Pharmacy—U.S. Benefits

ORLANDO NEALAssistant Vice President

Director of Pharmacy Analytics816.751.2203

oneal@lockton.com

L O C K T O N C O M P A N I E S

Market Update April 2012

FIVE STRATEGIES YOUR PHARMACY

BENEFIT MANAGER DOES NOT WANT

YOU TO KNOW As healthcare costs rise, employing pharmacy analytics is a very effective strategy to realize savings within your self-insured employee benefit plan. Many pharmacy contracts go unchecked by plan sponsors and their consultants. These contracts may not be written to benefit you, the client. They may be geared instead to provide a false perceived value, accomplished through ambiguous terms and definitions. It can, therefore, be very beneficial to have the Lockton Pharmacy Analytics Practice evaluate your pharmacy contract.

Below are five strategies that could be practiced by pharmacy benefit managers (PBMs) to increase their margins while eroding the savings for you as a plan sponsor.

Drug Classification

The patent cliff for brand drugs going generic during the next several years is significant. This means there will be billions of dollars of brand drugs losing patent protection, which could increase the generic fill rate to more than 80 percent. Considering the projected trend in generics, it is critical that your contracts

Market Update, Pharmacy—U.S. Benefits Lockton

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are written in such a way that will allow you to realize all the future value from new generics coming to the marketplace. PBMs will often include single-source generics in the brand bucket, which will artificially inflate both the generic and brand discounts. This strategy could lead you to believe that you are receiving a high generic discount guarantee, which is far from the truth.

Clinical Programs

Ask the Lockton Pharmacy Analytics Practice, along with our Medical Director, to evaluate your clinical programs. In addition to negotiating better discount guarantees that could bend the trend for you, our clients, some clinical programs will provide additional savings by managing the plan through prior authorizations, step therapy, dispense-as-written provisions, and other ideas. However, some clinical programs will actually drive additional costs to the plans. Some PBMs are reimbursed a “switch fee” from the pharmaceutical companies if they can successfully change a member to a drug that will generate additional rebates and administration fees for the PBM from the pharmaceutical companies. Without properly evaluating a client’s clinical programs, their members can be driven to fill costly branded drugs when a generic would be appropriate.

Rebates

It is important not to chase rebates. As brand drugs lose their patents, rebates will become insignificant. You should be wary of any strategy that will promote brand medications over generics. For every 1 percent increase in the generic fill rate, your total gross cost will decrease by at least 1 percent. As you evaluate your renewals, it is important to properly forecast rebates to account for the generic pipeline.

Formulary Management

Excluding expensive brand drugs from your formulary, where there is a lower-cost equivalent drug available, could provide significant savings to the plan. PBMs have been criticized for placing expensive brand drugs on their formulary in order to increase their rebate revenue from the pharmaceutical companies. Drug exclusion could be a great strategy for decreasing plan costs.

Auditing

Be certain that you have a clear understanding of your audit rights. It benefits you to have the ability to audit all claims, with no added costs from the PBM. The contract terms must also state that the PBM will provide a dollar-for-dollar true-up in the event that they fall short of the guarantees. Most plans do not audit, giving the PBM the ability to perform well below the quoted guarantee while the plan sponsor is not looking.

Through our rigorous request for proposal process, the Lockton Pharmacy Analytics Practice has procedures in place to help ensure fair play with the PBMs and superior pricing, by creating a competitive bidding proposal process.

For more information, contact your local client service team or e-mail pharmacyanalytics@lockton.com.