1. Pharmacy: Pharmacy Landscape and Uncovering the Optical Illusions
Gannon
Pharmacy Practice | November 15, 2018
Matt Adams
The contents of this presentation are confidential and proprietary to the Pharmacy Practice Division of Arthur J Gallagher & Co. and are to be used only by Gallagher Pharmacy Practice for the sole purpose of presentation of prescription drug RFP analysis to this client

2. The Current Landscape: Prevailing Themes
Specialty costs are skyrocketing
The supply chain is too complex
Vendors are consolidating
Seth
The regulatory climate is uncertain
Trust in the model is deteriorating

3. Pharmacy Benefit Manager (PBM) Landscape
Seth
Consolidation and partnerships have significantly changed the PBM marketplace
PBM revenue has increased, primarily driven by specialty pharmacy
Carve-in Carriers (UHC and Aetna) providing POS rebates for Fully Insured clients.

4. $
DRUG MANUFACTURER
PATIENT
Seth

5. Seth

6. Optics
Gannon

7. Optics
Gannon

8. Contracting Optics Definition of AWP Definition of Brands & Generics
Are single source generics bucketed under the generic or brand bucket?
Caveats
Rebates
Termination clauses
Seth

9. Definition of AWP
PBM pricing begins with the Average Wholesale Price (AWP) of prescriptions drugs
AWP has been the “price” standard for decades for both brands and generics
The most widely used AWP list is published by Medi-Span
Derived from the Wholesale Acquisition Cost (WAC) which is based on manufacturers’ reporting
Seth
The formula:
AWP =
WAC + 20%

10. Definition of AWP Sometimes PBMs don’t price using the whole code
Some PBMs use nine digits (NDC-9) instead of 11 (NDC-11)
Enables them to blend various package sizes of a drug into an aggregate discount that looks better
Full AWP
(NDC-11)
“Average” AWP
(NDC-9)
AWP
$100
$104
Discounted cost
$85
Quoted discount
15%
18.3%
Seth

11. Year 1: AWP - 85.00% Year 2: AWP - 85.50% Year 3: AWP - 86.00%
Sample Pricing Grid
Brand
Generic
Participating Pharmacy
(1-83 Days Supply)
AWP – 17.50%
Year 1: AWP – 81.00%
Year 2: AWP – 81.50%
Year 3: AWP – 82.00%
(84-90 Days Supply)(1)
AWP – 24.25%
Year 1: AWP – 85.00%
Year 2: AWP – 85.50%
Year 3: AWP – 86.00%
Mail Service Pharmacy
Year 1: AWP % Year 2: AWP % Year 3: AWP %
Seth

12. Definition of Brands & Generics
Seth

13. Rebates
PBMs negotiate with pharmaceutical companies to receive rebates on certain prescriptions dispensed to members
Applies principally to brand medications
Rebates average around $100 per 30-day brand-name drug
Plan sponsors, on average, receive around 90% of rebate dollars
Rebate sharing is typically arranged in one of two ways:
Flat dollar amount per-script
Percentage share of aggregate rebates
Seth

14. Rebates There are different definitions of rebates
Do the quoted rebate dollars cover all claims?
Some PBMs specify language in the contract such as “per rebateable claim” which means not all claims are considered eligible for rebates
Some rebate quotes may exclude drugs dispensed for less than 30 days at retail and less than 90 days at mail, making the quoted rebate dollars look better than they are
Seth

15. Rebates Point Of Sale (POS) Rebates for Fully Insured Clients:
Copay Plans – No Member Savings
Coinsurance (%) Plan Designs – Member Savings
HDHP’s – Member Savings
Line of sight / Transparency ?
Underwriting – How will it change?
Seth

16. PBM Contract Types Net Profit $6.50 Out to Client In to PBM Profit
How PBMs Generate Revenue – “Traditional Model”
In to PBM
Out to Client
Profit
Brand Drug AWP
$300.00 -
Discount
17.00%
16.00%
$3.00
Dispensing Fee
$0.50
$1.00
Rebates
$45.00
$40.00
$5.00
Admin Fees
$0.00
Gross Revenue
$8.50
Internal Cost
$2.00
Net Profit
$6.50
Seth

17. PBM Contract Types Net Profit $6.50 Out to Client In to PBM Profit
How PBMs Generate Revenue – “Full Pass-Through Model”
In to PBM
Out to Client
Profit
Brand Drug AWP
$300.00 -
Discount
16.00%
$0.00
Dispensing Fee
$0.50
Rebates
$40.00
Admin Fees
$8.50
Gross Revenue
Internal Cost
$2.00
Net Profit
$6.50
Seth

18. PBM Contract Types Net Profit $6.50 Out to Client In to PBM Profit
How PBMs Generate Revenue – “Hybrid Model”
In to PBM
Out to Client
Profit
Brand Drug AWP
$300.00 -
Discount
17.00%
$0.00
Dispensing Fee
$0.50
$1.00
Rebates
$45.00
$38.00
$7.00
Admin Fees
Gross Revenue
$8.50
Internal Cost
$2.00
Net Profit
$6.50
Seth

19. PBM Contract Types
Which model is best - Traditional, Hybrid, or Full Pass-Through Model??
One size does not fit all!
It is important to evaluate the different models based on what the market is yielding for your business.
Seth

20. Coalition or No Coalition?
Coalition PBM contract
Pooling clients together to negotiate a “one size fits all” PBM contract.
Advantages
Enhanced Pricing (group purchasing)
Guaranteed Pricing (normally this is still specific to client)
Disadvantages
Some coalitions require all participants to adopt the same formulary and network and possible clinical programs
Some coalition contracts are baked with hidden or exorbitant fees where the PBM pays the consulting houses to move business into the coalition.
Seth

21. Thank you!!!
Seth