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Is PBM Spread Pricing Increasing The Cost of Your Self-Funded Employee Health Plan?

December 28, 2011 By: Nadia Category: HealthCare, Medicine Advice, Medtipster, Prescription News, Prescription Savings

www.Medtipster.com Source: Terrance Killilea, Pharm.D. and Scott Haas, 12.08.11

Pharmacy benefit managers (PBMs) are contractors hired by health plans to administer health plan pharmacy benefits, and PBMs that practice spread pricing, charge plan sponsors (employers) more for prescription drugs than what’s actually paid to the pharmacy.

Spread pricing is largely unknown to employers and those who pay health bills. The practice is occasionally understood by some participants in the health system (health plans, brokers), but often not acted upon due to relationships. Spread pricing has a significant impact on health plan costs. For example, when a PBM pays a pharmacy a minor amount (say $6) for a prescription, but charges the employer and patient a much higher price (say $30). This higher amount is reflected in both the co-pay and the billing to the employer.

Clearly, this has an impact on the cost of a self-funded program, but it also impacts the premiums of fully insured programs through experience. Health plans providing fully insured coverage, where spread pricing is occurring, either do not know about spread pricing or know about it and share in the revenue. This revenue sharing often amounts to a per prescription fee paid to the health plan by the PBM. This arrangement occurs in both self-funded and fully insured situations. Regardless of the setting, spread pricing increases the cost of prescription claims above the actual cost paid to the pharmacy.

Health plans often use terms such as “transparency” or “pass-through” to explain pricing, but this does not address the actual issue of spread pricing. Elimination of spread pricing lowers claim costs for patients and plan sponsors, increases the affordability of medications, and is likely to improve overall health outcomes.

Until recently, spread pricing did not affect members of a health benefit plan. When a PBM reported a claim cost of $45, paid the pharmacy $12, and charged the member a $10 co-pay, the member was not affected by the higher claim cost. The plan, however, experienced a charge of $33 more than what was actually paid to the pharmacy. In this type of copayment  design, it’s the plan sponsor (employer) who bears the increased cost of spread pricing. 

Now, with increasing frequency, employers are establishing high deductible health plans (HDHP). An estimated 18 million Americans were covered under this type of plan in 2010*. A HDHP typically has an annual deductible of at least $1,200 for individual coverage and all expenses (except some preventive visits), including pharmacy costs, go toward the deductible. In the most common claim scenario, it’s the prescription drug cost that accumulates to satisfy the member’s deductible and out-of-pocket expenses. In some families, the prescription cost is the primary source of medical care cost, particularly in plans where maintenance check-ups and other wellness services have no co-pay or out-of-pocket exposure.

Spread pricing results in higher consumer costs. It is not unusual for generic prescription charges to be $30-$50 above the actual claim cost.** But more important, may be the affect on compliance and cost of care. While not being specifically studied, it’s reasonable to believe that compliance diminishes as the cost of prescriptions increase by 400% or more. The impact of multiple members of a family, on multiple medications, can be dramatic. The effect of high patient prescription costs on decreased adherence to therapy was the subject of a 2010 Wall Street Journal article.*** Spread pricing was not mentioned as a factor.

If higher medication costs lead to lower compliance, it’s likely to be more significant in patients with multiple or complex disease states. While the extent of lower compliance is variable, higher cost results in lower affordability and is likely to affect disease outcome. This is particularly true in situations where members are paying all of the drug cost, such as in a HDHP.

According to a recent Consumer Reports poll, 48% of adults have taken steps to save money due to the economy. Included among the actions taken were:

  • Putting off a doctor’s visit (21%)
  • Delaying a medical procedure (17%)
  • Taking risks to save on medications (28%), including;
    • Not filling a prescription (16%)
    • Taking an expired medication (13%)
    • Sharing a prescription with someone else (4%).

When one considers that a complex patient with hypertension, hyperlipidemia, and type-2 diabetes can be effectively treated with generic drugs cumulatively costing less than $300 per year, substantial compliance and successful treatment is likely. The likelihood of compliance decreases, however, when spread pricing drives the cost of that same therapy up to $2,000.

Finally, prescription cost increases due to spread pricing, places members and their families above the deductible ceiling quicker. Thus, the cost of therapy impacts the plan sponsor sooner, and negates the fiscal value of a HDHP. While this may not have a direct impact on care, it certainly increases net costs to plan sponsors, in spite of the establishment of a HDHP.

While spread pricing has been a common practice in the PBM marketplace for years, the impact on member costs and member quality of care is now greater. It’s advisable for all plan sponsors to assess the extent of spread pricing that is occurring in their pharmacy benefit and examine methods to eliminate it.

Footnotes

  • *American Association of Preferred Provider Organizations. APPO 2010 study of consumer-directed health plans.
  • **Based on competitive claim analysis where a transparent PBM has reported actual costs paid to pharmacies. There is no reason to believe that a larger PBM would be paying the pharmacy more than the smaller PBM for which the actual claim price is known.
  • *** http://online.wsj.com/article/SB10001424052748703927504575540510224649150.html

About the Authors

Dr. Killilea and Mr. Haas both work in the Portland, OR office of Wells Fargo Insurance Services USA, Inc.  Terrance Killilea, Pharm.D. is Vice President, Integrated Healthcare Metrics -Clinical and Fiscal Integration.  Scott Haas is Vice President, Integrated Healthcare Metrics.

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