5 Questions to Evaluate Your Current Pricing Model

The new year is upon us, and with the new year, new thoughts about your organization’s pharmacy benefit program strategies for 2023.

The administration and pricing of prescription medications are both complex and convoluted. You might encounter a breakdown in communication, understanding, and transparency around the pricing process for medications covered under the pharmacy benefit. One reason for this breakdown is the differing variables in each pharmacy benefit manager (PBM) contract, leaving plan sponsors like you in a state of confusion and sometimes frustration.

Revisiting available pricing model options and how your organization can maximize its bottom dollar will help you answer the question, “Does your current pharmacy benefit pricing model still work for my organization?”

What pricing models are available?

Traditional (Spread)

Traditional (spread) pricing is a model whereby the PBM charges the plan sponsor a contracted price with specific network pharmacy discounts while paying the dispensing pharmacy a different price. The difference between the two amounts is known as “spread”. The spread is then retained as revenue for the PBM versus charging the plan sponsor an administrative fee. This is a very common pricing model among the larger PBMs.

This type of pricing typically has no per-claim administrative fees and allows for deeper discounts and rebates to be offered to the plan sponsor. Compared to other pricing models, the traditional model usually generates the most aggressive annual pricing and rebate guarantees, in part because the PBM is using the spread during the plan year as a revenue source. This model is the least transparent of all pricing models.

Pass-Through

In a pass-through pricing model, the price charged by the pharmacy to the PBM is passed through to the plan sponsor. The PBM passes through the price billed by the pharmacy to the plan sponsor. Since there is not a spread, the PBM will charge a per-claim administrative fee. The PBM’s revenue source is the administrative fee. Pass-through pricing is limited to retail pharmacies, with the PBM using spread pricing for mail and specialty pharmacy. The PBM may also charge additional fees, such as network audit fees and rebate administration fees.

A few of the benefits of pass-through pricing include more transparency, allowing the plan sponsor to see the drug costs separate from the administrative costs, as well as the retention of any funds collected by the PBM over and above the contracted network discounts, in the retail setting. In addition, this model may offer plan sponsors greater control over PBM programs.

On the other hand, although this model promotes low administrative fees, beware of high administrative fees and additional costs for clinical programs. This model has variability in pricing because it is based on what the pharmacy charges the PBM versus a set price like the traditional model. Also, this model has less aggressive network pharmacy discounts compared to the traditional pricing model.

Acquisition Cost Plus

Acquisition Cost Plus is a newer pricing model where the PBM charges the plan sponsor the acquisition cost of the drug, a dispensing fee, and a per claim administrative fee. The benchmark to determine the acquisition cost depends on the PBM. Most acquisition cost plus models are now are limited to the pharmacies the PBMs own – either mail or specialty pharmacies.

The adoption rate for this newer model is low. Like the traditional model, the PBM generates revenue through administrative fees with the Cost Plus model. The difference is the administrative fees for the Cost Plus model are much higher because the plan sponsor is paying the actual costs of the drug.  When considering this model, note the cost of generic drugs may be significantly higher due to the high administrative costs. It is important to implement strategies to minimize a negative impact on members and to ensure generic drug utilization remains high.

National Drug Acquisition Costs (NADAC)

NADAC is a pricing model that estimates the national average drug invoice price paid by independent and retail chain pharmacies.

Drug invoice prices are included with this pricing model. NADAC excludes specialty and mail order pharmacies. The pricing model does not reflect rebates, pricing reductions, or off-invoice discounts.

Reference-Based

Reference-based pricing is a pricing model which has an established reference price for certain commonly used drugs. The reference price is the agreed price that plan sponsors are willing to pay for a drug, with set out-of-pocket costs for members.

A benefit to reference-based pricing is it sets reference points for commonly used medications. The pricing model also lowers the payer’s healthcare plan expenses and allows for member flexibility in drug choice. This model has the potential to negatively impact a member’s finances due to balance billing where patients are required to pay the difference between the amount the provider charges and the amount the patient’s insurance covers.

Acquisition Cost Plus and NADAC are also considered forms of referenced-based pricing.

Is transparency across the pricing models created equal?

In short, the answer is no.  Not all pricing models are created equal in terms of transparency. As a plan sponsor, you should have access to all your data to make informed plan decisions, monitor your PBM performance, and analyze your results.

According to Drug Channels Institute, “Plan sponsors satisfaction was strongly correlated with perceived degree of transparency. Plan sponsors using PBMs that were described as, “not at all transparent”, got a satisfaction rating that averaged at 5.8 out of 10. That compares with an 8.7 rating for plan sponsors with a completely transparent relationship.”1

What about rebates?

We will cover this topic in an upcoming post.  For purposes of this discussion, it’s important to note that 100% pass-through of rebates earned by the PBM is not limited to those plans that use pass-through pricing for retail.  PBM contracts with traditional, Acquisition Cost Plus, NADAC, and other reference based pricing models may also include 100% pass-through of rebates.

Questions to ask to evaluate if your current pricing model works for you

As the market and trends in the market are consistently evolving and changing, being adaptable in your approach will be key.  What worked in the past, may not work now, and as a plan sponsor, evaluating if your pricing model still works for you will be important.  Here are five questions to ask when evaluating whether your organization’s current pricing model is still the right choice for your healthcare benefit business goals:

  1. Why did we select our current pricing model and what is the pricing?
  2. What is most important to my organization; having standard drug costs like in the traditional model, or being able to see the pricing the pharmacies are charging like in the pass-through or Acquisition Cost Plus or the other models?
  3. How does my organization account for drug costs – ingredient drug costs and administrative costs together or separate? Which is most important?
  4. Is my organization ready to take more control and be an early adopter, moving towards a more transparent pricing model?
  5. When was the last time we evaluated our current pricing model?

References

  1. The 2018 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers, pages 137-138, https://drugchannelsinstitute.com/products/industry_report/pharmacy/ (As viewed on 05/2021)

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