With today's high gas prices, car buyers need to consider the total cost of vehicle ownership, not just the sticker price. Similarly, employers shopping for pharmacy benefits need to consider the total cost of the benefit management, not just the proposed discounts, fees and rebates.

The typical price-centric approach to purchasing pharmacy benefits for large, self-insured employers may actually yield an unintended, adverse impact on employer benefit costs.

New, rigorous analytic tools have been created to aid employers and consultants in securing significant pharmacy savings and enhance the transparency and accountability of pharmacy benefit managers.

Data related to PBM procurement competitions have led to interesting observations about PBM competitors and enhancements in the procurement process. Employers can apply careful purchasing techniques to exploit market inefficiencies and secure PBM contractual terms that benefit their bottom line, as well as the wallets of their covered employees and dependents.

Pricing focus can be misleading

PBM procurement often focuses chiefly on pricing elements, but that approach can be highly inefficient for large, self-insured employers for several reasons:

1. PBMs may use different definitions for certain drug benefit terms, complicating bidder comparisons.

2. Employers rarely select a PBM based on a thorough financial analysis of drug benefit plan projected net costs. Rather, PBMs frequently are selected based on:

• Which PBM seems to offer the best rebates or discounts.
• Simple spreadsheet models of pricing terms and aggregated data.
• Pressure from the health plan to retain the incumbent for economic efficiencies or to sustain the value of integrated programs.
• Business models with theoretical benefits, such as pass-through models.
• Performance guarantees made by PBMs during the proposal process often are based on operational performance areas like call-center phone stats, performance of pricing elements like achieving discount targets), an audit by the PBMs themselves and paying out limited, fixed-dollar damage awards for nonperformance.

As a result, many employers see the net cost for their pharmacy benefit plans continue to escalate over time.

The good news for employers is that these inefficient markets also offer opportunities for substantial savings with a thorough investigation of all factors that affect a plan's total cost.

With a more holistic approach, employers can take advantage of the inefficient marketplace by testing the PBM competitors' business models on a fair and equitable basis, securing PBM services at the best possible price and holding the PBM accountable for achieving verifiable drug plan performance metrics.

Consider drug mix

Savings can be divided into two components: pricing-term savings and drug-mix savings. Pricing-term savings result from current contract vs. bidder pricing-term differences, excluding consideration of drug-mix management differences.

Drug-mix savings result from historical vs. bidder proposed differences in drug-mix management, normalized for pricing-term differences. For example, drug-mix savings are increased when more expensive brand scripts are replaced with less expensive generic equivalents and decrease when brand scripts are replaced with even more expensive brands.

A typical RFP process focuses on pricing-term savings. If drug-mix savings are considered, they usually are calculated using a simple generic dispensing rate formula. Although the generic dispensing rate is related to drug mix, it does not fully account for the variation among PBMs.

This would be acceptable if drug-mix savings were typically too small to be of consequence or were consistent across PBMs. However, research shows that the opposite is true. In four studies in 2007, the average per employee per month savings was $6.97. Of that total, $4.28 (or 61%) was attributable to pricing-term savings, and $2.69 (or 39%) was attributable to drug-mix savings.

Two of the four studies were for employers with less than 2,500 workers. For these smaller employers, the average per employee per month savings was $9.22. Of that, $3.42 (or 37%) was attributable to pricing-term savings, and $5.80 (or 63%) was attributable to drug-mix savings.

In some PBM procurement competitions, the PBM with the best pricing terms may not offer the lowest employer cost. In fact, in four studies in 2007, two of the "lowest employer cost" winners did not have the best pricing terms, surpassing the pricing term leader with superior drug-mix management protocols specific to the employer.

As today's auto consumers know, simply offering a gas rebate at signing doesn't change the fact that a vehicle has terrible gas mileage, and the total cost of ownership will ultimately be much more than the rebate ever saved. Similarly, HR professionals are better armed to make the best decisions for their organizations when they fully understand the impact of all drivers of cost.

Emil B. Kraft is a chief actuary and a principal with DeepView Solutions, a Seattle-based corporation that provides PBM procurement services and contract analysis. It aims to lower pharmacy benefit costs by inducing drug companies and PBMs to align their activities and compensation with the best interests of employers and employees.