Benefits. II r^ompensaton International · 2019-11-05 · Oral Health Ten Steps to Implementing a Successful Consumer-Driven Health Plan Pensions ... Still more startling, most PBM

Benefits.r^ompensaton^ • ^ Vol. 44. No. 10 October2007 U O t W I

ANAHEIM^ ' II

InternationalFoundation News

Hot Topics

V to Condiccessful

by Linda Cahn©2007 Iniernaiional Foundationof Employee Benefit Plans

E ach year, hundreds of entities(including employers, corpo-rations, unions, insurance

companies and purchasing coalitions)and their consultants conduct requests

for proposals (RFPs) for selecting phar-macy benefit managers (PBMs). Imple-men ted wisely, PBM RFPs enable employ-

ers to decrease their prescription coveragecosts over their previous year's costs by 10% to

30%. Implemented unwisely, PBM RFPs resultContinued on page 12

Intemation

Canadian ConferenceCoverage and Countdown

E-Learningand Telewebs

Conferences/Seminars

Health CareHealth Care Quality Data—

The Good News andthe Bad News

The Link Between Gum Diseaseand Cardiovascular Risk:Taking Care of Employees'

Oral Health

Ten Steps to Implementinga Successful Consumer-Driven

Health Plan

Pensions

Risk Management:Multiemployer Pension Plan

Withdrawal Liability

General Benefits

Fashioning an Employee BenefitsPhilosophy Statement—Policies

Need to Be Tailored for a Perfect Fit

Web Exclusives

Six Steps to Cut Spendingfor Multiemployer

Self-Funded Health Plans

II

How to Conduct a Successful PBM RFPContinued from page 1

in no savings whatsoever. To conduct suc-cessful PBM RFPs, employers and other en -tities need to understand why PBM RFPsfail; restructure their PBM RFPs: and incor-porate safeguards into their RFPs to guar-antee success. This article describes each ofthese steps.

Understanding WhyPBM RFPs Fail

Drug coverage benefits and costs aredependent on one matter—and one mat-ter only—the PBM-client contract. In fact.all prescription coverage results flow fromthe PBM contract. Accordingly, every PBMRFP must focus on one core matter: theterms contained in the PBM contract.

Remarkably, few PBM RFPs ever final-ize a PBM contract before the RFP is con-cluded. Still more startling, most PBMRFPs don't even discuss specific contractterms before finishing the RFP

The above facts are borne out by a 2007International Foundation teleweb seminarconcerning PBM RFPs. More tban 80% ofattendees wbo bad conducted RFPs indi-cated in a survey that they bad never ne-gotiated any PBM contract terms until af-ter tbeir RFP was concluded.

Ignoring the task of negotiating actualbinding contract terms, most PBM RFPsinstead focus on analyzing PBMs' non-binding representations and price projec-tions. Thus, consulting firms typicallyconduct PBM RFPs by engaging in the fol-lowing futile activities.

Tbe consulting firm asks each PBM con-testant to provide its "current" or"expected" pricing terms and guarantees.Thereafter, the consulting firm "re-prices"each PBM's submission using the client's"current" claims data to ascertain eachPBM's "projected" aggregate costs. Inter-views are then conducted, during whicheacb PBM sales team competes in a"beauty contest" by providing still morenonbinding representations. Finally,the client and its consulting fiim select thePBM with the lowest projected aggregatecosts—and the most skillful sales team^asthe PBM finalist, and the RFP is concluded.

Not surprisingly, when the clientthereafter begins contract negotiations,tbe PBM finalist's previously submitted

pricing terms and guarantees rarely ma-terialize in the contract. After all, monthshave elapsed since the PBM submitted its"current" figures, and in any event thePBM never bound itself to tbe numbers itsubmitted.

Equally as harmful, tbe PBM finalistcan now propose numerous contractterms that were never discussed duringthe RFR all of which may have serious im-plications for the client. By way of exam-ple only:

•The PBM is to be an independentcontractor, not an ERISA fiduciary(even though tbe client is delegatingmost of its fiduciary duties to tbePBM by virtue of tbe contract).

• Tbe client's selection of an auditor willhe limited to those the PBM "ap-proves" (leaving tbe PBM free to "veto"all auditors who have conductedprevious audits and found contractviolations).

• The client cannot terminate the con-tract until three years bave passed,unless the client pays substantialpenalties of hundreds of thousands ofdollars to tbe PBM.

• The client must pay numerous addi-tional fees—none of which were dis-cussed during the RFP—for matterssuch as direct member reimburse-ment, online access to plan informa-tion, "nonstandard" reports, "nonstan-dard" drug utilization review (DUR),annual explanation of benefits (EOB)statements and otber never-discussedprograms.

• If tbe client fails to pay an invoicewithin five days, tbe PBM is free toterminate all prescription claimsprocessing (leaving the client and itsemployees without any coveragewhatsoever).

Since the RFP has already been con-cluded, all leverage for the client to resistsuch terms also has ended. Stuck with theresults of a poorly conducted RFP, theclient must accept onerous terms into itsnew PBM contract; commence anotherRFP where the same mistakes are often re-peated; or renew the relationship it hadwith its previous PBM.

Seeking an alternative, many clientsbegin a new PBM relationsbip but post-pone tbe execution of a new contract. Un-der this scenario, clients purchase hun-dreds of thousands—or millions—ofdollars of prescription drugs without ever

executing a new contract. In so doing,they place themselves in a position wheretheir new PBM is free to charge anything itwants for drugs and to alter its chargeswbenever it wants.

While the above may seem unlikely, itunfortunately is not. In fact, of five plansthat most recently sought advice, twowere currently obtaining prescription cov-erage from PBMs witbout executing acontract with those PBMs. Both entitieshad concluded RFPs during the previousyear and selected PBMs, only to find theirnewly selected PBMs thereafter insistedon contracts the employers or other enti-ties were unwilling to execute.

To ensure that a PBM RFP results in acontract that the employer or otber entityis entirely comfortable executing, the en-tity must completely restructure the PBMRFP Here's how to do so.

Restructuring a PBM RFP

Before the RFP begins, draft a modelform of the PBM contract. Eliminate ormodify all substantive terms tbat histori-cally appear in contracts and that areagainst your interests. Include "blanks" forall pricing terms and guarantees to enablePBM contestants to provide their bestcontract offers wben the RFP begins.

In performing the above tasks, con-sider the following to avoid simplyrewriting the typical PBM contract. Forexample:

•Virtually all PBM contracts containdefinitions that are ambiguous orcontrary to PBM clients' interests: Aclaim is defined to allow a PBM to in-voice its client for "reversed" or "re-jected" claims, wbich may constituteas much as 20% of all claims. Averagewholesale price (AWP) is defined toenable a PBM to retain all "bulk pur-cbase" savings and to cherry-pick thehighest prices among nationai report-ing services' different prices. Branddrugs and generic drugs are definedloosely to enable the PBM to relabeleach, in tbe PBM's own best interests.In short, most contract definitionsmust be rewritten to ensure they areairtight and in clients interests.

•Almost all PBM contracts contain fi-nancial "guarantees" tbat are essen-tially useless. For example, "genericsavings guarantees" are written stat-ing the PBM warrants a specific aver-

12 October 2007 • www.ifebp.org • Benefits & Compensation Digest

age "AWP discount" on all genericdrugs for which the PBM is creating aMAC (maximum allowable cost).However, the contract does not alsorequire that the PBM create a MAC fora large percentage (say, 90%) of allgeneric drugs. Therefore, the guaran-tee's value can easily be eviscerated ifthe PBM only creates MACs for asmall percentage of generic drugs.

• Almost all PBM contracts also containnumerous "performance guarantees"'that purportedly ensure that PBMsdispense retail, mail and specialtydrugs in a timely and accurate man-ner. However, these performanceguarantees are missing core termsthat will ensiu"e their success, hecausethe guarantees do not identify a spe-cific methodology for auditing eachguarantee and do not include suffi-cient penalties to incentivize PBMs tocomply witb each guarantee. Accord-ingly, each performance guaranteemust he rewritten to include thosecritical components.

• Almost all PBM contracts incorporatethree-year terms, with limited or norights for clients to terminate the con-tract. As a result, clients are lockedinto three-year contracts that becomeever more noncompetitive and out ofdate with each passing year. Draft theproposed contract so it provides for aone-year term, or a three-year termcoupled with a "90-day, with or witb-out cause, termination right." If thecontract contains a three-year term,include a "right to renegotiate," atleast annually, every pricing term andevery guarantee. Termination andrenegotiation rights will enahle an en-tity to "hold the PBM's feet to the fire"to obtain ever better terms annually,thereby ensuring tbat the contract re-mains a state-of-the-art, competitivecontract throughout its three-yearduration.

After finalizing a carefully drafted PBMcontract, hegin the RFP. Transmit the RFPto ail PBM contestants, and make sure itcontains two parts: the typical questionstbat are included in alt PBM RFPs hy allconsultants, and a copy of your proposedPBM contract. Require each PBM to pro-vide its response, wbicb must also includetwo parts: answers for all questions, and a"contract markup" identifying eacbchange the PBM will request in the pro-

posed contract if that PBM is selected. En-sure that eacb PBM also includes in itscontract markup a number for eacb blank,representing the PBM's hest offer for eachpricing term and guarantee. Also, requireeach PBM to identify any and all addi-tional fees tlie PBM will charge the plan.

Make clear in tbe RFP documents thateacb PBM's contract markup and finan-cial terms offer represents a binding rep-resentation that cannot he further negoti-ated or modified by the selected PBM.Attach a certification in the RFP docu-ments tbat states tbe above, and requireeach PBM to execute it. Refuse to reviewany contestant's RFP response until re-ceiving a signed, sworn certification fromtbe PBM. You cannot—and sbould not—waste your time reviewing PBM represen-tations unless tbey constitute bindingrepresentations, on which services will beprovided witbout furtber negotiations ormodifications.

Having obtained binding contractmarkups and binding financial termsfrom each PBM contestant, compare eachPBM's offer, and attempt to obtain evenbetter offers by requiring each PBM tocompete against other contestants' pro-posed terms. Assuming tbe consultingfirm is experienced in negotiating con-tracts, require it to negotiate with eacbPBM to modify its proposed contractcbanges and to improve its financial offer.

For example, if some PBM contestantsaccepted proposed contract languagestating the PBM is an ERISA fiduciary, andotber PBM contestants rejected or alteredproposed contract language, tbe consul-tant sbould negotiate with each of the lat-ter PBMs to change tbeir positions and ac-cept ERISA fiduciary language. Whilealmost no PBM-client contracts currentlyin the marketplace require a PBM to act asan ERISA fiduciary, entities have recentlyobtained such contract language fromPBMs hy requiring the language duringRFPs. Moreover, the language is extremelyimportant—particularly if the PBM's fidu-ciary duties are specifically listed in thecontract. After all. an ERISA fiduciary is re-quired to act "solely and exclusively" in aplan's interests.

If tbe proposed contract included lan-guage requiring the PBM to pass throughto the plan all rebates and all otber finan-cial benefits tbe PBM receives from every

Continued on next page

HEALTH C A R E —

More Information

For related article summaries, seewww. ifebp. orglpharmacybenefits.

Got a specific benefits question ?Need some help answering it?Call (888) 334-3327, option 5, andget a prompt e-mail or fax back.

Conferences and Seminars

Teleweb on Demand and on CDStructuring an Effective PBMRFP to Dramatically DecreaseYour PBM Cost

To order this teleweb, viewwww.ifebp.org/telewebcd.

Session 219—Selecting aPharmacy Benefit Manager (PBMj53rd AnnualEmployee Beneflts ConferenceNovember 4-7,Anaheim, California

For more inforination, viewwww.ifebp.org/iLsannual.

Books

Pharmacy Benefit Managers,Survey & Sample SeriesInternational Foundation. 336 pages.#6221. $ 112 {l.F Members $45). Eor morehook details, see www.ifebp.org/books.asp?6221.

Managing Pharmacy Benefits,Second EditionF Randy Vogenberg and Joanne M. Sica(International Foundation). 191 pages.#6054. $70 (l.F. Members $49). For morehook details, see www.ifebp.org/books.asp?6054.

To order, call (888) 334-3327, option 4.

October 2007 • www.ifebp.org • Benefits & Compensation Digest

drug manufacturer, and certain PBMs re-jected and altered the proposed contractlanguage, leverage the power of tlie RFP torequire each PBM to agree to such terms.Tell all recalcitrant PBMs that certainPBMs have accepted the proposed lan-guage (which some PBMs will do. if youmake sure to include smaller PBMs ascontestants). Further inform recalcitrantPBMs tbat tbose PBMs tbat refuse to ac-cept the terms will be eliminated as con-testants. If more and more clients requiresuch language in contracts during RFPs.PBMs' widespread practice of retainingmost manufacturer payments will change,dramatically increasing client savings.

If the proposed contract contained alist of all specialty' drugs (numbering ap-proximately 1,000 drugs) and the REPasked each PBM to submit a guaranteedminimum discount for eacb specialtydrug, compare each PBM's proposed dis-counts and negotiate witb eacb PBM on adrug-by-drug basis to improve all non-competitive discounts. In so doing, enti-ties or their consultants will be creating a"reverse auction" and thereby inducingeacb PBM to better its financial terms. Tbesame procedure sbould be used duringthe RFP to negotiate every noncompeti-tive pricing term and every noncompeti-tive financial guarantee offered by a PBMcontestant.

After concluding negotiations witbeach PBM, memorialize each PBM'schanges into a final, proposed contract fortbat PBM. Before semifinalists are se-lected, require each PBM to execute its re-vised contract, as well as another bindingcertification.

Interview each semifinalist based ontbe semifinalist's revised binding contract.Use tbe interview process not to conduct"beauty contests" among sales teams, butratber to extract further binding contractconcessions from each PBM contestant.Before a finalist is selected and an-nounced, make sure all contract changeshave been memorialized into a bindingcontract, and require each contestant toexecute its contract and a final bindingcertification.

On tbe day the finalist is cbosen andannounced, tbe entity will be in a positionentirely different from virtually all entitiesthat conduct PBM RFPs: It will he ableto execute the final contract, withoutany furtber negotiation or modification,knowing that it has used the leverage of

tbe RFP to obtain as good a contract aspossible.

Incorporating Safeguards toEnsure the RFP's Success

Before retaining a consulting firm orlaw firm, require tbe firm to provide aninitial free consultation to gauge its ex-pertise. Supply the firm with basic infor-mation about plan design—and a copy ofthe existing PBM contract—and ask thefirm to identify in a conference call thekey plan design and contract changes it

Before a finalist is selectedand announced, make sureall contract changes haveheen memorialized into ahinding contract and requireeach contestant to executeits contract and a finalhinding certification.

would recommend. Compare tbe recom-mendations and select tbe firm tbat hasdemonstrated the greatest expertise.

Thereafter, understand the recommen-dations and incorporate them into theREP. Draft a proposed contract that im-proves plan design, for example, by alter-ing tbe copay structure, identifying differ-ent formulary requirements or incor-porating a mandatory generic program.Rewrite tbe otber terms in tbe contract aswell, by reformulating all contract defini-tions and all guarantees and by eliminat-ing all terms that historically drive up en-tities' costs.

Employers that suspect their PBM is re-taining—and not passing through—mostgeneric drug savings due to poorly draftedgeneric guarantees should focus on draft-ing better generic drug terms: Definegeneric drug and maximum allowable cost(MAC) carefully. Draft enforceable annualaggregate generic discount guarantees.Also include a list of tbe 200 most com-monly used generic drugs, and requireeach PBM contestant to provide pass-through pricing, coupled witb a drug-by-drug maximum per pill cost guarantee atretail, and at mail, for eacb drug.

Employers tbat suspect tbeir specialtydrug costs are particularly excessiveshould consider conducting a two-trackRFP: one track for retail and mail drugs(with only PBMs as contestants), and onetrack for specialty drugs (with PBMs andindependent specialty drug vendors ascontestants). In so doing, PBM contes-tants may be induced to provide moreadvantageous discount guarantees forspecialty drugs.

Finally, make sure tbat the contract at-tached to the RFP—and subsequently ex-ecuted—is an airtigbt contract. After all,everything related to prescription drugcoverage will flow from the contract pro-posed and finalized during tbe REP. Thegoal must be to eliminate all contractloopholes, not most contract loopholes.

Ear too many employers assume that ifthey obtain most of tbe contract cbangestbey seek, tbey will bave accomplishedtheir goal. However, if die new PBM-clientcontract contains one unlimited loopholetbat gives tbe new PBM the discretion todramatically overcharge the plan, what-ever savings tbat may have been obtainedby eliminating all other loopholes maydisappear through the one remainingloophole. B&C

For information on ordering reprints ofthis article, call (888) 334-3327, option 4.

Linda Cahn is tbe founder and president of Pbarmacy Ben-efit Consultants (PBC), a consulting firm in Morristown,New lersey, PBC's focus is on analyzing PBM client con-tracts, drafting and negotiating contracts, and conductingPBM RFPs. PBC's clients bave included corporations,unions, insurance companies and purchasing coalitions. In1997, Cahn initiated the first class action litigation in thecountiy against PBMs. She received a bacbelor's degree fromPrinceton University and a law degree from Hofstra LawSchool. J

1 4 October 2007 • www.ifebp.org • Benefits & Compensation Digest