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Industry Insights

Paduda: It's Not the Price, Dammit!

  • National

In work comp services, far too many buyers focus solely on the price of the service.

Joe Paduda

Joe Paduda

That’s the wrong metric. It isn’t the price, it’s the cost (we’ll leave aside the return on investment/value).

Price is what you pay per unit. Cost is the total expense you pay.

Example: Some pharmacy benefits managers are trying to buy business by offering amazing prices, as in average wholesale price-80% for generic drugs. Sounds great, right?

Sure, until you have to explain to your boss why drug spend went up even though your discounted price went down.

While workers' comp payers have (mostly) figured out that the price of the pill is a lousy way to decide on a PBM, every now and then I get a call from a payer who’s just been offered a great price from a PBM and is either gleeful that he has been so smart and such a cunning negotiator, or he's panicked because the boss wants to change PBMs and the vendor manager knows it’s going to blow up.

OK, let’s walk through this.

The price of the pill is important, but it is only one part of the equation. Which is as follows:

  • Price per pill, X number of pills per script, X percentage of scripts processed in the PBM’s network.

Price per pill is determined by the definition of generic and brand, discount below AWP, brand/generic mix and, most importantly, by the type of pills dispensed. If a PBM does a crappy job managing the clinical aspects of the pharmacy program, you’re going to pay for far too many pills and for the wrong kind of pills.

I’ve also read PBM contracts with quite creative definitions of “generic" — some so creative that what any normal person would say is a generic is, for price purposes, a “brand” drug.

Since brand prices are typically AWP-10%-15%, a miscategorized generic is going to be super-profitable.

Next, if the price is too good to be true, it isn’t.

A PBM cannot afford to pay for pharmacist support, bill review fees, call center costs, compliance/state reporting, IT connections and customer service if it is charging AWP-80% for what are truly generics.

So, it’s safe to say you’ll be paying for lots of opioids, fenoprofen, convenience kits and other highly questionable, if not downright harmful, drugs.

But hey, at least you’re getting them for cheap!

Let's say you don’t care about the kind and volume of pills; you just want the deep discount. Even then, you will likely find that the cheap PBM delivers crappy results.

Here’s why: PBMs that pitch really low per-pill pricing are likely using a group health-contracted pharmacy network, which leads to big-time problems with paper bills and administrative hassles for adjusters. You may not see these costs, as they are buried in bill review “savings” and may not show up in your pharmacy report. But they are most definitely there.

Oh, and Rule No. 1 in work comp services: Do NOT piss off your adjusters.

Regardless, the network penetration for the cheapo PBMs tends to be pretty low compared to real comp PBMs. There are a bunch of reasons for that I won’t get into here.

What does this mean for you?

Do you want to explain to your boss why drug spend — and the combined ratio — are higher even though you got a great price from your PBM?

Joseph Paduda is co-owner of CompPharma, a consulting firm focused on improving pharmacy programs in workers’ compensation. This column is republished with his permission from his Managed Care Matters blog.

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