How to make sure you’re getting the best value when evaluating PBM vendor pricing

Understanding PBM pricing

There has been much talk in recent years about the pricing methodologies that pharmacy benefit managers (PBMs) use and related financial topics, including AWP or spread pricing, rebate holding, and transparency in pricing. 

The purpose of this document is to give payers a better understanding of the basics in PBM pricing models, as well as provide a brief list of questions to ask when evaluating PBM vendors to help identify which will best suit their unique book of business. Primarily when comparing pricing models, two are usually considered: AWP (spread pricing) and cost-plus (transparent pricing).

AWP (average wholesale price)

The most commonly used pricing model is AWP. AWP is determined by applying a markup to WAC (wholesale acquisition cost). WAC is a manufacturer’s list price of a drug when sold to a wholesaler. AWP values are distributed by commercial publishers, such as Medi-Span or Redbook, and are updated on a daily or weekly basis for use by PBMs. AWP values are not set by any one PBM and are accessible and auditable. The standard AWP calculation is:

(AWP - discount) + dispensing fee = price

Discounts used in the AWP calculation vary depending on pharmacy used (retail versus mail order) and whether the drug is generic or brand name.

Cost-plus

With the push for more ‘transparency,’ some PBMs now offer cost-plus or pass-through type pricing models. The cost-plus calculation is:

Cost (price of drug) + administration fee = price

Evaluators of different PBMs expect that this type of pricing model will easily allow them to compare, as cost should remain consistent across PBMs, leaving just the administrative fee as the definitive factor. However, comparison is not so easy, as cost varies across PBMs and even across pharmacies. 

Navigating different pricing strategies can be confusing and it’s difficult to evaluate without help (all transactions need to be considered).

Questions to ask PBM vendors

How do you define ‘cost’?

Explanation: It may be assumed that ‘cost’ in a cost-plus pricing model equals the exact cost of a drug paid by the pharmacy. However, many PBMs try to include other aspects of their program overhead into ‘cost’ that may not be so transparent, such as leased network rates, which may make the cost side of the equation larger (not strictly drug cost from pharmacies, but with the addition of leased pharmacy network rates added in) and allow the administration fee to look smaller in comparison to others. For all cost-plus/pass-through price comparisons, a detailed explanation of all that is included in ‘cost’, as well as the ‘administration fee,’ should be clearly defined.

Do you own or lease your pharmacy network?

Explanation: If a PBM leases their pharmacy network, then they have to pay a lease cost for each transaction through that network. The PBM pays the lease network a fee, and then the lease network, which owns the pharmacy contracts will make a spread between what is paid to the pharmacy and what the lease network is paid. . The combination of these charges makes the transaction cost higher in a cost-plus or “transparent” pricing model (and also makes the overall costs of working with that vendor higher).

What value-added (included without additional cost or fee) services are part of my pharmacy program?

Explanation: If evaluating cost-plus or “transparent” pricing models between PBM vendors, the Admin Fee includes administration of the program, but might also include other services. When comparing vendors, a payer needs to understand which services might be included as part of the program and which might come with additional cost.

Examples include:

• Specific formulary
• Clinical programs
• Reports and analytics
• Technology

How will you administer rebates?

Explanation: Rebates are difficult to administer for workers’ compensation:

• It may take 4-18 months to obtain a rebate and a brand drug must remain eligible during the rebate capture period for proper application
• Associated claims need to be identified and remain open to be credited

Many PBM vendors will either take the risk and use a rebate aggregator to pass along all potential rebates up front or include a set rebate amount for each transaction (brand or brand/generic). Either method needs to be taken in consideration when evaluating total cost of the program.

Can you provide both an AWP price and cost-plus price for comparison purposes?

Explanation: A PBM should be able to deliver the same overall savings using either price model, so there should be no issue with vendors providing both. And, without having to determine the underlying differences in what’s behind ‘cost’ or value-added services, it is often easier to simply compare AWP prices between the different vendors.

Also, it is important to note that with an AWP model, price and invoice accuracy is based on AWP value and the application of associated discounts listed in a contracted agreement. An audit for an AWP-based pricing model includes a review of internal systems to verify the accurate AWP value was used on the day of dispense and to calculate price discounts. (In essence, an AWP pricing model is usually more transparent than cost-plus models and easier to audit.)

Other questions to consider

To determine which pricing model is best for your particular book of business, consider the following questions:

Are most transactions in your book of business treated holistically or by category, such as State of Jurisdiction or individual employer?

Explanation: If your book of business includes varying employers of different sizes and types, some of those may have high generic utilization and small cost-per-script averages and may be impacted negatively through a cost-plus model, as with most cost-plus pricing models, ALL generic medications will have the same administrative fee applied, regardless of the cost. Differing States of Jurisdiction may also similarly impact cost per script averages.

How high is your generic efficiency?

Explanation: With a cost-plus pricing model, ALL generic medications will have the same administrative fee applied, regardless of the cost. If your PBM program results in a high generic efficiency, you may end up paying less by choosing an AWP pricing model. 

How many of your transactions are going out of network?

Explanation: Different pharmacies, especially those out of network, can assign different costs for the same medication NDCs. If your current book of business includes many out-of-network transactions, you may experience a larger variance of medication costs.  You need to evaluate ALL transactions when looking at a program that is best for you, including in- and out-of-network scripts.

In addition, you also need to verify the pharmacies used in the PBM network. While most PBMs include similar pharmacy chains, not all major pharmacies may be included in the network.

Do you have adequate programs in place to block unnecessary or inappropriate medications?

Explanation: The most expensive transactions are for medications that need not have been paid for. When considering PBM vendors, identify whether you have services in place to help block unnecessary medications, including specific formularies and other POS blocks and claim adjuster alerts, and then evaluate if additional costs come with those services.

Final considerations

The true value of a PBM should be measured by its ability to reduce a client’s overall annual spend, while still providing the best possible care to their claimants. Evaluators of PBMs need to recognize exactly what services they value from the partnership and what is included in the price structure provided. A good PBM will define what pricing methodologies they can provide, as well as what is included in each component, and also offer advice about which will deliver the lowest total spend at the greatest value.

We’re happy to assist in analyzing your data and provide objective advisement. For more information or for consult, contact us at expectmore@optum.com. 

At Optum, we focus on lowering costs, applying unique clinical expertise, and providing a better experience overall.

Better, for you and the claimants you serve.