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Drug Cost Management
and Pharmacy Consulting
Possibilities
Michael E Thomas Pharm.D
President
Thomas Rx Consulting
Part One
Drug Cost Management
Drug Cost Management
Goals and Objectives
• Understand why drug costs are managed
• Understand the cost trends in pharmacy
• Formularies – What are they and why are
they used and how they are used
• Learn contracting processes
• Learning Rebate processes
• Understand how PBM’s make their money
The Managed Pharmacy Paradox
Why all the fuss about drugs?
• If drugs represent only 5% 10% 15% 25%?
of total expenses, why focus on them?
• If drugs are cost-effective, why not use more?
• If new drugs offer therapeutic advantages,
why limit their use?
The Problem: Rising Costs
• Health care at 14.2% of GDP
• Rx program costs have more than
quadrupled in past 15 years to about 25%
of total costs
– Faster growth than other delivery sectors
• Rx costs $18.00 - $37.49 PMPM
Annual Rx cost growth rate of 12 % - 20%
Healthcare Percent of USA GDP
15.3%
16.0% 13.9%
14.0% 12.6%
12.0% 9.3%
10.0% 7.4%
8.0% 5.3%
6.0%
4.0%
2.0% Rx
0.0%
1960 1970 1980 1990 1993 2000
Health Care Financing Review
Overview of Trends
• Overall costs increase “uncontrollably”
– 2% lower trend with management
• Trend driven by utilization, mix, and Rx cost
– Trend dissection allows customized management
• Payers squeezed by increasing premiums and rising
costs
– Carve-out maintains focus on pharmacy program
costs
Payer Response to Rx Trends
• Dissatisfaction of cost containment efforts
– Increased focus on Rx cost vs. value
• Share Rx risk with physicians
• Share Rx costs with members
– Higher, tiered co-payments
• Aggressively manage Rx benefits
– Customize benefit design
• Reduce or eliminate of Rx benefits
Pharmacy Management Strategies
Cost containment
+
Utilization control
+
Medical treatment guidelines
+
Medical outcomes management
If “Outcomes” are the answer, what are the
questions?
• Should we add a new drug to the formulary?
• How will drugs impact medical and hospital
costs?
• How do physician treatment patterns effect
outcomes?
• What is the “best” drug for a specific patient?
• How will drugs effect quality of life?
Linking Drug Use to Outcomes
No change
$$
Switch drug
$$
Drug Change* Change dose
Start
$$
Add drug
$$
Early discontinuation
$$
*Adverse event; therapeutic failure
FORMULARY
Tool to control pharmaceutical costs
and provide quality care.
Formularies can be implemented in all
MCO’s and at different levels.
Pharmacy Benefit Manager (PBM)
National Health Plan
Regional Plans / Affiliates
Integrated Systems
Medical Groups
The Drug
MANAGED CARE TRENDS
Clinical Attributes
Pharmacoeconomics Decision
The Drug
Clinical Attributes
MANAGED CARE TRENDS
Preferred Products
Pharmacoeconomics Tiered Co-pays
Generic Substitution
Therapeutic Substitution
Prior Authorizations
Not Covered / NDC lock
Decision
Delivering the Economic Message
Formulary placement
vs. competition
• Advantaged
• Neutral
• Disadvantaged
Developing and The Payor
Implementing your
Economic Strategy
Pharma Pull through
or Push
through?
MANAGED CARE REQUIREMENTS
Clinical Attributes
Economic Factors
Economic Message
Formulary
Physician / Practice Needs
Placement
Delivering the Economic Message
Formulary placement
• Type of formulary in place.
• Product status on the formulary,
advantaged / disadvantaged?
Push or Pull through strategy?
• Whether or not the Managed Care
Organization (MCO) enforces the
formulary.
• What methods are used to enforce
the formulary?
• How closely do prescribers follow
the formulary?
Delivering the Economic Message
Physician Needs
• Maintain or enhance Income or Revenue
• Reducing PMPM drug costs or providing quality
care at a better value to improve contract with plan
or to receive incentives
• Improve productivity of the office or organization.
(i.e. time, resources, etc.)
• Increase or improve patient satisfaction, building
stronger patient-physician relationships.
• Patient retention
Managing and Maintaining Formularies
Introduction
• Drugs account for 8-12% of healthcare
expenditures and 85-90% of outcomes.
• The marketplace is demanding cost
containment measures consistent with quality
of care.
• MCO’s must foster safe, appropriate,
effective, economical use of drugs.
• A properly designed formulary is a basic
piece of Drug Benefit Management & DSM.
Optimizing the Contract
Identifying Issues
• Manufacturer
– Gain or Maintain Market Share
– Gain Access to Physicians
– Gain Access to Formularies
• Pharmacy Benefit Manager
– Substantiate Therapeutic Efficacy
– Determine and Manage Appropriate Utilization
– Manage Costs- Drugs Vs Total Costs
Optimizing the Contract
Identifying Issues (Cont’)
• Managed Care Organization
– Manage Outcomes
– Minimize Per Member per Month Costs
– Maintain Service
– Maintain Membership
Optimizing the Contract
Defining Goals
• Manufacturer
– Improve and Hold Market Share
• Pharmacy Benefit Management Company
– Maximize Cost Benefit
• Managed Care Organization
– Maintain Competitive Advantage
Optimizing the Contract
Developing Rebate
Contracts
• Definition and Administration
• Types
Optimizing the Contract
Definitions and Administration
• Retrospective Discounts
• Paid on Access or Performance
• Shared with Clients
Optimizing the Contract
Types
• Access
– Listed in Formulary
– Fixed Price per Unit
• Performance
– Payment Based on Market Share Levels
– Payment Based on ability to Move Market
Optimizing the Contract
Formulary Development
Formulary Development
• Pre Approval Activities
• Post-Approval Activities
• Types
Optimizing the Contract
Formulary Development
• Pre-Approval Activities
– Key Decision Makers
– Information Review
– Decision Making Criteria
– Decision Process
Optimizing the Contract
Pre-Approval Activities
• Key Decision Makers
– Therapeutic Assessment Committee
– Pharmacy and Therapeutics Committee
– Value Assessment Committee
– Plan Sub-Committee Groups
– Formulary Management Commitee
Optimizing the Contract
Pre-Approval Activities
• Information / Data Review
– Clinical Trial Data
– Literature Review
Optimizing the Contract
Pre-Approval Activities
• Decision Making Criteria
– Product Status within therapy class
– Indications (new or same as others in class)
– Product characteristics
• Dosage Form, Route of Administration,
Dosage Regimen
– Therapeutic Advantage/Efficacy
– Safety
– Cost/Benefit/Value
Optimizing the Contract
Pre-Approval Activities
• Decision Making Process
– Internal Review
– Recommend to P&T Committee
– Accept and/or Reject
Optimizing the Contract
Process
Therapeutic Assessment Committee
Accept
Reject Recommend to P&T Committee
Accept
Reject
Value Assessment Commitee
Reject Accept
Client Sub-Committee
Reject
Accept
Reject Formulary Management Committee
Optimizing the Contract
Post Approval Activity
• Co-Marketing/ Co-Promotional
Strategies
• Formulary Compliance
• Provider Education
• Measuring Results
Optimizing the Contract
Post Approval Activity
• Co-Marketing/Co-Promotional
Strategies
– Letters to Primary care Physicians
– Physician Intervention Programs
• Phone Interactions
• Face to Face Interactions
– One on One
– Group
Managing and Maintaining Formularies
Textbook Types of Formularies
• An open formulary is a comprehensive list of
1,000 to 3,000 drugs with few restrictions.
• A closed formulary is a limited list of 300 to
1,000 drugs. It is a more objective approach
to drug therapy. This type of formulary
increases compliance and market share for
greater economic advantages.
Managing and Maintaining Formularies
Formulary variations...
• 3-tier, open
• open with incentive paid to physicians based
on formulary compliance.
• closed list of brand name drugs with all
generics allowed.
• Open or closed, but with NDC blocks applied
to a small list of non-preferred drugs.
• Special Medicare, Medicaid,Worker’s Comp,
Hospice, Mental Health formularies
Managing and Maintaining Formularies
Formulary Development...
• Clinical services and products are designed
to meet the needs of individual clients.
• Drug Use Evaluation
• Therapeutic Class Reviews
• Medical and Pharmacy Review Boards
• P&T Recommendations
• Manufacturer Contracting
Managing and Maintaining Formularies
Formulary Developement...
• Determine product positioning, formulary
structure, and long-term plan to enhance
formulary compliance and market share
rewards.
• Implementation
Managing and Maintaining Formularies
Costs to Implement a Formulary
• Clinical reviews
• Contracting
• Updating of systems and various databases
• Printing and distribution costs
• Pharmacist incentives at the retail level.
Managing and Maintaining Formularies
Communication Links
• Create, print, and distribute a formulary
document for physician or pharmacist
reference.
• Incorporate prescription processing changes
that will communicate and enforce the
formulary at the pharmacy.
• Provide assistance to clients in educating
their plan members.
Managing and Maintaining Formularies
Communication Links: The
Formulary Document
• The document must be designed, typed,
reviewed, and incorporated into desktop
publishing software.
• The document is printed and distributed
to physicians and pharmacies.
• Updates are communicated through a
newsletter to providers.
• Internet
Managing and Maintaining Formularies
Communications Link: Systems
• Formularies are defined and built using data
elements from First Data Bank/Medi-Span’s
drug classification system. It takes
approximately 4 weeks to research and
construct.
• Main formulary file is created; sub-files are
created for individual group differences.
• Copays, Caps, Quantity limits, etc., are
incorporated.
Managing and Maintaining Formularies
CLAIMS
Claim Data National Claim Data Paid Claim
Rx Switch
Pharmacy
Card Claim Response
or Claim Response Claim
Pharmacy Processing Concurrent
Concurrent DUR
DUR
Setup Patient Chain System Message
-Patient ID Headquarters
-Drug Number
-Days Supply -Switches Pharmacy -Edits the Claim
-Quantity Claims to PBM (150 + Edits )
-Other Required Processors -Determine Payment or
Information Non-Payment based on edits
-Sends paid claims (claims that
pass edits) to Concurrent DUR
System for DUR processing
-Sends paid or rejected claim
response message(s) back to
pharmacy.
Managing and Maintaining Formularies
Rx Claim Flow
Data Entry Data Edits Member Eligibility Provider Verification Drug Validation
DAW Edits Client/Provider Generic Enforcement Utilization Edits
Pricing
Formulary Status Co-Pay Determination Periodic Limits Concurrent DUR
Managing and Maintaining Formularies
CONCURRENT DUR
Concurrent DUR occurs after the Rx being dispensed has passed all claim edits (The admin system contains 150+ edits i.e., member is
eligible, drug is a covered drug, quantity and days supply within acceptable tolerances, etc.) Concurrent DUR checks the drug being
dispensed against the patients profile which includes all active drugs (or within 30 days of being active) for that patient and the patients
disease state and allergies. Any problem detected can cause the Rx to be rejected or accepted (client decides outcome on each edit) and
in all cases a warning message (or messages) will be sent to the pharmacy to advise the pharmacist about any conditions detected. The
following is a list of the concurrent DUR checks done by most PBM systems.
Name Brief Explanation
Dose Check Using MEDISPAN supplied drug dosing information, the current script is
edited for under and over dosing at pediatric, adult, and geriatric age
levels.
Drug Interactions Drug to drug interactions are edited by comparing the current script to any
active scripts in the patient’s profile. MEDISPAN supplied drug
interaction data utilizing Hansten’s Drug Reference is used to perform the
edit. We can check for severity level 1, 2, or 3 interactions.
Duplicate RX The duplicate RX edit compares the drug GPI code of the current RX to
all active RX’x in the patient’s profile. If an exact match on GPI is found
the result is a Duplicate RX.
Duplicate Therapy Using drug GPI code, the current script is compared to the patient’s
profile for the use of therapeutically equivalent drugs.
Managing and Maintaining Formularies
Name Brief Explanation
Drug Regimen This is edit is performed for maintenance drugs. By checking the
patient’s profile and looking at the refill rate of the maintenance drug, the
system can determine if the patient is taking the medication at a slower
than recommended rate.
Allergy Check Patient allergy profiles can be entered into the system so that the
pharmacist will be alerted when a script is being filled that contains an
allergen sensitive to the patient.
Drug to Age Check The script is edited, using MEDISPAN supplied data, to see if the drug is
contraindicated for the patient’s age.
Drug to Sex Check the script is edited, using MEDISPAN supplied data, to see if the drug is
contraindicated for the patient’s sex.
Diagnosis Check Patient disease profiles can be entered into the system so that the
pharmacist will be alerted when a script will be filled that contains an
drug that is contraindicated for the patient’s disease profile. Both Known
and Inferred diagnosis checking is done. Known diagnosis checking is
done when the drug is contraindicated for a profiled disease. Inferred
diagnosis checking looks at the Patient’s drug profile and infers a disease
state based on the drugs being taken.
Acute/Maintenance Dosing Check Dosing parameters for maintenance drugs can be set to allow initial higher
(acute) doses to bring a condition under control then lower the dose for
maintenance purposes.
Managing and Maintaining Formularies
Name Brief Explanation
Case Management Allows a case manager to restrict or manage drug therapy for an
individual or for an entire group. The edit can be based on NDC or GPI,
days supply, and quantity dispensed. A customized message can be sent
back to the pharmacy.
Step Therapy This edit sets up prerequisite drug therapies before a particular drug may
be dispensed. Patient profiles are utilized to check prerequisites
Managing and Maintaining Formularies
Communications Link: Systems
• Special pharmacy messaging is created and
attached to specific NDCs to identify
preferred and non-preferred products.
• QA testing is performed and file printouts
are reviewed to assure accuracy.
• Ongoing updates to files require routine
review by clinical staff. for completeness
and accuracy.
Managing and Maintaining Formularies
Communications Link: Plan
Members
• Identify patients and physicians for notification of
non-formulary items.
• Distribution of pocket formularies.
• Educational materials for therapeutic interchange.
• Messaging via the pharmacy on-line system.
• Website programs with member access
Managing and Maintaining Formularies
Continuous Improvement
• Periodic reviews of therapeutic classes
• Assess necessary additions and deletions.
• Review of medical literature: unusual or
unexpected drug expenditures or increased
adverse reactions among members.
• New drugs on the market.
• Review formulary as membership changes.
• Review communication links.
Managing and Maintaining Formularies
The Future of Formularies
• Physician connectivity at point of care.
• Formularies will become a management
tool using medical claims data along with
pharmacy claims data to develop outcome
measurements and the most appropriate,
cost-effective pharmacotherapy.
Managing and Maintaining Formularies
The Future of Formularies
• The formulary will become patient- and
diagnosis-driven with value given to a drug
based on the outcome it creates.
• ?????
Follow the Money
Drug Management for Hire
• Administrative Fees from Clients
• Administrative Fees from Pharma
• Rebates
• Non-rebate funds from pharma
• Educational Grants
Administrative Fees From Clients
• Network Pricing • Pharmacy Contract
Spread
– AWP-13% + – AWP-14% +
$$
$2.25 (open) $2.00 (open)
– AWP-15% + – AWP-16% +
$2.00 (closed) $1.75 (closed)
Spread: The difference between what a PBM negotiates
with the pharmacy provider to fill a prescription and the
price the PBM negotiates with the client.
Often this difference is significant $$ per Rx as each Rx on
average is $30 therefore a 1% difference is 0.30 per Script
this is added to the difference in the dispensing fee
negotiated can be between $0.50 and $1.00 per script
Administrative Fee
• Can be Free to $’s per Rx
• Depends of Clients size and volume
• Depends on Services provided
– Therapeutic interchange
– Mail order
– Formulary management
– Clinical programs
• Disease Management
• Compliance
• Call Center
• Retro DUR
• Depends on Rebate Share
Rebates
• Who negotiates with with Pharma?
• Can be shared with Client
– PBM Share
– Client Share
• 100% Disclosure
– Fact
– Fiction
• Paid by PBM to Client
• Received by PBM from Pharma
Rebate Administrative Fee
• Fee charged to Pharma
– For special reports
– For contacting patients
– For contacting physicians
• Ranges in amount
– 1% to 3% typical
• Paid to PBM
– Can share with client
– Most keep 100%
Non-Rebate Charges
• Paid by Pharma to PBMs for Special Projects
– Compliance Programs
– Disease Management Programs
– Adherence Programs
– Specialty Distribution
– Special reports
• Physician contact reports
• Competitive product reports
Educational Grants
• Paid to PBMs for Educational Programs
– CME for MD’s
– CE for Pharmacists
– Health Fair Participation
– Educational Programs for Employees
• Leadership
• Management
Rebate Processing
• Manufacturer Billing
• Reports from PBM/HMO
• Rebate Collections from
Manufacturers
• Does the payment match
• Audits
• Refiling
Part Two
The Pharmacist Consultant
The Pharmacist Consultant
Goals and Objectives
• Learn what you need to be a consultant
• Learn what opportunities are available
• Learn how to make it happen
• Discuss what the future will hold for
consulting pharmacists.
What do you need
• Degree • Network
– BS Pharm – PBM
– Pharm.D – HMO
– MBA – Pharma
• Experience • Market Skills
– PBM • Enthusiasm
– HMO • Motivation
– Pharma
• Computer skills
• Presentation Skills
What are the Opportunities
• Training and Education • Consulting Services
– Formulary Mngmt – Drug Contracting
– Mail Order – Disease Mngmt
– Disease Mngmt – Rx Utilization
– Therapy Interventions – Patient communications
– Rebate Contracting – Physician communications
– HIPAA rules – Rx Claims audits
– New Drug Review – Rx Benefit Design Strategies
– Biotech and Specialty Rx’s – Clinical Program Strategies
– Clinical presentations – PBM selection assistance
How do You Make it Happen
• Understand the Healthcare Environment
– What are the needs
• HMO’s
• PBM’s
• Pharma
• Marketing Yourself
– Use you network
– Know your value
– Explain your value
How do You Make it Happen
• Know you client
– Needs
– Wants
– How you can bring value to them
– Leave room for tomorrow
• Watch for Opportunities
– Happen when you least expect
– Be prepared
What Does the Future Hold
• Carve out’s continue to happen
• Specialty Pharmacy
– Biotech
– High Cost meds
• The Internet
• Education and Training on all the above
• The sky is the limit!
Drug Cost Management
and Pharmacy Consulting
Possibilities
Michael E Thomas Pharm.D
President
Thomas Rx Consulting
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