The Big Cat Finds ROI Where the Sun Don't Shine

  • by: Peter Pitts |
  • 05/07/2018
In the United States, the manufacturers of branded medications (on-patent, innovative drugs) represent 39% of gross net drug expenditures while the morass of non-manufacturer middleman -- Prescription Benefit Managers (PBMs), brokers, agents and assorted wholesalers and intermediaries -- are responsible for 42% of gross expenditures. What’s going on?

Perhaps a better question is what’s not going on. Topping that list is a lack of transparency in the cost supply chain, leading to cloudy conflicts of interest. If sunshine is the best disinfectant, perhaps enlightened self-interest is the best medicine.

Consider Caterpillar. Like many large corporations they were suffering under the burden of runaway healthcare expenses –especially for prescription medicines. Between 1996 and 2004, this iconic American company saw its drug spend rise by an average of 14% annually.

And then something happened. The company realized that the mechanisms it had put in place to manage cost (the traditional PBM model) wasn’t getting the job done and that a major part of the problem was systemic conflict of interest

According to Todd Bisping, Caterpillar’s Global Benefits Manager, “Our initial analysis estimated that there was 10% to 25% waste in the system, some of which we believed was driven by conflicts of interest in the system. For example, some of the same consulting firms that plan sponsors pay to help them choose their pharmacy benefit manager (PBM) often receive “broker fees” from the selected PBM. As we evaluated the supply chain, we knew eliminating conflicts of interest would be an area of focus.”

Deciding to reassert control of their own destiny, Caterpillar decided to forge a new path. After thoroughly investigating their relationship with their PBM, Restat (now a part of the UnitedHealth Group), the company decided, per Bisping, to “disintermediate the PBM from certain functions” that generated profits for them – but not for Caterpillar or its employees.

“One thing is certain, says Bisping, “the current market dynamic is creating a bloated supply chain and, ultimately, exposing plan sponsors to additional costs.”

Caterpillar’s first steps was to identify the complex ecosystem of the prescription drug supply chain, applying the same principles to their pharmaceutical costs as they do to other expenditures at Caterpillar. The result? According to Bisping? “We eliminated waste in the prescription drug supply chain. That, in turn, promoted the sustainability of our healthcare benefits.”

Caterpillar developed a unique and potent pathway to success.

First, they identifed at least one major pharmacy that would be willing to partner in a direct contracting relationship (bypassing the normal PBM pricing process) via non-exclusive relationships.

In the current system, pharmacies do not have an effective way to increase their market share outside of building additional stores. By negotiating directly with pharmacies, Caterpillar enabled them to find another way to increase their market share -- by exchanging volume for margin. A win–win for both companies. Per Bisping, “Although this model also would work in an exclusive arrangement, we believe in healthy competition. So a key deliverable was to ensure that neither party would be locked into an exclusive arrangement. It also allows for continued competition as this methodology takes hold in the industry.”

Next, Caterpillar developed a new pricing methodology to eliminate the use of average wholesale price (AWP) methodology. Bisping believes (as do many health policy experts) that the AWP methodology is flawed and only produces more waste. Caterpillar worked with its pharmacy partners to develop a “cost-plus” methodology. The Caterpillar plan includes a “real” invoice price, which represents the actual net cost to purchase the drug by the pharmacy -- not a transfer price. It also includes all net items/revenue streams that are generated now or in the future by the purchase of such drugs.

For Caterpillar’s model to be sustainable, pharmacies need to realize a profit. Therefore, the final cost is real invoice price + overhead + margin for each drug. It allows pharmacies to optimize/compete on three fronts in addition to customer service—buying, efficiency, and margin—to make them a more attractive partner to payers and win more of their business.

Perhaps most revolutionary is Caterpillar’s recognition that the fatal flaw of the established PBM is a lack of fiduciary responsibility to its clients. Therefore, their new strategy establishes audit rights.

Obviously, the net price any company pays its supplier often is a confidential matter. However, to ensure that this new methodology doesn’t design in the historic opportunity for corruption, validation is necessary. Caterpillar’s arrangement gives them the right to engage a third-party auditor to ensure that their pricing methodology is properly applied. The audit keeps critical pharmacy information confidential while allowing the company to validate that they are paying the price agreed to in the contract. In other words, trust – but verify.

Rather than relying on their PBM for a one-size fits all provider network, Caterpillar developed their own. In locations where participants didn’t have reasonable access, Caterpillar added  local, independent pharmacies to the preferred network. According to Bisping, “With a preferred network in place, we chose to incentivize our plan participants to purchase their prescriptions at a preferred network pharmacy by maintaining current prescription copayments at those pharmacies. Plan participants continue to have the option of using a pharmacy in our broader PBM network; however, they now will have higher copayments (or coinsurance) at those pharmacies.”

Smart choice pays dividends. Says Bisping, “Our model is based on a simple premise: find a way to manage pharmaceutical costs so we continue to provide a sustainable, valuable prescription benefit to our healthcare participants.”

The Caterpillar model increases their ROI by decreasing COI (conflicts of interest). The company’s benefits design allows pharmacies to take control by setting their own prices and exchanging better pricing for volume, thereby eliminating the squeeze from PBMs who are forcing prescription volume to mail order (largely owned by PBMs) to lower their costs.

A key problem to address is an institutional one: too much benefit outsouring by too many companies (both large and small) – with too little strategic thinking. Perhaps this is a timely opportunity for a new wave of benefits consultants who, as their primary objective, is to help companies reduce costs and enhance patient outcomes – rather than the profits of PBMs.

It’s not an easy process. According to Bisping, “It’s been difficult to initiate and implement this process. Developing the solution has required a significant investment of time from Team Caterpillar and our consultants and vendors, but we think this model is an improvement over the way most payers purchase prescription drugs today, and other payers could easily adopt it.”

But, as Admiral Rickover so famously reminds us, “The devil is in the details – but so is salvation.”

Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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