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Preferred National Pharmacy Solutions


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Title: Preferred National Pharmacy Solutions

  • Preferred National Pharmacy Solutions
  • Committed to Revolutionizing the way Pharmacy
    Benefits are Delivered

  • Smoke Mirrors
  • An Overview of the
  • Pharmacy Benefit Management Industry in America

Presentation Overview
  • Background of pharmacy benefit management
  • How pharmacy benefit managers (PBMs) work
  • A description of questionable industry practices
  • Whats needed to resolve the problem
  • Preferred National Pharmacy Solutions
  • Creating an honest pharmacy benefit expense
    management capability for your clients

Historical Perspective
  • Until the 1980s, insurers and TPAs processed Rx
  • Prescription Card Services (PCS) and its
    electronic POS pharmacy capability, enabled
    payors to carve out pharmacy benefits and
    outsource them
  • Realizing that Rx administrators could be a
    useful tool in pushing their products, the drug
    manufacturers bought them in the 90s
  • Post-acquisition, the Rx administrators morphed
    into PBMs with an interest in self-dealing and
    maximizing profits
  • There are approximately 50-60 PBMs operating in
    the United States
  • It is now well-known that for 20 years, PBMs
    have been
  • shielded in secrecy,
  • avoiding accountability, and
  • acting in their own selfish best interest
  • all to the detriment of Plan Sponsors, Plan
    Participants and re-insurers.

Historical Perspective
  • PBMs have engaged in unfair, deceptive and
    self-dealing practices designed exclusively to
    increase their profits by
  • influencing the choice of drugs prescribed by
  • inflating Rx drug prices with a pricing system
    based on an inflated "sticker" price (AWP) set by
    a middle man,
  • not passing the savings negotiated via their bulk
    purchasing power to their clients,
  • willfully contributing to escalating drug costs,
  • failing in their fiduciary duty to their clients.

Paraphrased from conclusions drawn by U. S.
Senators during Congressional hearings on
pharmaceutical industry practices
What is a PBM and How do they Operate ?
  • Similar to the way in which health insurers, HMOs
    and TPAs are structured and operated, PBMs are
    designers, aggregators and managers of a variety
    of carefully selected products and service
    providers that are integrated to address these
    and other areas
  • plan design
  • provider networks
  • retail pharmacy
  • mail-order pharmacy
  • specialty pharmacy
  • claim processing
  • eligibility management
  • care management
  • rebate management
  • customer service
  • employer
  • patient
  • physician
  • pharmacist
  • performance reporting
  • sales and marketing capability
  • clinical oversight
  • decision-support tools
  • Typically, most PBMs outsource several of these

Component Parts of a Sophisticated PBM
PBM Profiteering Tactics and Schemes
  • Re-Defining AWP
  • The 4.16 Factor
  • The 8-Digit NDC Trick
  • Mark-Ups Price Spreads
  • Backroom Processor Schemes
  • Rebate Schemes
  • Flat, Access, Market Share
  • Rebate Disguising
  • Rebate Pumping
  • Re-Defining Brand and Generic
  • Formulary Steering
  • Pre-Authorization Schemes
  • Clinical Rules Protocols
  • Mail-Order Schemes
  • Leveraging Captive Facility
  • Multiple MAC Lists
  • Drug Switching
  • Drug Repackaging
  • Fraudulent Plan Design
  • Other Profiteering Schemes
  • Zero Cost Scripts
  • Higher Than Logic
  • Pocketing Refunds, Reversals and Returns
  • Payor Account Crediting Tricks
  • The Specialty Drug Issue

Common Definitions
  • What is a drug formulary ?
  • A list of prescription medications that a drug
    plan will pay for
  • Some formularies are more restrictive than others
  • Open formularies cover both listed and
    non-listed drugs
  • Closed formularies cover only drugs included on
    the list
  • Tiered formularies encourage the use of
    preferred drugs by charging higher co-pays for
    non-preferred drugs, whereas generic and
    preferred drugs require lower co-pays

Common Definitions
  • What is a therapeutic class ?
  • Simply put, all prescriptions fall into a
    therapeutic class
  • The National Drug Code (NDC) identifies the 20
    major drug classes to which a drug may belong.
    Examples of therapeutic classes include
  • Proton Pump Inhibitors,
  • Cholesterol Lowering Products, and
  • Antihistamines
  • They are the component parts with which
    formularies are created
  • PBMs offer several, but not all, drug options
    within a therapeutic class
  • What is transparency, full disclosure and pass
    through pricing ?
  • Transparency letting the client see and prove
    all that is promised
  • Full disclosure disclosing everything and being
  • Pass through passing all financial benefits on
    to the client

Redefining AWP
  • Definition of Average Wholesale Price (AWP)
  • Represented as being an average of prices charged
    by wholesalers
  • Actually set by manufacturers and drug pricing
    sources - sticker price
  • No independent review
  • According to the U.S. General Accounting Office
    (GAO), the AWP may be neither average nor
  • AWP - x is a myth. How do we know this ?
  • We studied an analysis of the drug costs of the
    major pricing sources
  • Redbook, MediSpan and FirstData Bank
  • This study tracked these costs over time
  • It identified large-scale price manipulation
  • Dave Morgan, Morgan Healthcare Audits

Not all Rx Pricing Sources are Alike
  • Note that FirstData Bank and MediSpan have
    identical prices for the top 10 brands based on
    the of scripts dispensed
  • Did they survey exactly the same drug wholesalers
    on exactly the same date to arrive at their
    average wholesale prices ?
  • Notice that Redbook is nearly 4 less expensive

Not all Rx Pricing Sources are Alike
  • When we examine the top 10 brand drugs based on
    cost we now see that the price of Oxycontin is
    the same across the board

The 4.16 Factor
  • Now notice that over a few month period,
    FirstData Banks AWP increased by exactly 4.16
    vs. Redbook
  • Is it possible that all of the manufacturers of
    these drugs chose to increase their prices by
    exactly the same amount at exactly the same time ?

The 4.16 Factor
  • This 4.16 increase was actually phased in across
    the board over time
  • Upon closer examination we note that narcotics,
    generics, and high profile drugs (e.g. Viagra,
    Zyrtec) are not impacted

The 4.16 Factor
  • The smoking gun
  • When the drug price manipulation program has an
    error, the price of the drugs reverts back to the
    pre-manipulation date !
  • a
  • 4 months later, when the problem is realized,
    the price manipulation program changed the
    prices back to the post-manipulation Level

Proof that AWP is a manipulated artificial number
and not market based
The 4.16 Factor was Discovered by Dave Morgan,
a Nationally-Recognized Rx Benefit Expert and a
Member of the PNPS Distinguished Panel of Advisors
The 4.16 Factor
  • In the settlement of the resultant civil class
    action case brought against First DataBank, one
    of several companies that report data on
    prescription drug prices, First DataBank agreed
    to reduce the reported AWP of certain drugs. by
    approximately four percent
  • The following language appears in a similar
    settlement agreement with Medi-Span
  • and now you know
  • ..the rest of the story

Subject to the provisions of Paragraph
(9)(A)(3) below, on a date which is no later than
three (3) years from the Effective Date of this
Agreement, Medi-Span shall discontinue
publishing, electronically or otherwise, the AWP
data field for any pharmaceutical. Medi-Span
shall use the three year period described herein
to notify its customers of the change in its
publications contemplated by this paragraph.
Re-Defining AWP
  • Spread The difference between the price charged
    to payors for drugs and the price paid to
  • Essentially amounts to marking-up claims !
  • Typical spread 4 - 6 /script or 9 - 13 PEPM
  • For generics, PBMs use multiple Maximum Allowable
    Cost (MAC) lists
  • PBMs may charge payors the MediSpan AWP and pay
    pharmacists the lower Redbook AWP
  • PBMs that own mail-order facilities keep the full
    spread on these drugs
  • Encourages PBMs to push drugs with highest
    spreads by manipulating the formularies
  • PBMs hide the fact that they create spreads by
    claiming that their contracted AWP rates with
    their pharmacies are confidential

The 8-Digit NDC Trick
  • The National Drug Code (NDC) is a unique
    11-digit, 3-segment number assigned to all
    medications intended for human use
  • The 1st segment identifies the manufacturer,
    repackager or distributor
  • The 2nd segment identifies the strength, dosage
    form, and formulation
  • The 3rd segment identifies the package size
  • Ex NDC number 00135-0315-52 is for
    Glaxo-Smith-Klines (00135) 1 Denavir Cream
    (0315) in a 1.5 gram tube (52)
  • To prevent competing PBMs from comparing Rx
    charges, PBMs often provide reports containing
    only 9 digits, which are useless
  • NDC 00135-0315-52 (a 1.5 gram tube) costs
    70.00 whereas
  • NDC 00135-0315-51 (a 2.0 gram tube) costs
  • Without the last two NDC digits, it is
    impossible to compare charges
  • PBMs often claim they cant provide 11-digit
    NDCs this is untrue because they use 11-digit
    NDCs to pay their network pharmacies

Backroom Processor Schemes
  • Most PBMs outsource claim processing to one of a
    few backroom companies that own the electronic
    POS pharmacy network
  • These companies, which are largely unknown,
  • Most of these companies provide call center and
    reporting services
  • These companies not only facilitate and support
    the profiteering schemes of PBMs, they partake in
    several of their own including
  • marking-up drug prices an average of 4 before
    the the PBM mark-up
  • charge pharmacists as much as .25/script in
    undisclosed fees
  • look the other way re pharmacy errors and
    profiteering tactics
  • SXC Health Solutions
  • DST - Argus Health Systems
  • Emdeon Business Services
  • McKesson/Relay Health
  • First Health Services
  • Unisys Health Services
  • Ramsell Public Health Rx

Rebates and Rebate Disguising
  • Drug manufacturers reward PBMs for promoting
    their brands
  • Offered only for single-source drugs for which
    there are no generics
  • Rebates represent a very significant source of
    PBM revenues
  • Average rebates are 10 of AWP or 3 - 6/script
    or 6 - 12 PEPM
  • Average rebate for the top 25 rebatable drugs is
    gt 20/script
  • PBMs promote drugs that yield the highest
    rebates, not ones that are necessarily in the
    patient's best interest (most efficacious)
  • PBMs have historically kept rebates, now theyre
    being forced to share
  • Retaining interest on rebates by collecting
    monthly, remitting quarterly or even less

Rebates Come in Many Forms
  • Access rebates - for formulary placement
  • Market share rebates - for exceeding estimated
  • Administrative rebates - for compiling data and
    verifying results
  • Rebates for influencing a doctors prescribing
  • Rebates to cover educational expenses
  • PBMs redefine rebates to exclude them from the
    amounts shared with payors and disguised by PBMs
    as formulary savings
  • Court Rulings A rebate is a rebate whether its
    called an
  • educational grant,
  • marketing incentive, or
  • administrative fee

Rebate Pumping
  • Rebate pumping occurs when a PBM creates a
    formulary substituting new, higher cost drugs for
    low cost drugs
  • This creates greater spreads and more PBM profit
  • These higher cost drugs are often not the most
    appropriate (efficacious) drug in the therapeutic
  • By acting in its own self-interest, the PBM has
    created a serious conflict of interest between
    it, the payor, plan participant, physician and
    pharmacist and often pit one against the other

Examples of Rebate Pumping
  • Protonix is 19 less expensive than Prevacid, and
    Lipitor is 46 less expensive than Zocor
  • PBMs typically push Prevacid and Zocor however
    because they offer them larger rebates
  • Prevacid and Zocor are often not the best drug
    for (most efficacious) a patients ulcer or
    cholesterol lowering treatment

Re-Defining Brand and Generic
  • The intentional blurring of the definitions of
    "brand drugs" and "generic drugs" by PBMs to suit
    their financial interests
  • This tactic represents several percentage points
    in undisclosed PBM revenues, costing payors tens
    of millions of dollars annually
  • It is not known to payors, consultants or anyone
    but the PBMs
  • Contracts do not define these terms or are
    ambiguous, such as
  • "branded generics a brand drug that is so
    cheap its considered the generic of itself and
    equal in cost as either a brand or generic, an
  • "multi-sourced brands, another term that is used
    to provide wiggle room in the miscategorizing of
  • Experts believe that this practice is very
    widespread and involves dispenses that can
    account for up to 10 of typical utilization

Re-Defining Brand and Generic
  • By miscategorizing drugs
  • charging brand prices for generic products,
  • retaining rebates for brand drugs by calling them
    generics, and
  • misstating a payors generic drug utilization
  • PBMs miscategorize brand and generic drugs for
    the purposes of
  • invoicing a generic drug as a brand drug to
    charge higher prices (e.g., AWP 17) rather
    than the true price (e.g., AWP 65)
  • labeling a brand drug a generic to keep the
    rebate, as almost all contracts require that
    rebates be passed on only on brand drugs
  • counting a brand drug as a generic to meet the
    generic fill level necessary to earn a bonus or
    meet a guaranty requirement
  • Nefarious, illegal, unethical ? Fraud is
    difficult to prove in court.

Re-Defining Brand and Generic
  • Miscategorizing Example 1 Amoxil
  • The antibiotic Amoxil is the same as amoxicillin,
    and the same price
  • Amoxil is categorized as a generic to achieve an
    overall generic fill-rate guarantee and as a
    brand to maximize profit (because the PBM can
    charge AWP 17 rather than AWP 65)
  • The same-priced amoxicillin may appear both on a
    PBM's MAC list (as a generic) and as a brand at
    the same time !
  • Miscategorizing Example 2 Oral contraceptives
  • Oral contraceptives may in fact be generic, but
    still contain a trade name, and priced either
    (the Kleenex facial tissue scheme)
  • Miscategorizing Example 3 Albuterol Inhalers
  • Teva, a generic manufacturer, introduced its
    ProAir HFA as a brand
  • FDB/MediSpan classified it as a generic vs. the
    innovator product
  • As its price moved to that of the innovator, it
    changed back to a brand

Re-Defining Brand and Generic
  • When is a drug a generic rather than a brand ?
  • the product's label name is the same as the
    generic name,
  • the drug is not listed as an "innovator product"
    by a drug data source,
  • the drug was never FDA-listed as a New Drug
    Application (NDA), or
  • the drug is listed as a generic in the FDA's
    Orange Book (re patents) or, it was otherwise
    found to be approved by the FDA as a generic
  • To avoid this problem, payors need to
  • deal exclusively with reputable pharmacy expense
  • use specific contract language which prohibits
    definition manipulation,
  • be specific and very clear about how terms are
    defined and used, in particular contexts,
    including examples where necessary

Formulary Steering
  • Influencing the prescribing doctor to change a
    prescription to increase a PBMs revenue and
  • Example Astra-Zeneca paid Express Scripts 500K
    to call 22,000 MDs to substitute high-cost Nexium
    for Prilosec, when Prilosec went generic
  • Formulary steering is aided when a PBM alters the
    formulary to eliminate low cost alternatives in
    favor of high cost brands
  • PBMs can place a drug on a formulary and still
    influence its use
  • by implementing prior-authorization requirements
  • by implementing clinical rules and protocols that
    make it difficult to prescribe/dispense the lower
    cost drug
  • Formulary steering is not easily traceable or

Formulary Steering
  • The practice of formulary steering is increasing
    despite greater opportunity for savings with the
    introduction of hundreds of new low cost drugs
    and generics
  • Formulary steering will continue as patents on
    brand name drugs with more than 30 billion in
    market sales will expire over the next few years
  • Formulary steering occurs with both multi-tiered
    plans and plans with open formularies

Mail-Order Pharmacy
  • Why is controlling mail-order pharmacy so
    critical ?
  • Mail-order is one of the fastest growing areas of
    pharmacy benefits
  • In 2001, mail-order was 12 of U.S. prescription
    sales, or 20 billion.
  • By 2004, mail-order sales were 34 billion, a 67
    increase in just 3 years
  • By 2006, mail-order sales were 42 billion, a 23
    increase in just 2 years
  • Today, mail-order represents 25 40 of a
    payors drug spend
  • Mail-order pharmacy is practical for persons who
    take drugs on a regular, long-term basis where
    prescriptions are refilled regularly
  • Persons who use mail-order are typically on
    multiple medications and require maintenance
    drugs for longer-term, chronic conditions
  • Due to the nature of this type of treatment,
    mail-order companies experience a larger quantity
    of medication per dispense

Mail-Order Pharmacy
  • As a result of the growth of mail-order services,
    many PBMs have bought mail-order facilities to
    continue their profiteering
  • The 3 largest PBMs own captive mail-order
    facilities and dispense an estimated 75-80 of
    all commercial mail-order scripts
  • Today, mail-order has become a huge profit driver
    for PBMs generating up to 60 of the net income
    for some companies
  • Mail-order is much more profitable than PBM
    administration indeed, industry experts report
    that the average profitability of a mail-order
    dispense is four times that of a retail
  • More than 50 of all mail order dispenses are for
    high-margin single source drugs. Recently,
    Medcos CEO refers to its mail-order unit as the
    companys crown jewel
  • Mail-order is still very much a black box and a
    component of pharmacy benefit management that is
    still largely out of control

Mail-Order Pharmacy
  • PBM-owned captive mail-order facilities can
    create a significant conflict of interest as the
    pharmacy administrator is also a seller
  • PBMs with captive facilities usually own them to
    engage in deceptive mail-order practices to
    increase profits
  • PBMs boast that the discounts for mail-order
    dispenses are always greater than discounts for
    retail, but they are not
  • Major mail-order frauds
  • Drug switching
  • Re-packaging
  • Using different MAC and AWP lists for payors and
  • Failing to promote starter dosages pushing
    mail-order scripts are for 90- versus 30-day

Mail-Order Pharmacy
  • What is drug switching ?
  • Contacting a prescribing physician to persuade
    him or her to change a prescription from generic
    or preferred brand to a non-preferred brand
    product to earn a greater spread or larger rebate
  • Incentives for drug switching ?
  • PBMs earn rebates on single source drugs vs.
    multi-source drugs where generic equivalents are
  • Drug manufacturers know that when generics are
    available, patients will request them
  • The challenge for PBMs many states have
    substitution laws that promote generic
    substitution via automatic dispensing by
  • Its the unique ability that mail-order firms
    have to facilitate changes in prescriptions from
    one drug to another that creates special value,
    not automated dispensing technology or paperless
    order processing

Mail-Order Pharmacy
  • How is drug switching accomplished ?
  • There are several days between the order and
    expected dispense date allowing the mail-order
    pharmacy time to obtain the prescribing
    physicians permission
  • Physicians often accept PBM representations about
    the added benefits of the new single-source drug
  • It is also just as profitable for the PBM to get
    a physician to switch from one single-source drug
    to a more expensive single-source drug
  • Several studies provide ample evidence to support
    opportunistic self-dealing via drug switching by
    PBMs with captive facilities
  • This evidence shows significantly lower generic
    substitution rates by captive vs.
    independently-owned mail-order facilities
  • The federal government has asked the FTC to
    investigate the matter

Mail-Order Pharmacy
  • What is drug re-packaging ?
  • The re-packaging and re-pricing of mail-order
    scripts to extract more from the payor and
    the patient
  • How is re-packaging accomplished ?
  • Creation of a proprietary NDC that is not
    recognized by the FDA
  • Creation of a price with an inflated per unit AWP
  • Billing the payor using the proprietary NDC and
    inflated AWP
  • Charging 100-unit price when buying in bulk (the
    gazillion unit price)
  • Buying from another re-labeler or re-packager
  • PBMs can do this while staying within their
    contract terms

Mail-Order Pharmacy
  • An example of re-packaging of Celebrex
  • PBM negotiates retail pricing of AWP-10 3
    dispensing fee
  • Mfg.s AWP is 105.34 for 60-Day supply or
  • Plans cost is 97.81 (105.34 10 3) or
  • PBM gets plan to push mail-order with a deal of
    AWP-25 3 disp. fee
  • Case 1
  • PBM establishes a 100 unit AWP of 2.76/unit (per
  • PBM re-packages Rx into 60-unit pack and charges
    payor 127.20
  • (60 x 2.76 25 3)
  • New PBM profit 127.20 97.81 29.39 ( 30)
    plus the margin it would have realized with the
    original AWP !!!
  • Case 2
  • PBM buys drug from re-labeler and establishes an
    AWP of 3.10/unit
  • PBM charges payor 142.50 (60 x 3.10 - 25 3)
  • New PBM profit 142.50 97.81 44.69 ( 45)

Mail-Order Pharmacy
  • 15 re-labeler products with inflated AWPs for

Mail-Order Pharmacy
  • 60-Pill Celebrex dispense price rose 77 from
    105.34 to 186.3

Mail-Order Pharmacy
  • What is plan design fraud ?
  • Concept provide financial incentives for
    patients to use mail-order by requiring fewer
    co-pays because the PBM offers the payor greater
    AWP discounts and lower dispensing fees via
  • By requiring only 2 co-pays for a 90-Day drug
    supply (vs. the standard 3 if the prescription
    were purchased at a retail pharmacy) the payor
    agrees to absorb the added cost in exchange for
    the anticipated savings
  • In most cases, the co-pay amount absorbed by the
    payor is greater than the savings, resulting in
    an increase in overall costs
  • As illustrated in the following slides, PBMs
    dramatically increase their revenues and profits
    on these mail-order dispenses

Mail-Order Pharmacy
  • Payor saves 11.36/script in ingredient and
    dispensing costs only to pay an additional 20.98
    co-pay costs for a net added expense of

Mail-Order Pharmacy
  • Carroll Study of 2 vs. 3 co-pay plan design for
    90-day supply
  • 44,847 scripts from non-captive mail-order
  • Summary
  • Pharmacies lose 269,082 in dispensing fees Rx
    margins rebates
  • Payor pays 7 (308,904) greater costs
  • PBM gets control of 6.4 million in new
    ingredient cash flow
  • Members save 809,532 at the expense of payor and

Mail-Order Pharmacy
  • Other sources of PBM revenues from captive
  • Excess revenue from 90-day scripts earned from
    terminated EEs
  • Revenues from wasteful usage 90-day supplies vs.
    step therapy (in which a patient starts a new Rx
    treatment regimen with an initial dispense of a
    few pills to see if they can tolerate the drug)
  • PBMs earn (typically undisclosed) administration
    fees for data collection (re member Rx usage)
  • PBMs earn (typically undisclosed) greater generic
    market share fees from greater vendor selection
  • Entering into seemingly transparent,
    full-disclosure contracts but unwittingly
    slipping 100 count pricing language into the
    contract so that they can stay within the letter
    of the law and not have to price their drugs on a
    bulk rate or an acquisition cost basis

Specialty Pharmacy
  • Specialty pharmacy is a relatively new area of
    prescription medications including non-orally
    taken pharmaceuticals, biotech products,
    gene-based therapies and injectables used to
    treat a variety of chronic, high dollar, complex
    conditions for which no other viable
    pharmaceutical option exists
  • While affecting only a small number of people,
    specialty pharmacy is expensive, averaging gt
    1,500/mo and as much as 15,000/mo
  • It is the most explosive Rx market in terms of
    growth, utilization and cost growing from 22
    billion in 2001 to 60 billion in 2005
  • With 600 biotech drugs in development and 150
    about to emerge from the pipeline, we will spend
    an est. 100 billion on specialty drugs by 2010
    (making it the largest category driving drug
  • Used for treatment of anemia, cancer,
    cardiovascular disorders, diabetes, respiratory
    disorders, MS, and rheumatoid arthritis, etc

Specialty Pharmacy
  • Examples of specialty drugs and their annual
    treatment costs

Specialty Pharmacy
  • Like mail-order, a captive specialty pharmacy is
    a dishonest PBMs gold mine as it provides the
    means by which to sell high priced, high margin
    drugs and generate enormous revenues for the PBM
  • Specialty drugs are covered under the medical
    benefit and typically provided by physicians in
    the buy and bill model
  • Physician writes a prescription
  • The script is ordered through the PBM
  • The drug is administered at the physicians
  • The payor is billed by the physician on a HCFA
    using a J code
  • Costs of product administration and patient
    monitoring services are often wrapped into the
    product cost
  • A University of Michigan study showed that
    physician-office based dispenses are 8 more
    expensive than those through other means

Specialty Pharmacy
  • Effective specialty drug utilization management
    programs include the following components
  • Formulary development
  • Clinical guidelines
  • Prior authorization
  • Step therapy
  • Quantity limits
  • Reporting and claims review
  • Provider education
  • Member education

Profiting from Zero-Cost Scripts, Refunds,
Reversals and Returns
  • Up to 20 of all prescriptions cost less than the
  • The differential is not passed on to either the
    patient or payor
  • PBMs and pharmacies often keep or share the
  • Keeping the overage may be a violation of ERISA
  • Appropriate contract language should also include
    lesser of language that allows for the payor
    and plan participant to pay the lesser of the
    guaranteed AWP discount, or the UC, or the MAC
  • Many scripts are eligible for refunds and
  • Due to pharmacy errors and changes
  • Returned prescriptions
  • Patient not picking up the script
  • Many audits of PBMs show them to be sloppy" with
    respect to crediting payor accounts

Profiting from Zero-Cost Scripts, Refunds,
Reversals and Returns
  • The wink and nod pharmacy bonus program
  • How it works
  • Why ?
  • Who pays ?
  • Who is accountable ?

Profiting from Zero-Cost Scripts, Refunds,
Reversals and Returns
  • How bad is it ?
  • In this plan audit example, 61,693 mail-order and
    retail dispenses were found to be greater than
    the co-pay.
  • The result was nearly 43,000 in overpayments or

Profiting from Zero-Cost Scripts, Refunds,
Reversals and Returns
  • Is the pharmacy costing consumers money ? Audits
    prove it.
  • Shortened days supply with extra refill
  • Drug diversion schemes
  • Dispense generics but charging for brand name
  • No claim reversals
  • Billed for services not rendered
  • Filling beyond authorized refills
  • Improper record keeping
  • Not catching invalid prescribers
  • 8.0 totally fictitious prescriber IDs
  • 2.5 no prescriber ID submitted
  • 1.5 prescriber ID does not match prescriber
  • Total of 12 bill back to pharmacy

2000 to 2007 Market Value Changes in Healthcare
Is it any wonder why PBM values increased 1,000
since 2000 ?
2007 YTD
2000 Current
2006 FY
1,000 PBM 1 28
634 Clinical Labs 17 (1)
490 Managed Care (7) 4
460 Renal Dialysis 6 (4)
397 Skilled Nursing 21 33
161 Wholesale Dist. (2) 11
117 Home Respiratory (2) 4
107 Med Tech (3) 4
68 Hospitals 3 9
28 Large Cap Pharma 14 7
2 SP 500 14 5
Source Factset, as of 4/30/2007. PBM includes
CMX (while active), ESRX, MHS, and ADVP (while
active). CLINICAL LABS includes BRTL, DGX, LH,
SP, and LABS (while active). MANAGED CARE
includes AET, WLP, CI, UNH, CVH, HNT, HUM, PHS,
SIE, and WC. RENAL DIALYSIS includes RCI (While
Active) and DVA. HOME RESPIRATORY includes LNCR
includes ABT, AZN, BMY, LLY, GSK, JNJ, MRK, NVS,
includes MDT, BSX, GDT, STJ, ZMH, SYK and
THC, TRI, and UHS.
Regulatory Concerns
  • ERISA defines a a fiduciary as any person who,
    with respect to an employee benefit plan,
    exercises ANY discretionary authority or control
    with regard to managing a plan or its assets and
    a person who provides services to the plan as a
  • Plan Sponsors are clearly fiduciaries of the plan
  • Health insurers are often ERISA fiduciaries
  • TPAs and PBMs are clearly parties-in-interest of
    the plan
  • ERISA places significant requirements on those
    who participate in the operation of employee
    benefit plans (incl. pharmacy benefits)
  • ERISA strictly prohibits a wide variety of
    transactions between parties-in-interest and plan

Regulatory Concerns
  • What requirements does ERISA impose on
    fiduciaries ?
  • Fiduciaries must
  • operate the plan exclusively in the sole
    interest of plan participants
  • strive to get a fair, honest and reasonable
    deal for participants
  • act with the care, skill, prudence and
    diligence of a prudent man
  • not deal with plan assets in their own interest
  • not act in a transaction involving a plan on
    behalf of a person whose interests are adverse to
    the interests of the plan or its participants
  • ERISA requires that the compensation of a
    party-in-interest be reasonable and that it be
    disclosed (per ERISAs prohibited transaction

Regulatory Concerns
  • The U.S. Department of Labor posits that both
    TPAs and PBMs are fiduciaries of the plan
    (although this is arguable in the former case)
  • In a 2004 action against Express Scripts, Judge
    Limbaugh of the 8th Circuit Court ruled that PBMs
    are fiduciaries of the plan
  • Numerous court decisions, regulatory bodies and
    legislatures have deemed PBMs to be fiduciaries
    or to be subject to acting as one
  • PBMs reject the notion that they are ether
    parties-in-interest or fiduciaries of the plan,
    despite court rulings to the contrary
  • Are PBMs fiduciaries or parties-in-interest? You

Regulatory Concerns
  • Why PBMs are fiduciaries of the plan
  • PBMs exercise both judgment and discretion in the
    plans design and operation. Examples include
  • formulary creation
  • establishing pricing structures
  • selection of generic manufacturers
  • PBMs are engaged to administer the Rx plan and
    negotiate fair, honest and reasonable deals for
    plan sponsors and plan participants, however
  • PBMs use their bulk purchasing power for their
    own benefit, and not that of the plan sponsor or
    plan participant
  • PBMs earn both unreasonable and undisclosed fees
  • PBMs engage in dishonest, deceptive
    double-dealing and profiteering practices
  • PBMs cloud the judgment of payors with excessive
    compensation arrangements

Regulatory Concerns
  • Knowing how PBMs work, and what ERISA requires,
    are payors and plan sponsors at risk if they
    continue to work with PBMs ?
  • Yes - both are in clear and present danger.
  • ERISA implicitly tasks plan sponsors, payors and
    TPAs with getting a fair, honest and reasonable
    deal for plan participants and operate the plan
    in the sole interest of plan participants
  • TPAs, payors and plan sponsors are at risk for
  • not researching and evaluating PBMs
  • being aware of such practices and not acting
  • trying to hide behind the cloak of ignorance
  • Service providers compensation from PBMs may be
    challenged re ERISAs reasonableness
    requirements and the new DOL 408(b)(2) fee
    disclosure regulations that focus on this very

Regulatory Concerns
  • Since 2002, 30 legislative bills in 25 states
    imposing fiduciary-like standards for PBMs have
    been introduced, many passing
  • ERISAs new 408(b)(2) fee disclosure regulations
    require disclosure of direct and indirect
    compensation received by service providers and to
    disclosure potential conflicts of interest
  • Proponents of PBM regulation say that
    comprehensive regulation is necessary to deal
    with fundamental conflicts of interest, lack of
    transparency, and other problems in the PBM
    business model to
  • provide payors with information regarding their
    internal workings and the contractual
    relationships between PBMs and drug manufacturers
  • require PBMs to act in the interest of the plan,
    provider and participant
  • prevent or provide guidelines for certain types
    of prohibited conduct
  • require disclosure of all monies paid by PBMs to
    TPAs, brokers, etc
  • provide status reports to regulators on a regular

Regulatory Concerns
  • PBMs have steadfastly denied allegations of
    wrong-doing and argue that competition rather
    than regulation will yield efficiencies and
    reduce drug costs for payors and consumers
  • Indeed, PBMs assert that additional regulation
    will reduce benefits, increase costs and make
    consumers worse off
  • While PBMs embrace transparency and full
    disclosure publicly, the The Pharmaceutical Care
    Management Association (PCMA), a PBM trade
    association, has been vigorously fighting any
    regulation including the new DOL 408(b)(2) fee
    disclosure regulations
  • Ironically, a key PCMA argument against state PBM
    regulation rests on its claim of ERISA
    pre-emption, i.e., that PBMs are subject to
    federal law (ERISA) and ergo not subject to state
    regulation !

Regulatory Concerns
  • Following the upholding of the Maine PBM
    regulations in Court, a PBM suffered an immediate
    and sustained decline of 11.5 billion in equity
    value evidencing the markets expectation about
    expected future effects of PBM litigation and
  • This is an enormous decline relative to the
    actual and potential direct fines that have
    resulted to date from these investigations
  • Support sources available upon request
  • DOL Fact Sheet Service Provider Disclosures
    Under ERISA 408(b)(2)
  • 02/02/08 Wellpoint letter to the DOL protesting
    fee disclosure regs
  • PCMAs publication independent pharmacists
    undermine competition
  • PCMAs Appeal of Maines PBM disclosure statue

The Present PBM Business Model is Broken
  • Our present pharmacy benefit management business
    model is rife with insurmountable flaws that
    cannot be easily overcome
  • Drug costs are out of control and continue to
    escalate at a rapid rate
  • Having limited control, and no understanding
    where their dollars are being spent, makes it
    difficult for payors to reduce their drug spend
  • PBMs make 711 per retail script and 3-4 times
    that amount on mail-order dispenses, while saying
    that their revenues are only 12/script
  • PBMs cant operate profitably as stand-alone
    companies earning only 12/script because their
    cost of acquiring business is too great
  • If PBMs abandon their business model their stock
    prices will plummet
  • Simply replacing one PBM with another is a
    well-worn tactic that doesnt address any of the
    fundamental flaws in the present system

The Present PBM Business Model is Broken
  • Despite trends toward transparency and full
    disclosure, PBMs remain a black box, neither
    accountable, monitorable nor truly auditable
  • PBMs dont negotiate in good faith or enter into
    honest, truthful contracts as they reject the
    notion that they should act in a fiduciary-like
  • Historically, efforts to fix a business model
    that is so broken fail what is required is a
    paradigm shift in pharmacy management that
    replaces the present PBM business model with a
    new one that
  • leverages core competencies, forges new ways to
    partner, offers new value propositions,
    establishes new distribution channels, etc.

A New Business Model is Needed
  • Any successful new business model must be founded
    on the guiding principle that trust, integrity
    and fair dealing as it relates to pharmacy
    benefit management must necessarily involve much
    more than just agreeing to cost-related
    contractual issues such as transparency,
    full-disclosure, and pass through pricing
  • It must pre-suppose dealing openly and in good
    faith in every aspect of the way in which you
    conduct business, by all concerned, at all
    levels, and at all times whether someone is
    looking or not
  • As we see it, you are either honest, or you are
  • Given this, the new pharmacy benefit expense
    management business model must align the
    incentives of all those involved (payor, plan
    participant, physician and pharmacist)

A New Business Model is Needed
  • The key ingredients of a truly honest PBM
    offering are as follows
  • A transparent, full disclosure and pass through
    pricing structure
  • A pharmaceutical cost structure based on net
    acquisition cost
  • The ability to deal directly with the
    pharmaceutical manufacturers
  • An expansive network of retail pharmacies,
    including sub-networks
  • Multiple large-scale redundant mail-order and
    specialty pharmacies
  • Proven, flexible technology that supports complex
    coverage rules and utilization controls and is
    accessible via the Internet to all remote users
  • The creation of a formulary that is value-based,
    not profit oriented

A New Business Model is Needed
  • The key ingredients (continued)
  • Plan designs that encourage the best result for
    the plan participant
  • An independent P T committee that acts in the
    sole interest of patients
  • Full support in the management of clinical
    initiatives including outbound education programs
    for patients, providers and pharmacies
  • The ability to support integrated medical and Rx
    claims processing
  • Advanced online tools to support plan participant
  • A call center for HR directors, plan
    participants, physicians and pharmacists staffed
    with highly-trained personnel that act only on
    their behalf
  • Independent outside program oversight to ensure
    program integrity

PMCS to the Rescue
A Heritage of Integrity and Credibility
Much like it legitimized the out-of-network
claims management industry with its unique claim
settlement process, PMCS has created a new type
of company committed to bringing legitimacy to
pharmacy management
  • Why PMCS? Because PMCS
  • understands the challenges faced by payors,
  • has established and maintained trusted
    relationships with many payors,
  • has an efficient distribution channel (ergo, a
    low business acquisition cost),
  • has a largely paid-for infrastructure
  • can aggregate the mass purchasing power of 2.3
    million employee lives with an estimated annual
    drug spend of more than 3.5 billion, and
  • has the technological know-how to coordinate and
    link the component parts

Why Now?
Because the market is demanding a better
solution and because the wherewithal is there
  • The Rx POS infrastructure (electronic card-based
    technology) and claim processing technology used
    by the largest payors/PBMs is in place, mature,
    proven and inexpensive to access, just like an
    ASP-based healthcare plan administration system
  • Retail pharmacy, mail-order and specialty drug
    networks are available to be contracted (just
    like a medical PPO) on a fair-priced, transparent
    and pass-through basis
  • Rebate contracting and access to Rx purchasing
    co-operatives are available to make the
    acquisition cost of pharmaceuticals for PNPS
    clients as low as that of the nations largest

Introducing PNPS
  • Preferred National Pharmacy Solutions (PNPS) was
    created to be the the only legitimate, cost
    effective, truly transparent and ERISA-compliant
    pharmacy expense management solution
  • To create PNPS, we conducted exhaustive research
    of the PBM and pharmaceutical industries
    (including the companies and technologies that
    support it) to develop the best solution to this
    complex issue and concluded that
  • the problem in the Rx industry is not the drug
    manufacturers, its the entities between them and
    the patients
  • the drug manufacturers are upset with the
    practices of PBMs and welcome the creation of an
    alternative transparent distribution channel
  • the current PBM model, which pits drug
    manufacturers, PBMS, payors and plan participants
    against one another, cant be fixed
  • resources exist in the marketplace with which to
    construct a new and viable business model for the
    pharmacy management industry

PNPS Turnkey Offering Components
PNPS Offering Includes
  • ALL of the key ingredients of a truly honest PBM
    offering that were previously articulated and
  • The best features found in the most sophisticated
    PBM offerings
  • Access to exclusive contracts, operating methods
    and technologies that are not otherwise available
    to TPAs anywhere in the industry
  • The only contract form that guarantees plan
    sponsors full fiduciary compliance with any
    current or future state/federal requirement by
  • our enthusiastically signing on as an ERISA
  • the most honest, straight-forward service
    agreement in the industry (supported by service
    partner contracts having identical ERISA
  • The ability to build a fully-equipped pharmacy
    management unit at your TPA to integrate with its
    medical administration unit, and
  • Private labeling that will make the PNPS program
    one of your own

The PNPS Alliance Partners
  • Technology platform
  • Claims administration
  • Network management
  • Call center support
  • Utilization management
  • Performance reporting

Why Ventegra ?
  • Ventegra was formed to create a new channel to
    deliver Rx benefit services that is more
    efficient, more integrated, more honest and less
  • Like Switzerland, Ventegra is neutral within the
    distribution system
  • Ventegra is the first pharmacy Contracting
    Services Organization (CSO) representing payors,
    providers and patients as their fully transparent
    contracting arm
  • Ventegra is also a Group Purchasing Organization
    (GPO) abiding by the safe harbors and federal
    regulations that govern GPOs
  • Ventegra has negotiated agreements with the
    manufacturers that facilitate simplified
    contracting between them and medical groups,
    public and private health plans, employer
    coalitions and nonprofits

Why Ventegra ?
  • Employing highly sophisticated proprietary
  • Ventegras contract terms are full disclosed and
    available for client viewing over the Internet on
    a 24/7 basis
  • all discounts, rebates and other incentives
    received are always passed through and returned
    directly to the payor monthly (vs. quarterly or
    annual), and also available for client viewing

Ventegrathe first market player of its
kind.provides a novel pharmacy benefit
contracting model that goes beyond traditional
PBM and PBA services, reports the industrys
leading drug benefit news publication from
Atlantic Information Services (AIS), Drug Benefit
News, in its December 9, 2005 newsletter.
Why Pharmacy Data Management ?
  • Nearly 25 years of pharmacy benefit management
    support experience for both commercial and public
    sector (Medicare and Medicaid) programs
  • A legacy of honest business dealings (e.g., no
    spreads, hidden revenue streams)
  • A proven claims and plan administration platform
    that supports the integration of remote service
    partners via web-based technology
  • Battle-tested at more than 4 million lives
  • Operates a proprietary pharmacy network offering
    competitive pricing
  • Able to fully support the flexibility that the
    PNPS program requires
  • Achieved the highest rating among respondents to
    the PNPS industry survey

Independent Auditing Program Oversight
  • Most retrospective Rx claim audits prove to be
    ineffective as they often result in contentious
    audit recovery attempts
  • PNPS has engaged the industrys most innovative
    and advanced forensic Rx claims auditor to verify
    each bi-weekly claims invoice
  • Ongoing audits serve as a preventive maintenance
    tool (much like an oil change), reviewing claims
    and the systems adherence to contract re
    pricing, plan design, formulary, utilization
  • Dynamic audits are reinforced with full annual
    retrospective audits
  • This audit proticol, the industrys most
    stringent (far beyond any URAC process), will
    enable your clients to satisfy all their ERISA
    fiduciary requirements for pharmacy benefit
    program management

Why Morgan Healthcare Audits ?
  • More than 150 audits in the last 5 years alone
  • More than 200 million in identified recoveries
    in 2007
  • Considered the top pharma industry computer
    forensic source used by the U. S. Dept of Justice
    and the FBI
  • Instrumental in locating anthrax-making cells for
    the FBI
  • The big PBMS have teams devoted to defeating them

Forming a collaborative initiative, PNPS would be
pleased to help you help your clients reclaim
control of their pharmacy benefit management
program by retrofitting a unique version of our
sophisticated turnkey and single-source solution
in your company.
Thank You for your time and consideration
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