Several months ago, The Columbus Dispatch ran a story about a lawsuit by Ohio Attorney General Dave Yost alleging that Express Scripts, Inc. (ESI) overcharged the Ohio Highway Patrol Retirement System (Ohio HPRS). This case caught my eye because one of the central complaints is that ESI failed to meet its “discount guarantee.” Discount guarantees are a bizarre and in the weeds concept in pharmacy pricing. I think that understanding how they work will make a lot of things in pharmaceutical pricing make a LOT more sense. I’ll use the contract language revealed in the complaint as an example of how this works. I encourage you to read through the Dispatch article and the lawsuit documents to understand what Ohio is complaining about.
A discount guarantee sounds fantastic, right? If I offered you 80% off your gas purchases guaranteed, you’d jump at the opportunity. However, there’s a great saying about this: “I’ll give you whatever discount you want if I get to set the starting price.” This encapsulates the idea that if I’m selling a discount, I need to make the starting price as high as possible. The concept of discounting and guaranteed discount percentages is common throughout the world of healthcare – from preferred provider organizations offering 40% discounts off provider charges, to PBMs offering discounts off of AWP, to wholesalers giving rebates off of invoice prices, to pharmaceutical companies giving discounts off of their selling price, and the ACA Medical Loss Ratio rule. But these discounts are a scam, because they are based on fake prices, and encourage higher and higher charges each year.
Fake Prices in pharmacy: AWP
The discount guarantee cited in the Ohio HPRS v. ESI lawsuit states that for 2019, ESI will guarantee a minimum discount off AWP for branded medications of 17.25%. For generic medications, ESI will guarantee a “minimum overall generic effective discount of AWP” of 82.25%. If you’ve never worked in pharmacy, or haven’t paid a lot of attention when you have, you’re probably wondering what that AWP is.
AWP is an abbreviation for the “Average Wholesale Price.” This term is historical, rather than accurate. It used to be set by querying wholesalers for the price they charged pharmacies for medications. Because of fraudulent responses on the part of McKesson Corp and First DataBank around 2000-2010, it no longer has anything to do with wholesalers, nor is it an average of anything at all. The AWP today is simply a price set by the manufacturer of the medication. You can think of it as a “Manufacturer’s Suggested Retail Price.” For branded medications, it has a link to the real price that a pharmacy pays for a medication – because of a settlement between McKesson Corp, First DataBank and a consortium of unions, the AWP is equal to 120% of the Wholesale Acquisition Cost or WAC – the price that a wholesaler pays to the manufacturer to obtain the medication. For generic medications, there is almost no link whatsoever between the AWP and the price a pharmacy pays to obtain the medication. For example, ondansetron 8 mg tablets have an AWP of $39.331 per tablet. An 82.25% discount would sound pretty good until you realized that as of 7/22/2020 the average pharmacy pays their wholesaler $0.10328 per tablet. That ~$0.10/tablet figure comes from a monthly government survey called NADAC (National Average Drug Acquisition Cost), in which pharmacies submit their invoices for medications, and the government publishes the average price per tablet.
For another medication, the AWP may be very close to the pharmacy’s cost. Take Metformin 500 mg tablets produced by Heritage Pharmaceuticals. For a typical 360 tablet, 90 day supply of this medication, the AWP is $12.09. A typical pharmacy’s cost is ~$10.70. That represents an 11% discount off of AWP, where the ondansetron’s cost to the pharmacy represented a 99% discount off of AWP.
These two examples should be enough to show that for generic medications, AWP is a meaningless benchmark, as useful as the MSRP of a used car.
Nevertheless, AWP is central to the business model of large, established Pharmacy Benefits Managers like ESI. They sell discounts off AWP to employers and manipulate reimbursements to pharmacies to hit these discounts. That said, let’s go back to HPRS v. ESI complaint.
Ohio HPRS v. ESI
In this lawsuit, AG Yost accuses ESI of the following:
“ a. Failing to meet the pricing discount and dispensing fee guarantees;
b. Misclassifying generic drugs as brand drugs to charge higher prices;
c. Overcharging for generic drugs by failing to timely adjust generic pricing lists to accurately reflect
the lowest available pricing;
d. Failing to disclose Defendant ESI’s sources of remuneration received in connection with its
performance of services for Plaintiff HPRS; and
e. Failing to perform services for Plaintiff HPRS as required by Section 5.1 of the Agreement
[Sponsor’s Trust In and Reliance On ESI].
”
There’s a lot to unpack here, but first, apparently ESI failed to hit their guaranteed AWP discount of 82.25% for generic medications and 17.25% for brands. Second, they operated in bad faith by classifying generics as brands. Third, they didn’t update their price lists frequently enough. Fourth, they got payments from other parties that they didn’t disclose and remit to HPRS as they were required under the contract and fifth, they violated their agreement to act as a fiduciary of HPRS.
The first allegation surprises me, as most pharmacies that I am in regular contact with receive payments well below the guaranteed discounts, and I do not believe that ESI would promise to hit a discount that was not already guaranteed in its own contracts with major chain pharmacies like CVS and Walgreens. I believe that likely ESI reported that they DID meet the discount guarantees, but that to do so, they did exactly what is alleged in the second count.
Classification of medications as generic or brand would seem to be an obvious exercise to the uninitiated in pharmacy reimbursement. If the name of the medication is the generic name, it’s generic.
If it’s not, it’s a brand, right? Well… Endocet is a “branded generic” of oxycodone/apap, whose reference brand is Percocet. Ok, let’s take a different tack: we’ll use the approval pathway that the medication used to get on the market – If a medication got approved under a New Drug Application or Biological License Application, it’s a brand. If it got approved under an Abbreviated New Drug Application, it’s a generic. Unfortunately, that doesn’t work either. “Authorized Generics” like Greenstone brand pregabalin are approved under the same NDA as the branded medication, Lyrica.
And some “branded” medications are approved under an ANDA, like Klor-Con 8 mEq tablets.
There are databases that list codes to classify a medication as a brand or a generic. However, most large PBMs have been sued enough times that in their standard contract templates, the definition of brand/generic can be based on any of at least 3 databases, one of is generally proprietary to the PBM. Allowing a PBM to define whether something is a brand or a generic based on a proprietary database is a dangerous proposition for a plan sponsor. Most savvy plan consultants will require a PBM to use standard MONY codes to define brands/generics.
Some PBM contracts allow the PBM to offset failure to meet a brand guarantee by overperformance on generics, or vice versa. In other words, if the PBM is required to meet a 17.25% discount off AWP on brands and an 82.25% discount for generics, then if the PBM hits an 88% discount on generics, they can meet only an 11.5% discount on brands and still be meeting their contractual obligations. Smart plan sponsors prohibit such offsets in their contract.
To understand why this matters, let us look again at the ondansetron example. We have established that the true price to a pharmacy of ondansetron represents a 99% discount off of AWP.
That means that classifying it as a brand or as a generic will dramatically bring down the overall discount for brands or for generics, because a 99% discount easily exceeds either discount guarantee. If the PBM notices that they are exceeding their guarantee for generics but is failing to meet their brand guarantee, reclassifying ondansetron as a brand will simultaneously make the generics guarantee closer to the target in the contract and make the brands meet their benchmark.
Deeper waters: pharmacy facing discount guarantees
Pharmacy contracting organizations (both chains and PSAOs) have accepted terms that mirror the discount guarantees offered to plan sponsors. Most independent pharmacy owners view these guarantees with either disgust or utter confusion, because they mostly experience these as “GER fees” which effectively expand the egregious fees paid to be in network in Medicare Part D to the commercial book of business.
These discount guarantees between a PBM and a PSAO or pharmacy chain are generally referred to as “Brand Effective Rates”, “Generic Effective Rates” and “Dispense Fee Effective Rates.”
PSAOs generally explain these to their member pharmacies as reimbursement floors. Since generics are generally paid on a proprietary list of “Maximum Allowable Costs” set by the PBM which can change at any time and have no theoretical floor (as evidenced by the increasing number of claim paid for less than $1) the concept of putting a floor under the reimbursements to the pharmacy can be appealing.
Indeed, for a savvy pharmacy owner who understands how they work, effective rate contracts allow the pharmacy to capture more reimbursement from the PBM and plan sponsor than they otherwise could.
Under a GER of AWP minus 84%, the MAC price paid at adjudication becomes meaningless – the pharmacy will receive a final reimbursement of AWP minus 84% on every claim for a generic when all is said and done. This means that Heritage metformin will be grossly underpaid – the pharmacy will purchase it at $10.19 per prescription and sell it for $1.93 per prescription, losing $8.26 on each prescription. Meanwhile ondansetron will be a massive profit center – the pharmacy will buy ondansetron for ~$0.10/tablet and sell it for effectively 16% of $39.331/tablet => $6.29/tablet, pocketing a profit margin of $6.19/tablet, or making $185.70 on each 30 tablet prescription.
Many pharmacy owners have grasped the concept of the GER and taken the opportunity to transfer money from plan sponsors to themselves by manipulating their dispensing habits to maximize the AWP of the items they dispense. They generally remain confused as to why a PBM would want to have a Brand Effective Rate however. Brand medications are already reimbursed based on a % of AWP, so what’s the point of having a Brand Effective Rate? I myself asked this question multiple times without a good answer until I read through this case.
Under the contract terms between ESI and HPRS, ESI must transparently “pass-through” all of the prices paid to pharmacies at claims adjudication. If ESI transmits a price to a pharmacy of $100, they have to bill HPRS for $100. ESI receives compensation for its services via a separate administrative fee paid by HPRS to ESI. HPRS was wise to require pass-through pricing from ESI, as multiple PBMs have marketed arrangements with no administrative fee to plan sponsors. Under that type of arrangement, the PBM takes its compensation by marking up the claims. For example, the PBM might pay a pharmacy $100 and then bill the plan sponsor for $200, pocketing a “spread” of $100.
“Pass-through” contracting arrangements seek to prohibit this behavior, as the PBM is much more likely to act in the best interests of the plan sponsor (i.e. act as a fiduciary) when its compensation is limited to an administrative fee than when its compensation is based on how bold it is in marking up claims.
So what’s the connection then between discount guarantees and pass-through arrangements? A PBM with a discount guarantee and a pass-through arrangement with the plan sponsor will be absolutely thrilled to have a pharmacy-facing discount guarantee as well, because it allows the PBM to manipulate the MAC pricing on generics to hit the plan sponsor guarantee to the penny, while passing through the adjudicated prices to the plan sponsor as per their contract AND to take a spread on every claim.
If the adjudicated price on a claim no longer matters to the pharmacy because they are REALLY getting paid based on a GER guarantee, then the PBM can perfectly honestly say that the plan sponsor is paying exactly what the pharmacy was “paid” on that claim and collect their administrative fee for their “pass-through” contract. Later in the contract cycle, the PBM will collect the difference between the aggregate adjudicated prices and the GER from the PSAO and pocket that spread as additional compensation. Brand Effective Rates allow the PBM to do the same thing on brand claims. In this case, HPRS had a brand guarantee of AWP minus 17.25%. Suppose that the pharmacies have a BER of AWP minus 19%. The PBM could manipulate their computer systems to adjudicate prices paid to pharmacies at AWP minus 17.25% on every claim for the HPRS group, and then collect the difference between the 17.25% and the 19% guarantee from the pharmacies a quarter later. By doing so, they are technically meeting all of their contractual obligations while acting in bad faith to all of their contractual counterparties. In fact, I have heard from multiple pharmacies of a major PBM doing precisely this across hundreds of claims – overpaying relative to the pharmacies contract at adjudication and then recouping the difference 5 months later.
So what is the smart plan sponsor to do against this rigged game? Stop playing the AWP discount game. Instead, in an RFP a plan sponsor can ask for pricing that is based on fair pharmacy and PBM reimbursement – a “cost plus” NADAC plus a true cost of dispensing based dispense fee of ~$10-15 per prescription, and a per member per month administrative fee to the PBM. Additionally, a savvy consultant could restrict the PBM from recouping any funds from the network pharmacies after adjudication of a clean claim under any kind of discount arrangement. Additionally, plans should establish their own contractual arrangements directly with network pharmacies to pay for pharmacy services beyond simple dispensing. Plans can and should pay pharmacies on a performance basis for their ability to help improve HEDIS measures and lower overall healthcare costs. There has been a disconnect for at least 2 decades between how pharmacists are trained (as clinicians trained in optimizing drug therapy to meet goals of therapy, like reaching a blood pressure less than 130/80 or an A1c <7% or suppressing HIV viral load) and how community pharmacists are paid (for an NDC in a bottle). High caliber benefits consultants can arrange contracts with accountable pharmacy organizations to pay pharmacies and pharmacists for improving therapeutic outcomes rather than simply for dispensing more product with ever higher AWPs. Establishing a link between accountable pharmacy organizations and plans aligns the pharmacies’ best interests with those of the plan.
Smart pharmacy owners can opt out of these scammy discount arrangements by voting with their feet and leaving PSAOs that agree to these types of terms. They can join accountable pharmacy organizations and commit to work to improve therapeutic outcomes rather than working to maximize their reimbursements for drug product. By doing so, they will build a bright future for their practices and for their larger communities. The incumbent AWP discount game is zero sum and antisocial – pharmacies can only make money at the expense of plan sponsors. The cost-plus drug product reimbursement and therapeutic outcome performance based reimbursement model is prosocial. Under that arrangement, the pharmacy does well financially by improving the health of their community and the financial state of the other businesses in their community by reducing the total cost of healthcare.
We pharmacists can build a better future for our profession and our communities by 1) exposing the incredibly convoluted system built by large incumbent PBMs and 2) presenting an alternative system. We cannot continue to stand by and watch our profession’s fair compensation for our services be consumed by the greed of PBMs in addition to watching PBMs continue to mark up the cost of our services to the end purchaser. It is our duty to build out that alternative system and sell it. I firmly believe that it is possible, but it will take a lot of work and getting out of our comfort zones to do so.
I enjoyed reading the article every bit of it, it explains very well the pbms practices and true meaning of GER and BER!
Just now seeing this article. This was great, Ben. I don't think we can go with performance based payments until reimbursement is under control. PBMs will use it as a club to further steal from us. I love the idea once we stop the bleeding and guarantee a return on investment on our inventory