Third Party Programs in Community PharmacyMonday November 7, 2011David A. KnappPrescription market dominated by Third Parties90% of outpatient prescription sales now come from Third PartiesWho are the payers?• 44 % private• 30 % Medicare• 16 % Medicaid• 10% Private-pay (cash)Who are the payers?Private sector:Employers covering employees and dependents, and retirees and dependentsWho are the payers?Public sector:Federal governmentFederal employees, dependents, and retireesMedicare beneficiaries: elderly; disabled; end-stage renal disease, others.Who are the payers?Public sector:State governmentState employees, dependents, and retireesMedicaid beneficiaries: low incomeOther state welfare programsManaging a drug benefitPayers can do it themselves.Pay premiums to insurance companies, a managed care company (HMO), etc.Managing a drug benefitInsurance companies contract with a specialized firm to deal with drug benefit:Pharmacy Benefits ManagerA company that administers a drug benefit program for an employer or health plan.Managing a drug benefitPayer – sets goals for the program and financial parameters -Insurance company – estimates risk and sets premium for payerContracts with PBM to implement benefit programManaging a drug benefitAnalogous for public programs:Legislature sets goals and parameters.Agency structures program.Sometimes contracts with PBM to implement or does it itself.What does the PBM do?• For each plan, define:– What’s covered (formulary, brands, preferred brands, generics, preferred generics, specialty items)What does the PBM do?• For each plan:– Define what’s covered (formulary, brands, preferred brands, generics, preferred generics, specialty items)– Negotiate prices with manufacturers and wholesalers (including rebates for volume, formulary placement, market share)What does the PBM do?• For each plan:– Define what’s covered (formulary, brands, preferred brands, generics, preferred generics, specialty items)– Negotiate prices with manufacturers and wholesalers (including rebates for volume, formulary placement, market share)– Establish a network of community pharmacies to serve plan members.What does the PBM do?• For each plan:– Negotiate contracts with community pharmacies to establish terms of service and reimbursement policies.– Reimbursement involves defining product cost, dispensing fees, and patient cost sharing.What does the PBM do?• Establish a mail service pharmacy option.– Alternative to community pharmacies.– Attractive initially as a lower-cost mechanism for supplying chronic medications.– Often includes incentives to steer members such as lower copaymentsWhat does the PBM do?• Administers program: claims processing, adjudication, etc.• Managing cost and utilization.– Program affordability depends upon:• Controlling product costs.• Controlling dispensing costs.• Controlling utilization of services by the member.FormulariesList of covered medications.Includes brand and generic drugsOrganized into tiers with different patient cost sharing.Developed using both clinical and cost considerations.Generic substitutionEncouraged to reduce plan and patient costs.Generics now account for ~75% of dispensed prescriptions.Quantity LimitsPlans have a variety of administrative controls on quantity limits (30 vs 90 days supply; early refill controls; caps on dosage or numbers of medications.)Patient Cost SharingCopayments – flat amounts.Coinsurance – percentage of charge.Patient Cost SharingComplexity of cost sharing is increasing:• More plans now using coinsurance rather than flat copays.• Four-tier plans now account for 25% of plans.– Generics, preferred (formulary) brands, non-preferred brands, specialty pharmaceuticals.Patient Cost SharingIn past year, cost sharing for specialty drugs has increased by 37% - from $61 to $87.Cost sharing for other tiers stayed relatively the same.Other Utilization Controls• Step therapy.• Prior authorization.Pharmacy Benefit ManagementCompaniesEmployer, insurer, MCO PlanPatientPharmacyPharmaceuticalManufacturersMailServiceSpecialtyPharmacyPBMCopaymentPaymentFor ServicesRebatesPaymentFor ServicesRebatesPharmacy Benefit ManagerA critical player in the prescription drug market.• Constant tensions among the players.• Vitally important to community pharmacies, since their revenue depends upon negotiating profitable contracts.Community Pharmacy Perspective• Chains have the size to negotiate.• Independents must band together to gain negotiation strength.Pharmacy Services Administrative Organizations• Formed by groups of independents to negotiate with PBMs.• PBM contracts involve more than just reimbursement levels.– Payment schedules, audits, fees, insurance, etc.Evaluating a PBM ContractSee Scenario beginning on page 265 of