are less expensive. Several states, including Massachusetts, Illinois, Minnesota, Rhode Island, and Wisconsin have begun to import drugs from other countries, most notably Canada, in addition to Australia and Europe.

Congress has clearly noted the demand for lower cost drugs and therefore several bills have been introduced to allow reimportation. Political analysts believe that strong public sentiment may force Congress to allow some level of drug reimportation. Not surprisingly, pharmaceutical manufacturers are fighting any efforts to allow reimportation, pointing out that current pricing allows companies to invest in research to create new drugs.

Many employers, unions, and health plans have explored reimbursement for foreign prescriptions as a component of cost reduction. While reimbursing health plan members for prescriptions filled while traveling is commonplace, extending payment to foreign source drugs ordered by the member has significant risk. The plan may assume significant liability if their member is harmed by a drug from an illegal distribution system which the plan has endorsed.

While some states view reimportation as a solution to higher drug costs, there are concerns that must be closely examined. For example, current payer reimbursement strategies are based on the average wholesale prices (AWP) of distributed prescription drugs and their corresponding National Drug Code (NDC) numbers. Imported drugs may not have an NDC code, or the NDC code may not be recognized by the established U.S. data companies. If an NDC is not recognized by the adjudication system, that prescription drug claim will be rejected by most of the U.S.-based reimbursement systems.

Reimportation may also pose some challenges for the Medicare system. The government will have to decide whether to credit drugs reim-ported from other nations as part of theout-of-pocket amount for purposes of calculating the beneficiary drug coverage. Lastly, the primary concern related to drug reimportation is safety. The FDA has reported numerous instances of tainted and even counterfeit drugs, primarily those purchased from unlicensed Web-sites located outside of the United States. However, there clearly remain safe sources of medications and unless American consumers and state and city governments experience significant and potentially life-threatening events due to reimportation, they will continue to view it as a viable alternative. Until legislation is passed, employers or states considering reimportation would be well served to work within existing legal channels.

Mandated Benefits

State governments, often using Federal guidelines and rulings, and supported by the courts, have become increasingly involved in mandating benefit coverages. Mandatedbenefits take the decision-making process out of the hands of the PBM and payer and place it into the hands of elected officials who may or may not have a strong grasp of theimplications of their actions.

One of the more common mandated benefits involves contraceptives. Plan sponsors and employers that offer drug therapies for male sexual dysfunction may be challenged with legislative mandates that require parity by providing contraceptives to female members. Special interest groups are also influencing coverage for other therapeutic categories including AIDS and antipsychotics. For example, groups representing the mentally ill have successfully lobbied in many states to ensure coverage of drugs for depression. Still other states are requiring that plans that cover diabetes medications, must also cover supplies. California has mandated that all drugs for chronic or debilitating illnesses (which in theory could include virtually any disease or illness) be covered. The result is a patchwork of laws that make it difficult for multistate employers to develop effective and compliant pharmacy benefit programs.

Desiring greater autonomy over how their money is spent, some employers have chosen to carve-out their pharmacy benefit. In effect, this creates a self-funded benefit. Thepharmacy benefit is then regulated by the Employee Retirement Income Security Act (ERISA), which provides greater freedom and flexibility by allowing employers to cover medications they deem necessary and appropriate for their employees and beneficiaries.

While there are benefits to self-funding the pharmacy benefit, there are some issues to examine—most of which can be readily addressed through an experienced PBM. For example, it may be difficult to integrate pharmacy programs with the medical benefit if they are administered by separate companies and if the PBM does not have experience in working with health plans and with data collection and analysis. If the employer group does not have ready access to the medical data, that too can present challenges. A number of PBMs have experience in working with employers and their medical plans to obtain and integrate data, however. Therefore if an employer wants to pursue that option, it should proceed.

Mail Service

Over the past decade, states and the federal government have been asked by retail pharmacy organizations to examine PBMs use of mail service. One of the arguments made by retail pharmacy is that when PBMs are allowed to provide a 90-day supply of drugs for 30-day copay, it gives the PBM an unfair pricing advantage.

The Pharmaceutical Care Management Association (PCMA) estimates that mail service discounts are 11 percent deeper than discounts on retail drugs and that currently mail service spending represents 16 percent of total prescription drug spending. That figure is expected to increase to 20 percent in 2014, representing millions of dollars in potential savings for plan sponsors. Conversely, PCMA estimates that provisions to increase regulations and limit mail service practices would increase costs by $97 billion between 2005 and 2014. This increase in costs would likely lead to hundreds of thousands of individuals losing prescription drug coverage.

Recent efforts to limit mail service appear to be failing in many areas. For example, in Michigan in 2004, the once widely touted Michigan's Consumer Prescription Protection Act failed after analysis from employers indicated that the law would increase costs to consumers significantly.

Employers should recognize that mail service should be more than a cost-saving strategy or prescription delivery mechanism. Through education programs such as refill reminders, information on the importance of persistency and compliance programs, as well as newsletters and brochures with articles regarding commonly asked questions about popular drugs, mail service has the potential to insure both the plan sponsor and plan member will secure maximum value from the pharmacy benefit.

Medicaid

While mail service has been an active area for government involvement for several years, clearly the area where government and PBMs have the most interaction is with Medicaid and Medicare. It is estimated that Medicaid programs will see the most significant increase in prescription drug expenditures over the next decade. CMS projects that, by 2011, Medicaid will be paying for almost 20 percent of all U.S. prescriptions. To help manage these costs, many states are turning to PBMs.

There are considerable implications for employers as Medicaid coverage grows. Employers can learn valuable lessons from the research conducted and programs implemented by state Medicaid programs. According to a 2004 study by Atlantic Information Services, a leading publisher of healthcare data, managed care PBMs could save some states up to 50 percent in Medicaid costs through strategies such as pharmacy networks, closed formularies and prior authorization.

Before implementation, Medicaid programs are subject to intense scrutiny. In particular, states are spending considerable resources to ensure that formularies, prior authorization and disease management programs provide adequate and fair coverage. Employers seeking new ways to manage costs might consider some of the tactics approved by state Medicaid programs as applicable to their own pharmacy benefit.