Key Points
Procurement
Savings
Predictable Costs
Spreadsheet Analysis
Why don’t the savings I was promised during the request for proposal (RFP) ever seem to materialize?
What can I do as a buyer to make sure my RFP yields predictable total pharmacy costs?
What exactly goes into the “spreadsheet analysis”, and how does that yield a savings estimate?
Procurement
If a plan sponsor requires a PMPM deal, instead of the status quo discount and rebate “guarantees,” it would hold a PBM partner accountable to net cost and mitigate the risk of misaligned behavior, such as a PBM driving greater utilization to more expensive drugs.
Broad Imbalance of Knowledge
Lack of Accountability
No "guarantees" on cost avoidance/projections
Broad Imbalance of Knowledge
Creating accountability on key cost drivers is essential when comparing PBMs’ formularies, clinical program rigor, auto-refill protocols, and accounting for medication repackaged with new PBM-managed labels that have different starting prices. The two cost drivers that matter most in calculating total drug costs are drug mix and unit cost.
Lack of Accountability
Be cautious if a PBM guarantees discounts and rebates on high-cost brand and specialty drugs, because the door is left wide open for excuses including “more specialty,” “more expensive brand utilization,” or “new-to-market drugs” are driving costs up.
No "guarantees" on cost avoidance/projections
Rx Procurement Savings vs. Stakeholder Accountability
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
Base Actual Plan Spend
Year 1 Cost Avoidance Projection
Year 1 Actuarial Budget Projection
Year 1 Stop-Loss Attachment Point
Year 1 Actual Plan Spend
For illustrative purposes only, actual results may vary
FINANCIAL Accountability
LOW
MODERATE
HIGH
ABSOLUTE
17% Cost Avoidance
5% Trend
9% Trend
7% Trend
Drug mix is the highest predictor of total plan drug spending and represents the types of drugs dispensed based on the formulary, clinical program approvals, and the number of pills shipped or refilled per person.
Drug Mix
Unit cost represents how to classify a drug (e.g., brand, generic, or specialty) and how much each drug costs, inclusive of discounts, rebates, and administrative and dispensing fees.
Unit Cost
Procurement
Savings
Why is there a disparity between the pharmacy RFP and actual results?
The devil is in the details of these complex procurement processes. Understanding how legacy PBMs make money can help put some power back in plan sponsors’ hands and highlight areas of potential conflict (e.g., if a PBM partner is retaining some portion of any revenue stream associated with the fulfillment of drugs for plan members, then that value is not accruing to payers and their members). And PBMs make money in more ways than most plan sponsors realize, including entering the businesses of repackaging and manufacturing drugs.1
AWP vs. NADAC:
Average Price Change Over Time (Generics)
AWP
NADAC
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
-1.0%
0.0%
-58.0%
-54.0%
-51.0%
-43.0%
-36.0%
-31.0%
-22.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
-50.0%
-60.0%
-70.0%
2017
2018
2019
2020
2021
2022
2023
2024
Josh Golden
Senior VP, Strategy
Read the Blog
FROM THE EXPERTS
Predictable Costs
What can I do as a buyer to make sure my RFP (procurement process) yields predictable total pharmacy costs?
What can plan sponsors do to bridge the knowledge gap?
NADAC represents the retailer’s true cost of acquiring the drug into inventory, which means that NADAC reflects the actual economics in the supply chain. When the real cost of a drug goes down, NADAC follows suit and deflates.”
NADAC – Our Preferred Benchmark
The best-case scenario is that plan sponsors with a large enough population – typically 4,000 lives or more – require all PBMs to bid PMPM guarantees, not AWP discounts and rebates where the total spend cannot be fully understood or compared on an apples-to-apples basis. This simplifies the procurement process so that a payer’s chief financial officer, chief human resource officer, or chief executive officer can quickly do the math, know what’s being spent per member or per employee year-over-year, and evaluate it next to what they’ll be paying next year.
Leverage PMPM Guarantees to Improve the PBM Procurement Process
You don’t have to know what a brand or generic is because you’re getting a total cost guarantee. I truly believe PMPM is the easy button for everybody to understand something that’s been so complex.”
Kirstin Begley, PharmD
Chief Commercial Officer
Listen to the Podcast
FROM THE EXPERTS
AH010 – The Power of PMPM: Holding PBMs Accountable for Total Drug Spend, with Kristin Begley, PharmD
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Spreadsheet Analysis
What exactly goes into the “spreadsheet analysis,” and how does that yield a savings estimate?
Formulary and clinical program differences can easily add up to 12% to 23% of a plan’s total spend (net of rebates), but most spreadsheet models do not assess this. Also, considering that ~2% of drugs drive 50% or more of the average plan’s overall spend2 – a story we hear frequently – we think these drugs should be individually priced and guaranteed.
More time and attention should be spent evaluating the specialty drug list, formulary placement, and clinical program controls during the procurement process. These are the factors that ultimately drive the total costs for plan sponsors.
Plan sponsors should include actuarial oversight in their procurement process. While it’s an added cost, a consulting actuary will likely tell you to expect a positive mid-single-digit trend (e.g., 5%). A stop loss vendor will be even more conservative than the actuaries and forecast an 8% - 10% trend, as that is what actual PMPM costs have demonstrated for most plan sponsors year-over-year. Unfortunately, most plan sponsors have come to accept this level of inflation as normal.1
In our opinion, PMPM cost is the true cost, not discounts and rebates off an unknowable baseline.
Table 4 shows how typical rebate guarantees may be gamed to benefit a PBM, which could explain a portion of the year-over-year increase in plan costs that most plan sponsors experience. Don’t worry’s though. There is a way to deal with this without becoming a PBM attorney.
The Truth about Rebates
For plan sponsors that may prefer the status quo procurement, a word of caution:
Plan sponsors should pay attention to some other factors that may influence total costs, such as newly repackaged drugs and auto-refill protocols. Newly repackaged medication can add another 3% to 5% to a payer’s cost, and the procurement process should evaluate whether a PBM promotes 15 months of therapy for chronic conditions vs. a more reasonable 13 months. Moving from a 75% refill threshold to 90% means that members would have approximately 30 days of excess medication at the end of the year vs. over 80 days of excess medication. Figure 4 demonstrates how auto-refill of a specialty drug can inflate costs for plan sponsors if a single member’s refills are “too soon.”
The Truth about Auto-Refills
Bridget Mulvenna
VP, National Business Development
FROM THE EXPERTS
What else gives traditional PBMs an advantage?
PBMs have scale and vast resources. They have been able to maintain a position of power during the typical procurement process because they have better visibility around:
Assumptions used for illustrative purposes: 10K life group with 100,000 claims/year >10% advantage given to Legacy PBMs on rebates
Why does it seem like the PBMs always have the upper hand in procurement and contracting?
Why don’t the savings I was promised during the request for proposal (RFP) ever seem to materialize?
What can I do as a buyer to make sure my RFP yields predictable total pharmacy costs?
What drugs are coming to market, their costs, the rebates associated with them, and what utilization will look like (e.g., what the total population likely to use a new-to-market drug is)
Pipelines
Patents
What patent expirations are on the horizon, and how the generic manufacturers will react (i.e., PBMs know which drugs will lose rebates, how many competitors will enter the market with generics)
Modeling
How all the little decisions made around prior authorization, formulary additions or deletions, etc., will impact plan costs.
Read the Blog
Plan sponsors can break this addiction [to rebates] by prioritizing better formulary and clinical management and incentivizing members to use lower-cost drugs through reduced co-pays, for example. This will align plan sponsors with industry trends favoring transparency and cost management – a shift that will be accelerated by the ripple effects of the Inflation Reduction Act on commercial plans.”
Five Ways to Improve Your PBM Procurement Process in 2025
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Why Capital Rx?
If you’re a health plan fiduciary responsible for managing a pharmacy benefit program, you can find trustworthy resources if you know where to look and what to ask for.
Traditional PBM Cost Structure
100% Pharma Revenue Pass-Through
Cost-Plus Retail Economics (NADAC)
Low-Value Drug Optimization (Formulary & PA)
Auto-Refill Protocol Adjustments
Specialty Cost Optimization
Capital Rx Cost Structure
*Savings results may be higher or lower based on market competitiveness of current contract and existing drug mix.
Total Year 1 Savings
Savings in second plan year estimated at 1-2% due to pass-through of generic price deflation and supply chain price concessions.
15.3%
The Truth About Pharmacy Benefit Procurement
Explore
Why savings don‘T Materialize
Why does it seem like the PBMs always have the upper hand in procurement and contracting?
PBMs have a tremendous impact on total plan spend through formulary management, refill cadence, and clinical programs, which ultimately drive per member per month (PMPM) cost for plan sponsors (here defined as what the plan pays - all-in, net of claims costs, dispensing fees, admin fees, and rebates).
PBMs have more information than plan sponsors and consultants, which gives them the upper hand in the procurement process. Unfortunately, most procurements do not capture the most impactful clinical management items influencing a payer’s total drug spend.
Why Use NADAC-Based Pricing Over AWP
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You can read the full eBook and find more valuable health benefits content at Judi.Health/Insights!
Learn More
References
1. HMP Omnimedia, LLC d/b/a Drug Channels Institute. What’s Behind CVS Health’s Novel Vertical Integration Strategy for Humira Biosimilars. September 2023. Available at: https://www.drugchannels.net/2023/09/whats-behind-cvs-healths-novel-vertical.html
2. IQVIA Institute for Human Data Science. The Use of Medicines in the U.S. 2024: Usage and Spending Trends and Outlook to 2028. April 2024. Available from www.iqviainstitute.org.
This eBook expands upon an article originally published in the International Foundation’s March/April 2024 Benefits Magazine (Vol. 61, No. 2).
Creating accountability on key cost drivers is essential when comparing PBMs’ formularies, clinical program rigor, auto-refill protocols, and accounting for medication repackaged with new PBM-managed labels that have different starting prices. The two cost drivers that matter most in calculating total drug costs are unit cost and drug mix.
Rebates should be weighed, but not too heavily. Auto-refills should be monitored. And plan sponsors must understand other factors that give PBMs an advantage.
1. A Clear Per All Rx Guarantee
2. Sources of Potential Savings